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Finance Bill

Volume 21: debated on Tuesday 6 April 1982

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Order for Second Reading read.

3.39 pm

I beg to move, That the Bill be now read a Second time.

The Chancellor of the Exchequer presented his Budget to the House four weeks ago today. We had three days of debate on it, and to print all the comment and analysis that has appeared about the Budget in the press it must have been necessary to fell a Norwegian forest.

When all the commentators have had their say, what really matters is what the Budget eventually achieves. It is clear what it set out to do. It aimed to help restore the balance between the personal and business sector. It aimed to help bring down inflation and restore jobs on a sustainable scale, and it aimed to do all this by means of responsible fiscal and monetary policies. In all these respects it was a Budget which continued the strategy which the Government initiated in May 1979. As a Government we are determined to continue the policy of fighting inflation, which is the heart of that strategy.

We meet today under the shadow of other events, and our thoughts are naturally with the naval task force in the Atlantic. We wish them god-speed. But those events have in no way altered our resolve to continue with our basic economic strategy; nor is the scale of our effort in relation to the Falkland Islands, substantial as it is, such as to require any change in that strategy. There is no question of that. The policies embodied in the Budget and in the Finance Bill stand unchanged.

Let us look at what has happened since the Budget. The Budget, of course, was aimed primarily at industry and business, and there can be no doubt that it has been favourably received in those quarters. Surveys of opinion indicate that most businesses expect it to have a favourable effect on output and investment. The recently published CBI inquiry for March, though it should not perhaps be linked too closely to the Budget measures themselves, shows improving prospects for output, orders and price increases. The Financial Times business opinion survey released earlier this week corroborates these trends, and, in addition, shows a further continuation of the improvement in business optimism.

Government policies are being well received in financial markets too. The decline in United Kingdom interest rates continued through February into March. Most rates have come down by 1½ to 2 per cent. since the new year. Not surprisingly, it was just after the Budget that banks and building societies announced their latest reductions in base rates and mortgage interest rates. Can anyone seriously believe that we would have had the benefit of those lower rates if we had accepted the advice of those who called for massive increases in the level of borrowing?

Of course, not all the recent news about the economy has been uniformly encouraging. For example, we have had some disappointing industrial production figures over the winter, though output in many industries was clearly affected by very severe weather and industrial disputes; but I am pleased to say that preliminary indications—such as car production and steel output—show that there should be some bounceback in industrial production in February.

The depressed output figures of course also largely account for the rise in manufacturing unit wage and salary costs between December and January. Despite this, the trend in unit wage and salary costs remains very favourable. In the three months to January, they show a rise of about 3 per cent. compared with a year earlier, which is well below the international average and comparable with the best—Germany and Japan.

The latest figures for exports also show some fall off in volume from the encouraging levels recorded in the previous four months. But the very uneven distribution of the fall, with exports of semi-manufactured goods and basic materials showing a rise, suggests that the severe weather up to mid-January had a depressing effect. If that is so I expect there to be some improvement in the February figures.

The general picture of the economy is an increasingly encouraging one. All three measures of GDP now confirm that a turning point in activity was reached last spring since when GDP has risen by about 1 per cent. Industrial and commercial company profits, excluding North Sea oil, are now recovering strongly—they rose by a quarter in the second half of 1981. That should encourage investment and make it easier to finance.

The Central Statistical Office index of longer leading indicators has been picking up strongly since the autumn in response to lower interest rates, stronger share prices and improved business confidence. Retail price inflation has fallen to 11 per cent., half the rate in the spring of 1980.

The right hon. and learned Gentleman has given us information that we are all pleased to hear. If things are going so well, will he explain why it was reported in the press yesterday that officially there are more bankruptcies, more receiverships and more voluntary liquidations than at any time in the history of the country? If things are going so well, why is everyone going bankrupt?

The events that the hon. Member has described are the product not of the present, or of the future that I am describing, but of a period some time ago. One does not become bankrupt overnight. The hon. Gentleman referred to a report that he had read in the press yesterday. No doubt his reading of the press has taken him forward to today. He will have read that prices paid by manufacturers for raw materials and fuels fell by 2 per cent. in March, so that the annual increase is down to 8 per cent. That reflects a further easing of the cost pressures on industry.

Although not too much should be read into the exceptionally low increases in the adult seasonally adjusted figures for unemployment in February and March of about 5,000 each month, they, too, clearly provide evidence of a further slowing in the rate of increase. In the past three months the increase in unemployment, which has averaged about 20,000 a month, has been a quarter of that in the same period a year ago.

The outlook for 1982 and 1983 is encouraging. Of course there are uncertainties—for example, those associated with developments in the United States—but we expect output to continue its recovery, on a more broadly-based front than last year with industrial investment, for example, showing some recovery. All of the outside forecasters considered by the Select Committee on the Treasury and Civil Service in its report published yesterday see output growing by about 1½ per cent. in 1982, a continued healthy surplus on our balance of payments current account, and inflation falling into single figures before the end of the year.

If we look at the overall position, it is possible to see that the longer-term effects of our strategy are working through. The signs of improvement and the tax reductions which the Chancellor announced in his Budget result not so much from this particular Budget, but from the strategy as a whole reflected in the Chancellor's previous Budgets. We can all remember with what scorn the last one was greeted with by Labour Members and how it was going to lead to slump and disaster. It did nothing of the kind. This Budget and this Finance Bill continue the same steady strategy, which is already beginning to ensure that the process of recovery proceeds on a sound basis.

Before going on to some of the particular provisions of the Finance Bill, I wish to comment briefly on one crucial matter relating to the general impact of the Budget—its effect on unemployment. I think that it is worth nailing two canards now. First, contrary to what the right hon. Member for Stepney and Poplar (Mr. Shore) contended in his Budget broadcast, the Government are not planning on unemployment at over 3 million over the next three or four years. Let me read to the House exactly what we said in the public expenditure White Paper. The figures in paragraph 12 of vol. I have been used by the Opposition to support their arguments. It states:
"This is not a forecast or a prediction. If developments on pay and the world economic recovery are favourable, there is a reasonable prospect that unemployment levels in the later years may turn out to be somewhat lower than has been assumed."
The second point that I wish to make is more than a canard. It is absurd to suggest that this Government or any Government have the slightest interest in keeping up the level of unemployment. If it were possible sustainedly to reduce the level of unemployment rapidly and dramatically, this Government, and any Government, would jump at the chance of so doing. However, there is no such route and it is self-deluding to think that there is. This was a Budget for jobs, because only industry can provide jobs. It was a Budget that was designed specifically to help industry. It was a Budget that was designed to provide jobs on a sustainable basis. That is a slow—indeed, painfully slow—process, but one that can be achieved given continued sensible moderation on the pay front.

I think that the Minister said that the prospects were based on unemployment figures that were somewhat lower than assumed. What exactly does he mean by "somewhat lower", and what were the figures that he assumed?

I follow what the hon. Gentleman is trying to say. I have made it clear that the figure which appears and to which reference has been made by the Opposition is an assumption. I have quoted from the public expenditure White Paper a passage which makes clear the nature of developments which would render the levels somewhat lower than those that have been achieved. The hon. Gentleman asks "How much lower?" The answer depends on the extent of the factors that will operate. At the end of the sentence during which the hon. Gentleman indicated that he wished to intervene, I referred to one of the factors that will operate, and that is pay. Obviously we are talking about a scale. The answer, in short, is that the more progress that is made on pay moderation, the more it will be possible to proceed below the assumptions that appear in the White Paper.

Does the right hon. and learned Gentleman agree that, on the figures that he has described, we must assume that the Government's policy is working. Assuming that the policy is in fact working, what is the lower amount that he describes as "somewhat lower"? Let us assume that the strategy is successful. If that is so, by how much will the amount change?

It seems that I have been unable to make matters clear for the hon. Gentleman. The assumption is stated clearly in the White Paper—it is one that has been relied upon by the Opposition—as are the circumstances in which the outcome will be more favourable than the assumption assumes. The extent to which the outturn proves to be more favourable than that stated in the White Paper must depend on the extent of the developments in pay and the world economic recovery, which are stated to be the factors that could lead to a better outturn. The hon. Gentleman may shake his head, but it seems reasonable to say that that is the case. The extent of progress is infinite and the degree of success depends upon that extent.

Finally, before coming to the specific provisions of the Bill, I shall refer to yesterday's report of the Select Committee on the Treasury and Civil Service, which many hon. Members will have read with interest. The House will not expect me to agree with all that the report states. However, I am glad to note its welcome of the reforms in the taxation of capital gains and the way that the extension of indexed-linked gilt-edged securities will mean that the Government will no longer be taxing the interest needed to maintain the real value of capital.

On other aspects of the Budget, the Committee has pointed to some changes in the way in which the medium-term financial strategy has been presented this year. I emphasise to the House that to a large degree these are more a matter of presentation than of substance. Of course, changes have to be made from time to time. Circumstances change; for example, the new monetary ranges allow for changes in the banking system. But for the most part the new presentation is designed to conform more closely to the way in which policy has been operated. It does not represent a departure to any extent.

The monetary path accords with the fiscal policies in the Budget and the measures reflecting them in the Finance Bill. But the most important measure of all to help industry in the Budget does not actually appear in the Bill. It is the decision to restrain our borrowing requirement, in order to keep down the burden of interest on industry. That is what really counts when it comes to recovery.

The most important specific measure that appears in the Bill is the reduction in the national insurance surcharge. It is the widely disliked tax on jobs, which was first imposed, and then increased, by the Labour Party. We propose to reduce it, a step which has been welcomed by the CBI and industry in general. Of course it would have been nice to go further, but the reduction proposed will provide a significant boost to industry without placing a strain on the PSBR and interest rates. And we are ensuring that the benefit will be concentrated entirely on the productive private sector. In all, the reduction should cut the cost of employing labour in the private sector by some £640 million in 1982–83.

Moreover, this reduction in the surcharge comes on top of our decision to shield employers from any increase in their national insurance contribution rates for two consecutive years. As my right hon. and learned Friend said in his Budget Statement, if we had not protected businesses, and so employment, in this way employers would have had to find nearly £1 billion more in the coming year than will actually be the case. Those who call for a larger reduction in the surcharge should compare this record with that of our predecessors. In their last two and a half years in office they were responsible for increasing the combined charge on employment—the employers' national insurance contribution and the national insurance surcharge—from 8½ to 13½ per cent., an increase in the charge of some 60 per cent.

In addition to the reduction in the national insurance surcharge, the Bill contains a wide range of measures to assist particular sectors of business and to encourage enterprise.

The measures to assist industrial innovation announced by my right hon. and learned Friend are mainly on the expenditure side, but the tax component consists of the change in capital allowances for rented teletext televisions. Teletext is a leading product of British information technology. The extension of the 100 per cent. first-year capital allowances for rented televison sets equipped to receive teletext provided by clause 62 should encourage wider use of this product and assist British manufacturing output.

I welcome the assistance that will be given to teletext receivers, which will be of great assistance in my constituency, where British manufacturers make many such sets. However, is it not unfortunate that one of the by-products of what has been proposed will be an incentive to rent teletext sets as against outright purchase? Will my right hon. and learned Friend give an undertaking that consideration will be given to encouraging consumers to purchase these sets?

I am sure that we shall have an opportunity further to explore whether that consequence follows when we debate the specific clause. I am not in a position to give a specific undertaking at this stage.

Several measures in the Bill will assist the construction industry. The increases in the stamp duty thresholds in clause 113 should give some encouragement to house construction for purchase by owner-occupiers, while the introduction of capital allowances for new housing to be let under assured tenancies should help to increase the supply of rented property. Both measures should increase job mobility. There is also further assistance for industrial buildings, including the extension of the small workshop scheme until March 1985 for very small workshops. This scheme has proved extremely successful in increasing the availability of workshops suitable for small businesses, and its extension for very small workshops will not only provide additional work for the construction industry but also assist the small firms sector.

A somewhat larger number of clauses relate to small firms and enterprise. These include several measures designed to encourage equity investment in small and family companies. The business start-up scheme is to be improved by increasing the limit for investment qualifying for relief from £10,000 to £20,000 for 1982–83 and 1983–84, and clause 45 also contains a provision to allow any unused balance of the 1981–82 £10,000 limit to be added to the £20,000 limit for 1982–83. This enables tax relief of up to £22,500 for 1982–83 for people investing in new trading companies, so that an already generous scheme has been made still more so. The Bill also provides new arrangements to help the purchase of own shares by unquoted trading companies, so removing obstacles to their raising equity capital.

Clauses 36 and 37 provide improvements to the existing tax relief for employee profit-sharing schemes, together with the new relief that we are introducing for those exercising share options outside approved schemes. I hope that these changes will ensure that use of these arrangements continues to increase. These schemes increase employees' identification with their firms, which can only contribute to the success of an enterprise and the job security of those who work in it.

Among the other measures in the Bill to assist both new and existing small businesses are the increase in the profits limits for the "small companies" rate of corporation tax in clause 21; the extension of the period for income and corporation tax relief for pre-trading expenditure from one to three years in clause 44; a further increase in the VAT registration limit in clause 12; and relief for VAT paid on supplies of services before registration in clause 13. In addition, clause 42 provides a new relief for businesses' contributions to certain local enterprise agencies, a change which meets widespread representations and has been warmly welcomed.

Individually, measures such as these are not substantial, but collectively they add up to a great deal. They continue the improvement in the tax environment of small businesses that we began in 1979, thereby materially improving prospects for growth and employment in this sector.

The Bill also takes a stage further the reform of the capital taxes begun in 1979. These have a profound effect on motivation, in that they can reduce the willingness to save and invest, out of all proportion to their yield. We have always made it clear that there is a proper place for capital taxes in this country's fiscal regime. But it is vital that they should not destroy enterprise and endeavour.

Undoubtedly the unfairest aspect of capital gains tax has been the way in which it has been levied on paper gains. By providing in clause 71 for an indexation allowance based on future inflation, the Bill sets about remedying this injustice. In so doing it will also make investment in equities more attractive. In turn this will have a beneficial effect on company finances and, therefore, on jobs. The increase in the capital gains tax exemption to £5,000 proposed in clause 65 will go some way towards compensating——

—those with gains affected by past inflation. The exemption will itself be indexed to protect its value against any further falls in the purchasing power of money.

The increase in the capital transfer tax threshold to £55,000 and the reform of the rate bands in clauses 75 and 76 and schedule 10 are also in the nature of an adjustment for inflation. I should perhaps point out that the increase in the CTT rate bands does not fully compensate for inflation since the levels were originally set by the right hon. Member for Leeds, East (Mr. Healey).

The right hon. and learned Gentleman has claimed credit for the reduction of inflation to low levels. Why, under these circumstances, has he brought forward the greatest measures of indexation that we have seen?

I was about to come to the general question of indexation and say it was appropriate to do that. In view of the Budget changes it was reasonable to ask, as I knew the right hon. Gentleman would, what view the Government had on the role of indexation in the economy generally.

There are two important points to have at the forefront of any consideration of this question. First, the impact of indexation will vary enormously. Therefore, it is a mistake to be generally in favour or generally against. Secondly, there is a major difference between automatic indexation provisions and "truth in taxation" provisions, which do no more than ensure that the impact of taxation cannot change drastically as a result of inflation without any express parliamentary decision that this should happen.

Examples of completely unindexed economies and completely indexed economies are both rather rare. Indexation of social security benefits is widespread among industrial countries. In our case this has existed for over a decade. Looking abroad, one will find numerous combinations of indexation of benefits, wages, taxes and financial instruments.

In this country, successive Governments have been anxious to avoid indexation of wages: first, because this would prevent necessary readjustments in real wages from taking place; secondly, because it makes the economy vulnerable to external price shocks; and, finally, because it is usually unnecessary. Unlike, for example, financial contracts, wage bargains are usually renegotiated every year anyway. With the exception of the unhappy experience of threshold agreements, we have prevented the adoption of widespread wage indexation and the problems that it has brought to a number of European economies.

Parliament has decided that, unless it votes otherwise, the thresholds and bands for income tax should be raised in line with inflation, so that it is clear whether a real increase or reduction is being proposed, and that it does not just go by default.

The Bill extends this principle to capital transfer and capital gains taxes. Furthermore, it will largely eliminate the injustice of levying taxes on future paper gains. These are important changes, but they are, in my view, entirely consistent with our previous approach.

During the debates in the Standing Committee considering the Finance Bill last year, the Minister kept telling us that he needed the money. I remember that he coined the phrase "We need the money". Why is it that this year, when the country faces greater difficulties, the right hon. and learned Gentleman is giving money back to the better off in society? He knows that the Government need the money even more than they did last year.

The hon. Gentleman says that we are in greater difficulties this year and that we need the money more. That is strangely inconsistent with the general fiscal position of the Opposition, who call for massively increased borrowing. Therefore, it appears that the hon. Gentleman has been inconsistent. The fact that last year it was not possible to do what this year is possible is to be welcomed rather than deplored.

As the right hon. and learned Gentleman has talked about indexation, perhaps he will answer this question: if the Government think that it is right—as they apparently do—to index future interest payments on some gilt-edged securities, is there not an equally strong case for indexing salaries and wages in the public sector.?

I do not think that that is so. I gave the reasons only a moment ago why it is dangerous to do that. I am sure that the experience of other countries indicates that. On gilt-edged securities, one is not on all fours with that idea.

The right hon. Gentleman asks "Why?" I shall tell him. When offering gilt-edged securities that are indexed, one is not providing an entitlement. One is offering a variety of Government securities and not covering the field exclusively by that means. Therefore, the right hon. Gentleman is not comparing like with like.

Before the right hon. and learned Gentleman leaves this matter, can he say what the eventual full-year cost of this change will be? Pages 10 and 11 of the Red Book state that the cost for the first year will be £150 million. That will be 25 per cent. of the yield. However, a footnote states that the eventual effect is likely to be substantial. Will the full-year effect be £300 million or £400 million? If not, what will it be?

I cannot give the hon. Gentleman a fuller figure now. I shall endeavour to give all the available information during the course of our debates.

What is the Government's position on indexation? Is the right hon. and learned Gentleman saying that the Government are not in favour of general indexation and are doing it only to have truth in taxation?

No, I am not saying that there is an absolute general rule. I have clearly said that circumstances vary and that it is unwise and contrary to what every other country is doing to say that there will be general indexation and that we shall switch to an indexed society. I have said why I believe that indexation of wages is undesirable, whether in the public or the private sector. I have also said that both on truth in taxation grounds and on more general grounds it is desirable to do so for certain taxes. I have supported the inclusion of an index-linked element in the range of Government securities offered to the public.

As by far the largest source of long-term funds is pensions savings, does that mean that the Government are in favour of index-linked pensions? That, surely, is one of the major reasons for holding index-linked bonds.

It is true to say that the range of opportunities offered to the pension industry has been substantially increased by the Government's change in funding arrangements. It is for the industry to assess the extent to which it can avail itself of the change that has taken place.

Does my right hon. and learned Friend agree that only Denmark has index-linked bonds? No other Western country has them.

If my hon. Friend says so, I am sure that that must be right.

Returning to the specific provisions of the Bill, I should like to say a word about North Sea oil taxation. Its structure must be appropriate for conditions of both rising and falling prices. We said last year that we were very willing to consider alternatives to the present structure consistent with our objectives. We have since carefully considered the views put to us by the industry. The changes to the structure proposed in the Bill take account of the industry's strong opposition to a separate tax based on gross revenues rather than profits. We are therefore abolishing SPD.

At the same time, we are introducing a system of advanced payments of PRT which will ensure that the Exchequer continues to receive some take from larger fields at the start of field life. In most cases, these advanced payments will be completely set off against ordinary PRT liabilities within a few years. For the exceptional minority it will be repaid at the end of field life.

The changes that we are making do not greatly affect the overall tax burden on the industry, but they will reduce it slightly. We do not believe the size of that burden will discourage exploration or development, or deprive the industry of a reasonable return. The new structure will provide a firm basis on which the industry can plan for development. Oil companies face many uncertainties—they are in a risky business. The Government cannot change that, and to a considerable extent carry their share of the risk. But what we have done should ensure that returns will be commensurate with risks.

There are two aspects that I wish to raise. The first relates to the clause dealing with the taxation of ethane. Why does it deal only with ethane, and not propane and butane? Secondly, in referring to the taxation of North Sea oil, and oil generally, there seems to be little incentive for the marginal fields—the 50 million to 100 million barrel fields—or for the deeper fields. There is no incentive. The Government's proposals are distinctly detrimental to the development of some fields.

On the hon. Gentleman's first point, we are looking more widely at the case for an extension to other feedstocks and at the problems of the petrochemical industry, but I am not in a position to say more at this stage.

On the hon. Gentleman's second point, I am not sure that I agree with his view of the consequences. No doubt we shall have ample time to explore who is right.

I deal next with excise duties, which are dealt with at the beginning of the Bill. Once again, industrial considerations influenced our decisions.

As my right hon. and learned Friend said in his Budget Statement, a sensible presumption has grown up that these duties—which are levied in money terms—should be adjusted in line with inflation. This year's increases broadly compensate for inflation over the past year, but within this general approach we have tried to act flexibly to take account of special factors where they exist. We have increased the tobacco duty by a smaller amount to take account of the two increases last year. We have treated the spirits duty in the same way because of the particularly difficult position of the Scotch whisky industry.

We have imposed a smaller increase on derv than on petrol. As virtually all derv is used by businesses, this should help keep their costs down. On petrol, where there was a strong case for an increase in the duty in real terms, we have borne in mind the importance of the car in rural communities and confined the increase to one that is broadly in line with inflation. Of course, no increase in these duties is ever popular, but to have allowed them to fall appreciably in real terms would not have been justified, and would have had unacceptable implications for the PSBR.

Most of the measures that I have described aim more or less directly to assist business, but individuals, too, have been assisted. The Bill proposes an increase of about 14 per cent. in the income tax, personal allowances and rate bands. That is 2 per cent. more than the increase needed to compensate for inflation in 1981 as required by the statutory indexation provisions. About 1·2 million people who would have paid tax next year if there had been no increase will not now have to do so. These are people on the very lowest incomes, and they have been kept out of tax altogether.

Some provisions have not been included in the Bill. Proposals to deal with company residences, tax avoidance and upstream loans were all included as draft legislation in the Inland Revenue document "Tax Havens and the Corporate Sector". Why are the Government not proceeding with those proposals? Are they no longer interested in dealing with tax avoidance by such companies, and interested only in pursuing the poor on social security matters?

The hon. Gentleman has not given his normal attention to the Budget Statement, because those matters were explained.

Before concluding, I should point out that there are a number of matters, not in the category to which the hon. Member for South Ayrshire (Mr. Foulkes) referred, on which we have announced proposals but which do not appear in the Bill. As the Bill progresses we shall bring forward new clauses to deal with these matters including the capital allowances for housing let under assured tenancies, which I mentioned earlier. I am sorry that that is the position, but it is necessary to proceed in this way if we are to consult the parties concerned and ensure that the legislation is sound.

The right hon. and learned Gentleman has admitted that there are large gaps in the Bill compared with the intentions announced in the Budget. Why has he reversed the usual order, so that the public expenditure White Paper will not now be debated until after the Finance Bill? He would have been able to fill these gaps if he had not been in such a hurry to debate the Bill today.

As the hon. Gentleman will appreciate, I am not responsible for the order in which business is taken on the Floor of the House.

We naturally look forward with great relish to the many hours that we shall spend in discussion of the detailed provisions of the Bill. Obviously the House will want to examine each proposal in detail. I am delighted that the relish on the Conservative Benches is matched, if not exceeded, by the relish on the Opposition Front Bench.

I am sorry, but I shall not give way.

Naturally, the House will want to examine each proposal in detail. As we do so, I hope that hon. Members will bear in mind the broader context in which we should see the Bill. It represents a continuation of the long-term strategic objectives of the Government to bring down inflation, restore prosperity and reduce unemployment on a sustainable basis. It is in that spirit that I commend the Bill to the House.

4.20 pm

The Chief Secretary was right to refer at the beginning of his speech to the events that have engaged the attention and anxieties of hon. Members since the dramatic announcements last Friday. That, indeed, overshadows our Second Reading debate on the Finance Bill.

I would go further. It will, of course, have some implications for the whole course of the economy as it develops during the coming year. In the most obvious context, it will have some clear reflection in the public expenditure totals for 1982–83. I am not sure whether the hon. Member for Colne Valley (Mr. Wainwright) was right to suggest that it would have been better to consider that first, before Second Reading. I am glad that the matters have been separated, but perhaps we shall have more material to assist us with our discussion of the public expenditure White Paper—given the way in which events have unfolded—when we consider that matter after Easter.

I tried to interrupt the Chief Secretary, but he did not give way. Surely the right hon. and learned Gentleman should have given us some information about the likely cost. We do not blame anyone, but the fact is that we shall be in great financial difficulties as a result of the Falklands dispute, whichever way it goes. The Minister did not attempt to give any idea at all about the effect on the economy. He did not say a word about what would happen. I hope that my right hon. Friend will press the Chief Secretary on this matter, because surely he ought to have given us some information about the economic costs.

My hon. Friend will understand that, while I fully share his wish for the kind of information for which he has asked, it is not within my ability to supply the answers. Nevertheless, I hope that the Chief-Secretary will reply now, or have a word with the Minister who will reply to the debate to see whether a more ample reply can be given then.

Perhaps I can be forgiven for not anticipating that the right hon. Gentleman would raise that point, as I dealt with it much earlier in my speech. It is of considerable importance. It is obviously quite impossible at this stage to give any estimate of the cost of the action that is being taken in response to the Falklands crisis. However, the cost of that expenditure will be met in a way that is consistent with the Government's economic strategy.

I shall have a word to say later about the studied ambiguities of the Chief Secretary's response, but let us explore the matter further just for a moment. There will clearly be implications, at any rate for the cash limits applied to the Ministry of Defence and perhaps to one or two other Departments as well. As I said earlier, there will clearly be an overall effect on the public expenditure totals. Certain costs will arise from consequential measures affecting our visible and invisible trade. All that will affect the national accounts, but, of course, it is too early to give any measure of this because events are only now beginning to unfold.

At this stage, we can, and should, note that the first substantial claims on the 1982–83 contingency reserve have already been made. Secondly, if the implication of what the Chief Secretary said is that, regardless of the costs involved—we simply do not know—he is determined that other Government spending Departments should be affected, and given that we now have an economy with such under-used resources, that will be totally unacceptable, at least to the Opposition.

On Second Reading of the Finance Bill, it is right to look first at the Budget measures in the context of the prospects and of the Government's overall economic strategy. The Government's view was set out in the 1982–83 Red Book which was published the moment the Chancellor sat down on 9 March. Since then, as the Chief Secretary reminded us, the Treasury and Civil Service Select Committee has conducted its examination of the Chancellor together with officials from the Treasury, the Bank of England and the Inland Revenue. It also considered evidence from a number of non-governmental bodies, including the CBI and the TUC. It helpfully published its report yesterday.

It is worth looking at what the Select Committee said. The outlook for 1982, as the Select Committee sees it, is not substantially different from that reflected in the main categories in the Red Book. It is worth noting that the Select Committee says:
"The main feature of the change in GDP between 1981 and 1982 remains the end of destocking accompanied by a very rapid growth of imports".
As for the medium term, the Select Committee notes:
"The assumption of 2½ per cent. growth in 1983–84 and 1984–85 is … at the top end of the range of the 'rise in the supply potential of the economy' … that is, it is enough to hold unemployment roughly constant given demographic changes and changes in productivity."
As the Select Committee points out, the unemployment implications are that in the three years 1982–83 to 1984–85, unemployment, excluding school leavers, will remain constant at just about 3 million registered unemployed. I am sure that the House will agree with its concluding sentences:
"That the assumed rate of growth over 4 years of a cyclical upswing is insufficient to reduce unemployment significantly is clearly disturbing as it suggests a trend of increasing unemployment over the cycle as a whole. It is all the more disturbing when that rate of growth is based on precarious assumptions".
It is important to note the short term and medium term forecasts of the consequences of the Government's budgetary and other measures. To put the matter bluntly, the evidence is now plain—I heard what the Chief Secretary said and shall comment on it in a moment—in support of the change that I made during the Budget debate, namely, that the Government proposals are built upon an assumed unemployment level of just over 3 million. I suspect that that is the new norm in the minds of Treasury Ministers—the new regulator for the economy.

The human, social and economic implications of a permanent army of unemployed of 3 million and a rate of output no greater than at best what is necessary to keep that figure constant have yet to be understood by the electorate, but understand it they will and accept it they will not.

I understand the sensitivity of the Chief Secretary and his colleagues to that charge. That sensitivity has been revealed by the number of occasions on which he has sought deliberately and repeatedly to refute it. His arguments in defence are not strong. All he keeps saying is that, although the Government do not actually want 3 million unemployed, they do not believe they can do anything about it. The moment that we make the assertion that the factors that affect the economy and its output are susceptible, though imperfectly, to deliberate Government intervention by demand management, he says "No, you cannot do that at all because, as we all know, there is no such thing as reflation. You cannot reflate; you can only inflate." With one sweep of his arm the whole post-war history up to 1974 disappears. We do not accept that. Those who assert that and supinely accept 3 million unemployed simply show their own unfitness to hold office and their lack of will.

The right hon. Gentleman makes great play with the unemployment figure. How does he explain that the confidential internal Labour Party report forecast in 1977 that there would be 2½ million unemployed by 1980? That report was remarkably accurate.

The hon. Member for Norfolk, North (Mr. Howell) should not repeat such rubbish. First, I know of no such report. Secondly, I know of no status of any such report. Thirdly, far more persuasive and important: what was the level and trend of unemployment when the Labour Government left office? We do not have to argue about the matter; the facts are on the record.

I want to turn to the Government's economic strategy and major objectives as they define them. The Chief Secretary, in what I thought even by his standards was a remarkably complacent speech, repeated what he and others have said every year since they came to power—that the major objective is to reduce inflation. It was not given quite the same emphasis as before, but it is there and he seems to believe that he has done pretty well.

Our critique on that aspect of the policy remains clear and consistent. First, the Government have persistently chosen the wrong means of pursuing a shared end. I have in mind both the ineffectiveness of the policies they have pursued and the consequences to output and employment that their counter-inflation policies have directly entailed. The ineffectiveness can be judged by the fact that their actions, particularly the virtual doubling of VAT in their first Budget and their persistent and enforced increases in public sector prices, the charges made by nationalised industries, the increases in local authority rents and the inevitable increases in rates, have contributed to the increase in the retail price index which it was their proclaimed aim to avoid.

During the Government's first year, inflation rose dramatically from the 10·3 per cent. which they inherited to 18 per cent. During their second year it was reduced to 12 per cent. at which it remained during their third year. The Government maintain that inflation is now likely to show a fall. They hope that the elusive single figure target will be achieved during this financial year. I believe that could be the case, and if during the course of the fourth year they regain the level from which they started I shall willingly concede the success they have achieved.

I doubt whether there will be any significant fall below 10 per cent. As I remember it, the rate dropped to 7·5 per cent. or 7·8 per cent. in October 1978. I suspect that much will depend upon interest rates and oil prices over which the Government control is inevitably limited, partly due to their own folly in dispensing with exchange controls over capital movements.

Does the right hon. Gentleman not agree that, when the present Administration took over, inflation was rising rapidly and that in an economy where the rate of inflation is increasing rapidly it is extremely difficult to stop that rate of growth? Does he agree that when this Administration took over it also took over overseas debts that his Government had incurred?

The Government took over the overseas debts that the previous Labour Government had incurred, but they also took over the enourmous new earnings that the self-sufficiency in North Sea oil, with its prices doubled in 1979, gave them. As for his other point, I am inclined to believe that the hon. Gentleman is mixing up 1979 with 1974. In 1974 there was a built-in accelerating rate of inflation, which was part of the law of the land with every month that went by—precisely that indexation of incomes to which the Chief Secretary referred. No such excuse is available to the right hon. and learned Gentleman.

Will the right hon. Gentleman not admit that the inflation rate in April 1979 was false for two reasons? The first is that prices had been unfairly kept down. Gas prices had been frozen. Secondly, it was the beginning of a trend. Will the right hon. Gentleman not admit that the inflation rate of today is the first true indicator since the war with no dividend controls, no foreign exchange controls, no price controls and that sort of thing. In talking of unemployment a few moments ago, the right hon. Gentleman said that the rate was 1·5 million when his Government left office. Will he agree that the extent of overmanning was between 2 million and 3 million?

If the hon. Gentleman could say to me and to the House that this country was still producing the same amount of GDP with a smaller labour force as a result of three years of Conservative control, I would have to listen to him. An interesting argument would arise over whether our labour resources were being used more productively. Unhappily for the hon. Gentleman, what he has to say to me is not that at all. Not only are about 150 per cent. more people unemployed than two or three years ago, but our industrial output is also about 14 per cent. lower. That is the folly. That is the failure. That is the answer to the hon. Gentleman.

I am not giving way twice. I wish to move to slightly more controversial matters. I do not believe that there is serious dispute over what I have stated so far. I turn to the other consequences of this all-too-modest improvement in the rate of inflation. No one can doubt the price that has had to be paid not by the Government but by the nation, by industry and by our people. The fall in GDP has been the sharpest in the Western world. The increase in unemployment puts us into the top position of major industrial nations in that wretched league.

Almost in anticipation of the question I was asked, I looked up the statistics. We are one of the seven major countries—Japan, Italy, France, Germany, Canada, the United States and ourselves—that have their summit meetings on an annual basis. I shall compare the second quarter of 1979 with the last quarter of 1981, the latest figures available. Since the second quarter of 1979, when the Conservative Government became responsible for our affairs and during a period of growing recession following the second oil shock, Japan has increased its industrial output in volume terms by 14·2 per cent., Italy by 7·5 per cent. and France by 1·7 per cent. Germany is down by 1·7 per cent., Canada by 3·7 per cent., the United States by 3·9 per cent. and the United Kingdom by 11·9 per cent. We are bottom of the league. The same applies to manufacturing industry.

I turn now to the other side of the question, which is unemployment. In the second quarter of 1979, Britain occupied fourth place. I should like to have seen us bottom of that league. The unemployment rate was 5·7 per cent. Top of the league was Italy with 7·6 per cent. In the fourth quarter of 1981, all seven nations show an increase. Unemployment in Italy, which now occupies second place, has risen from 7·6 to 8·9 per cent. Top of the league is Britain with 12·3 per cent. All the rest are well below that figure, including France and Germany and those countries that have suffered seriously from the second oil shock about which we hear so much.

The last point is one that I have made repeatedly but which I make again. The one difference between Britain and all these countries is that we alone have been self-sufficient in oil during this period.

Does the right hon. Gentleman not consider as significant and one of the principal causes of the statistics that he gives the fact that British industry has been losing its relative competitiveness for over two decades? Is the right hon. Gentleman really trying to tell the House that overmanning, restrictive practices and the refusal to accept new technology have not had a significant impact? Will he deny that, in the last year, British Leyland, for example, has produced approximately the same number of cars with 30,000 fewer workers?

If we are being serious with each other—I hope that occasionally we can be—we will agree that there are deep-seated problems in our economy that have existed over the years and under successive Governments. There is much to put right. I would, however, implore Conservative Members to think seriously why the country has suffered not a setback but something approaching a disaster in precisely the three years during which the Conservative Government have pursued policies that they believe are radically different from the policies pursued by all previous post-war Governments.

I hope that the Government have reflected on this experience, although I see no sign of ft. I hope, however, that they will do so. It is a great irony that one of their many charges against the Opposition and against the policies of demand of reflation that we urge is that any increase in money supply will lead not to an increase in real demand for goods and services but simply to higher costs and prices. We contest this. We are prepared to resume the argument at any time. The irony is, surely, that the Government have demonstrated the truth of the very opposite proposition. The policies that are aimed at reducing the money supply and, according to the Government's reasoning, inflation have mainly had the effect not of reducing the rate of inflation but of reducing output and employment. That is the logical consequence.

The House will note that I referred to policies "aimed at reducing the money supply". The reality has been very different, as those hon. Members who served on the treadmill of the Select Committee will be only too willing to confirm. The cornerstone of the Government's counter-inflation policy, the setting of monetary targets in the medium-term financial strategy, has fallen out. In the first year, the range of 7 to 11 per cent. achieved an outturn of 19 per cent. In the second year, the figure of 6 to 10 per cent. ended up as 16½ per cent. This year, of course, the Government have given up the ghost. There is an 8 to 12 per cent. target that we are asked this year not to take too seriously and we are asked to judge it simultaneously with no fewer than four other targets. The whole process has become meaningless. The Opposition note that.

I hope that hon. Members will note the extent to which the Government have failed to achieve a reduction in the money supply sterling M3. According to Treasury Ministers 18 months ago, money supply was the one thing that was really and truly under Government control. Let us not forget those words. In the past two-and-three-quarter years, since the Tories came to power, money supply has risen by no less than 55 per cent. If there was anything in the money supply theory, the implications for inflation in 1983–84 and 1984–85 must be truly terrifying.

Is the right hon. Gentleman complaining that there has been insufficient monetary growth or too much?

The right hon. and learned Gentleman will never find a quotation in which I have subscribed to or supported the doctrines of money supply targets, either in Opposition or in Government. I am afraid that he cannot get me on that one. It is a completely misconceived way of tackling the problem of inflation.

As the right hon. Gentleman regards it as a matter of no importance, why is he wasting the time of the House on it?

As the House will know, I normally spend virtually no time on the matter—I simply brush it aside. Money supply is not a meaningful economic indicator. I have maintained that view from the first time that I spoke on these matters from the Dispatch Box. I have said that I am extremely interested in the problem of inflation and in dealing with the problems of the balance of payments and the rest, but I am not at all interested in so-called intermediate targets such as money supply, which is supposed to affect inflation, and others such as the public sector borrowing requirement.

I have spent my time, quite exceptionally, assisting Conservative Members who have believed in this nonsense and who, if their original beliefs were correct, must be facing the prospect of complete disaster in the next few years. I want to give them a little encouragement.

Does the right hon. Gentleman believe that the Government of which he was a member and in which the right hon. Member for Leeds, East (Mr. Healey) was Chancellor were mistaken to have money supply targets? If so, what harm does he believe they did?

The rightful charge against my right hon. Friend the Member for Leeds, East (Mr. Healey) is that he adumbrated the target for money supply. But he was not a true monetarist, in the sense that he did not——

He did not believe them.

My right hon. Friend adumbrated them as did many other European Governments, but he absolutely did not try to make money supply growth targets the major regulatory factor of the British economy. Nor did he seek to make the PSBR the overriding regulator of the British economy. He was far too interested in common-sense matters such as how the balance of payments was doing and what was the state of employment.

I turn to what I understand to be the second plank of the Government's policy. The one of which we have heard is the control of the money supply.

Are we to understand that when the right hon. Member for Leeds, East (Mr. Healey) agreed to money supply targets at the request of the IMF the Labour Government had no intention of doing anything other than adumbrate them and that they did not intend to stick to the targets at all?

The basic reason why the IMF came into our affairs then, as on previous occasions, was that we were in serious balance of payments difficulties. We had to borrow internationally to manage our current and other accounts. If the House is in the least rational, it will well understand that with the quadrupling of oil prices, minimal reserves and an ordinary current account deficit of more than £1,200 million in 1973, it is remarkable that we were not driven to international borrowing much earlier. Money supply targets were all part of the IMF rigmarole and one of the matters to which the IMF attached importance.

The basic role of the IMF was to get its money back, and that, of course, was what we were prepared for.

It is quite exceptional for the right hon. and learned Gentleman to seek to enter into major debate about 1976 in the middle of the Second Reading of the 1982 Finance Bill. I have answered his point three or four times. I have given him my view of the irrelevance and absurdity of money supply figures. I have told him what I think about them. I have also pointed out the results of his attempt to apply them and the fact that he has failed to apply them in spite of his best endeavours. I have tried to educate the Tory Party out of the nonsense that it has pursued and to guide it into wiser paths for the future.

I must proceed. [Interruption.] I shall deal with a second matter on the supply side of the economy. [Interruption.] The Government's doctrine on the supply side has always been ill defined and at times I have thought it even mystical.

Order. It is one thing to ask a Minister or Shadow Minister at the Dispatch Box a question but quite another to have a conversation across the Chamber.

I owe you an apology, Mr. Deputy Speaker. Conservative Members were casting aspersions. Whether my right hon. Friend is right or wrong, the Tory Party do nothing right and matters are a bloody sight worse now than they were under the last Labour Government.

The Government's strategy, if their mix of polices can be dignified with such a term, has rested not only on their attempt to control inflation but on what they describe as improvement in the supply side of the economy. By that, they seem to mean that if the inflation rate is reduced, provided that the Government lift the burdens of taxation from the people and remove the disincentive effects of high personal taxation, British industry will bound forward like a prisoner released from his chains, or, in the unforgettable phrase of the then Secretary of State for Industry, British industry will be galvanised.

I shall have something further to say about that later. Suffice it for the meantime to note that, far from reducing the burdens of taxation, the Government have markedly increased them. Although those with the highest incomes—unearned just as much as, or perhaps even more than, earned incomes—have benefited from taxation cuts, the great bulk of the British people, far from experiencing the stimulus of a reduction in direct taxation, have experienced a substantial increase in it.

That brings me to the second leg of the Government's supply side policy. Time and again, the Government have emphasised the importance that they attach to the reduction of interest rates. On Second Reading of last year's Finance Bill, a reduction from 14 per cent. to 12 per cent. minimum lending rate was presented to the House as the most significant component in an otherwise pretty horrendous Budget package. The Government clearly believed that that would be followed by further reductions in the course of the year, but events soon put a stop to that and by last autumn short-term interest rates had risen to 16 per cent. They are still 13 per cent. today, which is hardly the cause for celebration that the Chief Secretary sought to imply.

As we all know, every 1 per cent. in interest rates imposes a heavy additional cost on British industry. As my hon. Friend the Member for Newham, North-West (Mr. Lewis) suggested, it is not in the least strange that the figures for company liquidations are so wretched. The 19 to 25 March issue of British Business showed that company liquidations in February were 13 per cent. up on the figure for February 1981, which was itself 74 per cent. up on that for February 1980. Like the Chief Secretary, I am always sceptical about figures for one month, so I shall offer him figures for the last quarter. According to Trade Indemnity, the credit insurance underwriters who keep a special watch on company liquidations, business failures increased by 15 per cent. in the first quarter of 1982 compared with the same quarter of 1981. The problem is therefore very great.

I offer one last reflection on this. It must surely be plain that whatever contribution inflation makes to our difficulties—there is no doubt that it contributes—the conquest of inflation is no guarantee that the problem of unemployment has been solved. Last weekend, some of us attended a conference with German politicians and leaders. The interesting fact emerged that despite an inflation rate of only 4 per cent. to 5 per cent., Germany is nevertheless suffering a marked increase in unemployment. Despite the removal of many guest workers back to their countries of origin, unemployment in Germany is approaching 2 million. Clearly inflation is not causing the problem or getting in the way of a solution. The only possible explanation is lack of demand. Lack of effective demand, not only in Britain and Germany but throughout the Western world, is the central problem that we have to face and which the Government will not face and will not devise policies nationally or internationally to combat it. So much for supply side policy.

The Government would like to believe that interest rate policy will be more successful in 1982–83 than it was last year. Given the continuing uncertainties of American interest rate policy and the continuing orthodoxies about the overriding importance of the money supply, the continued free movement of British capital and, above all, as I understand it, the Government's adoption of an exchange rate target, I am far from confident that we shall sustain even the present high short-term interest rates in the coming year.

While I contemplate the economic problems that this country faces and the Government's failed strategy, which is still substantially in place, I can only view the prospect ahead with the gravest concern. The fundamental flaw in the Bill is that too much money is being taken out of the economy in taxation. We all know that the Government do not believe in fiscal stimulus, and there is almost none in the Bill. Once national insurance is brought into the reckoning, as it must be, the volume of taxation on incomes has not lightened this year. Indeed, it has slightly increased. At the same time, there are continued efforts to cut public expenditure. Despite the smokescreen that the abandonment of volume targets has put around the totals, it is clear that the only increase in public expenditure planned for this year will be in the payment of benefit to still greater numbers of people out of work.

The end of de-stocking occurred in 1981, so there is no evidence that any substantial forces of recovery will be operating on our economy in 1982–83. I well understand that the short-term effects of the welcome downward movement of oil prices will assist expansion in the world economy, but in considering the year as a whole my optimism about oil prices does not extend that far.

We believe—I shall return to this—that a substantial stimulus is needed through an increase in public expenditure and other means. We also believe that the competitiveness of the economy can be assisted by changes in taxation and the lightening of the tax burden.

The only measure to which I can offer support is the reduction in the national insurance surcharge, which I have been urging upon the Government for a year or more, and which will reduce costs particularly in manufacturing industry and thus of increasing the competitiveness of British products in both export and domestic markets. Nevertheless, I must tell the Chief Secretary that it is an extraordinary procedure not merely, as it were, to adjust the rate support grant to local authorities in respect of that part of the national insurance surcharge which they would otherwise have paid, but to charge them with the total amount so that they suffer a reduction in rate support grant greater than the saving in cost brought about by the reduction in national insurance surcharge. In other words, yet another disguised cut is being inflicted on every town hall and county hall in the land.

Leaving that aside, the tax burden remains too heavy. Not only is it too heavy overall, but once again it is grotesquely tilted in favour of those who have and totally unhelpful to those who have not. Here, my first concern is the treatment of the unemployed, who are to be brought into taxation for the first time in July this year. We were led by ministerial statements to believe that the sharp cut of five points in the uprating of unemployment benefit as compared with other social security benefits two years ago would be restored when unemployment benefit came into the tax net, but that is not so. Unemployment pay is to be taxed, but its value is not to be restored. It is amazing that the Government should fail to make good that shortfall in unemployment pay, as it is only from 1 January this year that earnings-related benefit, which gave such considerable assistance to the unemployed in the first six months of their unemployment, has been phased out.

The difference in the financial situation of a newly unemployed man on average earnings with an average size family this year, compared with what it was last year and when the Labour Party was in office three years ago, is about £13 a week. On fair and relevant calculations—which we will get before the House in the form of a written question and answer—there is a much greater loss once one takes into account the charge to taxation of people who become unemployed within a year, and, further, the postponement of their tax refunds to the end of the financial year when they become unemployed.

My right hon. Friend's fundamental criticism of the Budget is that it fails to reflate. Is not another major criticism of this Budget that it has handed out several hundreds of millions of pounds to the better-off in society in the form of capital gains and capital transfer tax concessions? At the same time, the same Budget is imposing a tax burden on the unemployed. Is not that one of our major objections?

I strongly agree with my hon. Friend. If one was to bring a double-barrelled shotgun against the Finance Bill, the first of my bullets would be the one that I have fired and the second would be the charge that my hon. Friend has made, which I intend to develop.

Government policy has directly contributed to the growth of unemployment. It is outrageous that those who have been directly affected by that policy, and who are unemployed through no fault of their own, should be singled out for such exceptional and severe penalties.

The Government have not grown weary of ill-doing. Only this week they have made an administrative decision which will further damage unemployed people. Their tax refunds will not be paid before the end of the tax year.

Let me turn to the great body of taxpayers. True, the Government have indexed tax allowances this year. That is expressed in some of the clauses of the Finance Bill. The Rooker-Wise-Lawson amendment has been honoured by the Chancellor in the 1982 Budget. However, as we all know, he dishonoured it completely by making no allowance in last year's Budget. Now he has made a modest step in conceding a 2 per cent. additional allowance to taxpayers. However, he has a long way to go, and he knows it—13 per cent.—before he restores the situation to what it was up to the 1981 Budget.

The results of all this are now well known to the House and to the country. It took the Chancellor and the Chief Secretary quite a time to reveal—or was it to learn?—the fact that when income tax and national insurance were taken together no one on incomes up to 150 per cent. of average earnings failed to be worse off this year than they were even in 1981–82. Their position compared to what it was in 1980–81 is markedly worse. A married couple with two children on three quarters of average earnings paid 40·7 per cent. of their income in taxes of all kinds in 1980–81. The same family, on 75 per cent. of average earnings in 1982–83, will pay no less than 43·4 per cent. Those on average earnings paid 42·7 per cent. in 1980–81 and will pay 45·2 per cent. in the coming year. Those on 150 per cent. of average earnings in 1980–81 were levied 43·9 per cent. of their income in taxation. This year they will pay 46·5 per cent. Only those with incomes several multiples in excess of average earnings have found their situation improved. Yet it is that relatively small group of people on high earned and unearned incomes, including the owners of property, who have been singled out this year for specially favourable treatment.

The Chancellor has virtually demolished the capital gains tax. He has raised the exemption level to £5,000 in a single year. He has indexed the £5,000 threshold, and he has introduced the principle of indexing into the capital sum.

For those paying capital transfer tax, the treatment has been no less generous. Here, too, the thresholds have been increased, the bands changed, and both have been indexed.

As my hon. Friend the Member for Workington (Mr. Campbell-Savours) said, the costs are considerable. I will not try to bring together the vast sums which are the cumulative total of the Government's concessions to those who are affected by these taxes. As this year's Red Book indicates, the cost in this financial year of the changes in the capital gains and capital transfer taxes will be £35 million and in a full year no less than £270 million. When the answer comes to the question of my hon. Friend the Member for Blackburn (Mr. Straw), we shall find out that the bill is substantially larger than that.

I find it extraordinary that the Chancellor should see fit to introduce this substantial indexing of threshold rate bands and capital sums in the interests of those who are substantial property owners, while at the same time he has done so little to assist those with little capital at the ocher end of the incomes scale.

I am sure that many hon. Members will agree that it is a disgraceful feature of the present supplementary benefit regulations that no payment of supplementary benefit can be made to anyone who has a capital sum of £2,000 or more. In November this year that figure is to be raised to £2,500. There is no proposal for indexing VAT, and in any event it is plainly too low, particularly for those people with redundancy and severence lump payments who are obliged to dispose of their compensation before they become entitled to supplementary benefit.

I conclude on my main charge against the Bill——

My right hon. Friend has made a devastating attack on the Government's fiscal policy. Will he not agree that the before-tax pay of manual workers in Britain has fallen by 5 per cent. relative to average earnings? Therefore, even before the tax position, the Government have hammered the least-well-off.

That is perfectly true and I am grateful to my hon. Friend for pointing it out. The only reason why the impact of Government policy on pre-tax earnings—and therefore on ordinary spending—has not been felt so far is that people have been drawing on their savings. I believe that we will now see a considerable contraction, not merely in pre-tax and post-tax earnings but also in the consequent demand for goods and services throughout the economy. That is a further source of worry for the future.

The Budget and the Finance Bill do nothing to reduce the great evil of unemployment in Britain. Nor do they—apart from the small-scale assistance to bulk users of energy and the cut in the national insurance surcharge—do anything to improve the competitiveness of British industry.

A week before the Chancellor's Budget I urged a different strategy, comprising a substantial increase in public expenditure, a cut in interest rates and in our present unrealistic exchange rate and a package of tax reduction measures to start the economy on the path to recovery.

Now that our money GDP has risen to over £280 billion a year, the £9 billion involved amounts to just over a 3 per cent. increase in demand. Given the vast under-used capacity of British industry, that is in no sense a massive and, as the Government would like to think, irresponsible increase in demand. The increase in the PSBR associated with that increase would be substantially less—some £5·5 billion—giving a PSBR equal to just under 5½ per cent. of our GDP, slightly less than the 5·7 per cent. PSBR which the Government achieved in 1980–81.

But the difference in the outlook for the British economy would be immense, and the outlook would be immensely improved. Instead of the continued 3 million-plus unemployed, there would be a reduction of at least 500,000. We should, moreover, increase our gross domestic product not by the precarious 2 per cent. that appears in the Red Book, but by some 5 per cent. Lack of foresight, grievous errors in strategy and stubbornness in error have characterised many aspects of Government policy. At the moment, it is in defence and foreign policy that those criticisms are most vividly demonstrated. However, taking the past three years as a whole, and taking account of the prospect that lies before us until the next general election, there can be little doubt that it is precisely in the central management of the economy that the Government's errors and failures have been the most damaging of all.

We shall, of course, debate and seek to change many aspects of the Bill. But the Bill—which embodies, once again, an economic strategy of disaster and decline—is what we shall vote against later today.

5.20 pm

The right hon. Member for Stepney and Poplar (Mr. Shore) was hard put to it to make out a case against the Budget, despite the invaluable help that he received from the hon. Member for Newham, North-West (Mr. Lewis).

It is the height of hypocrisy for any Opposition Member to criticise the Government's economic strategy. The Labour Government, who left us with overseas debts, had to go to the International Monetary Fund. When the Conservative Party took over from that Government, unemployment and inflation were rising, production was falling and so on. However, the Government have begun to repay the overseas debts. I can well understand the right hon. Gentleman's irritation. The Government's policies appear to be working. Production is increasing and inflation is falling. Wage claims are more realistic and exports have improved. Therefore, any fair-minded person will accept that the Government's policies are working. I am delighted that the Budget continues something that we started two and a half years ago.

In Committee, we shall have quite a lot of fun and debate on the Bill's 139 clauses and 17 schedules. The general reaction to the Budget in industry, in the City, and in the street is that it is to be welcomed. It has helped business. This year, the reduction in taxation is just short of £2 billion. In a full year it is just short of £3·5 billion. That must be good. The right hon. Member for Stepney and Poplar failed to refer to the world recession. However, that recession has been deeper than any of us imagined.

I shall concentrate on indexation. Clause 65 refers to capital gains tax. I know that this subject is anathema to some Opposition Members, but capital gains tax is a tax on inflation. Like most people, I am delighted that the threshold has been increased to £5,000. Indexation will continue under a sort of Rooker-Wise formula. That applies from 6 April 1982. However, with respect to my right hon. and learned Friend the Chief Secretary, the Treasury has created too many complications. The system could have been much simpler. Many of my hon. Friends and I would have preferred the tax to be phased out by reducing the amount of tax levied from 30 per cent. after one year, to 25 per cent. after two years, to 20 per cent. after three years and so on. That would phase out capital gains tax if an asset were held for six years.

That might be felt to be too generous. Alternatively, the percentage could be reduced every two years and capital gains tax could be phased out over a 12-year period. That would be rough justice for inflation. As the Bill stands, there is no relief for the high inflation that we have suffered between 1965 and 1982—a period of 17 years.

Hon. Members will recall that 5 April 1965 is the effective date for asset valuation. Let us consider the example of an asset bought for £10,000 in 1965. If the asset has not increased in real value since 1965, but has merely increased in line with inflation, it is worth—in 1982—£43,000 without there having been any increase in the asset's value but with a total rate of inflation since 1965 of 430 per cent. If the asset is sold, there is a nominal profit of £33,000 from which we should deduct the £5,000 threshold. That gives a £28,000 liability for capital gains tax, which would be £8,400 at 30 per cent.

Unless my right hon. and learned Friend changes clause 65, that position will remain, because, with the indexation of that hypothetical asset in 1982, the £5,000 threshold will increase—if inflation stands at 10 per cent.—by 10 per cent. of the original cost price. An anomaly remains, and I hope that my right hon. and learned Friend will consider it in Committee. Everyone agrees that the £5,000 threshold is rough justice for inflationary tendencies. However, as there is to be no carrying forward, the so-called bed and breakfast sale of shares at the end of the fiscal year should be allowed.

I turn to clause 76 and capital transfer tax. I welcome the indexation. Capital taxes are certainly different from revenue taxes. One's revenue goes up and down every year. Indeed, one hopes that it will increase each year. There is an annual adjustment. However, with capital taxes the capital remains. Meanwhile, inflation continues. That means that indexation is a good thing.

We are told that the public sector borrowing requirement will amount to about £9,500 million. How are we to finance it? Last year, the Chancellor of the Exchequer introduced index-linked bonds. They were issued only to pension funds. The first tranche of £1 billion went all right, as did the second tranche of £1 billion. However, the third tranche of £750 million did not go. About 60 per cent. was left with the underwriters. Consequently, my right hon. and learned Friend announced in the Budget that he would extend the holding of index-linked bonds to everyone.

As opposed to equities, the gilt market enjoys many privileges. If one holds gilts for a certain period, the capital profit is exempt from capital gains tax. No matter which party is in office, that gives the Government of the day an advantage when borrowing on the market. I understood my right hon. and learned Friend to say that the Treasury and Civil Service Committee believed that index-linked bonds were all right. It did not say that at all. In page 19 of the fourth report, it said:
"We believe that the Treasury's consultations with outside interests on these matters before the Budget were of a very limited nature. The Committee therefore intend to conduct an enquiry into the implications of the extension of indexation in financial markets."
I should not have thought that was agreement that index-linked bonds were good.

The Committee went on to say that index-linked bonds would affect the equity market, which in turn would affect investment in business and, as a sideline, building societies and house purchase.

In page 19 of the report the Committee says that an index-linked bond offers an investor the protection of capital against inflation. Everyone would agree with that. But how can it be done? It is done only by saddling the taxpayer with the cost of inflation. Last year the total amount of gilts sold on the market was about £7,500 million. Of that, one-third—worth £2,500 million—were index-linked. The Select Committee is to reconsider the matter.

One matter that I do not care for in relation to index-linked bonds is that, if one takes the effect not only on the building societies but on pension funds, there will be more and more pressure on the index-linked pensions enjoyed by some civil servants and others in the public sector but which the private sector cannot afford. I refer to the Scott report. I know of no private British company with a guaranteed index-linked pension scheme. The normal pension scheme probably has a 2 per cent. or 3 per cent. escalating clause each year. Depending on the profitability of a company, the board of directors may decide to put more money into the pension fund so that, instead of a 3 per cent. increase, there will be a 10 per cent. increase. Sometimes people have been fortunate enough to receive a pension that is nearly index-linked, but it is not a statutory or legal responsibility of the employer.

The only reason why index-linked pensions are paid in the public sector is that they are not funded. No one could fund index-linked pensions in the private sector, which is why there has always been resistance towards them. Many of us would now agree that it was a mistake for a previous Conservative Administration to introduce index-linked pensions in 1971–72, because it is a millstone round the necks of future taxpayers. The indexation part of public sector pensions alone costs between £250 million and £300 million, which must be borne by the taxpayers.

If one considers the effect of an extension of index-linking, one must examine the position of pension funds. At the moment, the portfolio of the pension fund extends over many investments, including overseas investment, property, equities and gilts. In those circumstances, no pension fund manager could guarantee an index-linked pension. It will mean that more and more pension funds must lend their money to the Government under index-linked bonds. Eventually, the future taxpayer will be taking on the responsibility of the index-linked pension not only in the public but in the private sector.

Indexation was only touched upon by the Treasury and Civil Service Select Committee. There is great difficulty and danger in pension funds going into the hands of the Government. One issues an index-linked bond today with a 2 per cent. to 2·5 per cent. real rate of interest, plus inflation-proofing. If one assumes that the rate of inflation is a constant 10 per cent. and that it is a 10-year bond, the Government of the day can borrow 100 units, but, at the end of the 10 years, they must repay £236. I do not object to that as yet, but how do the Government account for the £136? They could set up a sinking fund during the 10 years to pay for that, as any business would. However, the Government are not doing that, as is clear from the Red Book. The storing up of capital appreciation by any Government is dangerous. I urge my right hon. and learned Friend to cancel index-linking, but, if he is to continue, he must set up a sinking fund.

It is said that companies could borrow money on index-linked bonds. That is true, but it would be a very stupid financial director who did so, because he has no control over the rate of inflation. In any case, if he were foolish enough to do it, he would borrow £100, set up a sinking fund and set aside so much cash each year so that, at the end of the 10 years, he would have the capital to repay the debt. Private industry cannot possibly do that at the moment, because our tax laws are such that the company can charge only 2·5 per cent. interest per annum. It cannot charge the capital appreciation or increment during the 10 years. What company will issue bonds if, first, the financial director does not know what the rate of inflation will be and, secondly, he cannot charge the extra against his profit?

The right hon. Member for Stepney and Poplar was keen before the Budget, as were some of his colleagues, that it should be reflationary. That would be easy with index-linked bonds. If the right hon. Gentleman wished to spend another £9,000 million, he could issue index-linked bonds at 2 per cent. to 2·5 per cent. Instead of the going rate of 12 per cent. that he would normally pay on that borrowing—namely, £1,080 million—he need only pay £180 million while storing up the repayments for future taxpayers.

I have paid great attention to the hon. Member for Croydon, South (Sir W. Clark). I ask him in all seriousness not to confuse a figure for the increase in general stimulus to the economy with an increase in the PSBR, which I gave as 0·5 billion. Secondly, in the context of his interesting remarks about sinking funds—which is a splendid eighteenth century concept that I can well remember—surely the modern equivalent of that is to have a growth policy. Unless we have a regular growth in the GDP, shall we not be in trouble?

I agree with the right hon. Gentleman that reflation of £9 billion would probably add only £5 billion to £6 billion to the PSBR. However, my argument remains the same. I had worked out the interest on £9,000 million, but we could work it out on £6,000 million. It still shows that, with an index-linked bond in the year that one borrows the money and in subsequent years, the servicing of that debt is very much less. Of course, a sinking fund is an old-fashioned concept, but it is fairly sound. If one knows that one is building up a debt that must be paid in future, one can take action so that money is available to repay the debt at the end of the period. No Government can guarantee growth. It does not matter how successful they are.

One cannot guarantee growth. No Government, including this Government, have been foolish enough to say that they could.

At the moment the national debt is £120 billion. This is a purely hypothetical example, but if the national debt could be converted into index-linked bonds, it would not cost about £15 billion to service. That adds to the figure of the public sector borrowing requirement. If there were a 2 per cent. or a 2½ per cent. coupon, we could reduce the servicing cost from £15 billion to £3 billion, because we would not be doing anything about capital appreciation. Therefore, there would be no public sector borrowing requirement. Anyone in his right mind must realise that——

Indeed. Anyone in his right mind must see that that is absolute folly.

I hope that my right hon. and learned Friend the Chief Secretary will think again. It is all right to talk about index-linked bonds and to say that the Government's objective is to reduce inflation. I go along with that, although the Government cannot guarantee it. No one can guarantee that. However, we are not doing too badly at the moment. In any case, we cannot always guarantee that the economy will be under sound and good management. It is possible that the Opposition may come to power some time. Let us just think of what would happen and of the bonanza that any politician or Government could have with index-linked bonds.

As I said in an intervention in the speech of my right hon. and learned Friend, only one other country in the Western world has any index-linking—Denmark. I do not think that I would go along with what the Danes do. It is folly for the United Kingdom——

If there were a large amount of indexed stock extant at some hypothetical time in the next century when the Oppostion take office, might that deter them from incurring too much inflation because of the need to redeem the stock during their time in office?

I agree. My hon. Friend knows this as well as anyone else. The issue of index-linked bonds fudges the national figures. I draw my hon. Friend's attention to the Red Book. In page 33, line 13, it gives-the cost of servicing the PSBR as £15,411 million. That evidence came from the Select Committee. That includes the inflationary element of the index-linked bonds that have been issued. Line 30 refers to a deduction of £518 million, which took out the inflation-proofing.

I say in all sincerity that to put that weapon in the hands of any politician is saddling future taxpayers with a millstone that we cannot afford. Following the Scott report, we already have the albatross of the index-linked pension. It would be folly to go on with index-linked bonds. It would mean that future taxpayers would be taking on the responsibility of index-linked bonds not only for the public sector but for the private sector. I urge my right hon. and learned Friend to think again.

5.44 pm

I do not share the depth of concern of the hon. Member for Croydon, South (Sir W. Clark) about an organised approach to indexation, but Liberal Members do share the concern that he has eloquently voiced about the Government's disorganised indexation this year, which shows every sign of being improvised, imperfectly coordinated with the Bank of England and not sufficiently thought through.

I experienced one small symptom of that when, in preparation for today's debate, optimist that I am, I tabled a question for priority answer by the Chancellor of the Exchequer. I asked for the cost that had been entered into the public expenditure White Paper for the indexation of Government securities already in issue and how that had been computed. I knew that that was buried somewhere in a great amalgamated total in the public expenditure White Paper so the answer must be at the top of someone's desk, ready to be flicked out and sent back. Not at all. A Treasury Minister replied that he would let me know as soon as possible.

Treasury Ministers are not in control of the obligations that they hand on to later Governments. One thing is certain from the way in which they behave over the indexation of Government securities—they do not expect a Conservative Government to be there to reap the harvest of these ill-advised issues. It is no wonder the concluding sentence of the report of the Select Committee of the Treasury and Civil Service on the Budget reads thus:
"We consider that there is a need for the Government to spell out their long-term objectives for the indexation of the financial and tax systems."
I hope that the Financial Secretary will be good enough to do just that for us.

The Chief Secretary's usual bland complacency seemed to have been nourished from two sources this afternoon. The first was the release of his boss from the thraldom of the old medium-term financial strategy, which has dropped away in tatters. I can imagine the relief that must give to Treasury Ministers. Secondly, the Chief Secretary seemed to be deriving enormously disproportionate satisfaction from the inevitable, but tentative, cyclical recovery of some selective parts of our sad economy. The Finance Bill will do nothing seriously to nurture that modest recovery, of which there are a few signs here and there.

The right hon. Member for Stepney and Poplar (Mr. Shore) referred to procedure. There has been a reversal of our usual procedure in the House—that is, to debate the public expenditure White Paper a short time before we debate the Second Reading of the Finance Bill. This year the Finance Bill is being taken first. It was published in great haste, and with many gaps, so that it could be taken first. In his usual grandmotherly way, that reversal of order is meant to try to make the Chancellor of the Exchequer's point that, as he says in his book—and what a slender book it is proving to be—
"finance determines expenditure and not expenditure finance."
Therefore, he says that to teach the children a lesson we shall debate the Finance Bill first, which will rub in his slender and shaky point.

The results are not a credit to Treasury Ministers. As the Chief Secretary admitted, the Bill is full of gaps compared with the intentions for legislation announced in the Budget. That does not help any part of the financial or business community or other taxpayers. It means that these major matters will be slipped in by way of amendment during the long, weary passage of the Bill through Committee. It has been deplored many times that the Government, not being able to make up their minds when they present a Bill to the House, should come along with afterthoughts, to the great inconvenience of hon. Members. Also, there has been barely time for the Treasury and Civil Service Committee to report. The Chairman of the Select Committee properly apologised, when he published the report, for the improvised appearance of the document. There has not even been time for a respectable printed document to reach the hands of hon. Members. There were various inquiries that we on that Committee would have liked to pursue before making that report.

I hope that hon. Members will not dismiss this next point as trivial. The Bill was published in such haste that Her Majesty's Stationery Office ran out of stock after supplying the Vote Office and one or two favoured London customers. Perhaps because I am an accountant I have been sent serious complaints from accountants in two big provincial cities that it was well into the following week, after all possible efforts that they made, before they were able to come by a copy of the Bill because the Stationery Office could not supply them.

That is a hindrance to our procedures in the House, because, hon. Members will agree, we rely upon expert comments from people whose professional expertise enables them to understand this appalling reference by legislation. We have not as much of that expertise as we should have had because of the haste in getting the Bill together.

I return briefly, but sorrowfully, to the extraordinary copybook maxim that the Chancellor parades again and again. I have to repeat it. It is that
"finance determines expenditure and not expenditure finance".
I do not know what his Front Bench colleagues will say on this basis when they come to the House for Supplementary Estimates to pursue the results of their negligence about the Falkland Islands—that is a matter for speculation—but I know that this absurd maxim does not tie up with the solemn British commitment to NATO, which is expressed solemnly in real terms. We cannot be excused for reneging on that by saying that there is not enough cash in the kitty.

And how do Treasury Ministers reconcile keeping their solemn election commitment about maintaining the Health Service and providing in real terms enough for its maintenance year by year with their dictum that everything must be subject to the financial criteria? This childish maxim is based on the false analogy that the Exchequer is a retail shop writ large. Or perhaps, as the Prime Minister often has it, an ordinary household budget writ large.

We all know that the Government, with their power to organise the money supply and control over borrowing, are in a completely different position. Homely little comparisons with the retail trade and the rest are misplaced. They also reflect the ancient heresy, which some of us hoped had been blown away at the end of the middle ages, that there is a fixed store of wealth in the world and no way of rapidly increasing it.

In fact, very often it is expenditure that increases finance. If one is not prepared to put expenditure first in some important cases, there will not be the finances. I have no wish co reverse the Chancellor's maxim and say that expenditure must always determine finance, but anybody ought to know that it is a circular process. To try suddenly to cut the circle and say that finance must be the determining factor is a heresy.

On balance, the Bill will offer no real stimulus to industry or to our exports. I wish that the Chief Secretary would pay a little more attention in these matters to his learned and skilful brother. Writing in the Financial Times, Mr. Samuel Brittan exposed the hollow centre of this year's Budget, and now the Finance Bill, when he pointed out that the Chancellor was placing all his reliance for an improvement in the economy on managing reduced interest rates.

Mr. Sam Brittan went on to say that the Chancellor
"made this claim even though no one knows how interest rates are going to behave or how the Government will react when there are conflicts between the vaguely drawn criteria for settling interest rates set out in the Red Book."
One realises how wise and far-sighted Mr. Sam Brittan was when one examines the tapes today. They contain serious indications that the Government may have to move to get the banks to increase interest rates if the falling pound is to be sustained in line with the Government's policy for sterling.

As to growth, the right hon. Member for Stepney and Poplar dealt faithfully with the Government's pretensions on that point, but I should like to add one further shot from the same source used by the right hon. Gentleman, that of the report of the Select Committee on the Treasury and Civil Service. In casting justified and serious doubt on the growth forecasts in the Red Book, the Committee said in paragraph 34:
"A further contributor to forecast GDP growth is the assumed reduction in the Treasury's 'statistical adjustment': this contributes nearly a half of the forecast 2½ per cent. GDP growth between the second half of 1981 and the first half of 1983".
I have known of Conservative Governments relying upon frail supports, but when they have to rely on a statistical adjustment for about half of their forecast improvement in GDP they are losing whatever touch they once had.

The Bill reflects a bankrupt strategy. I do not pretend for a moment that any of the amendments that the Liberal Bench and our allies on the SDP Bench will push in Committee will be able to rescue this strategy. We shall have to try. For instance, we shall move for the abolition of the employers' national insurance surcharge, because if there is merely a reduction it will not be enough. Small business people, who are crippled by the cost of taking on extra workers, especially young people, do not trust the Government, and a Government who reduce the surcharge one year are capable of putting it up again in the following year or two. So we should like to strike the Act off the statute book, and shall move for its repeal in Committee.

We also intend to go considerably further, through amendment, with the process of recovering the Chancellor's lapse of 1981, when he failed to index the personal allowances. A mere token 2 per cent.—and one cannot take tokenism much further than 2 per cent.—as a genuflection in repentance for last year's failure is far too little. We shall move to increase substantially the income tax personal allowances, merely to keep up with inflation.

We also believe that there is a serious defect in the Bill with regard to the Government's promotion of index-linked gilt securities in the general money stock market. The terms of competition for borrowing by the private sector—I hope that the Financial Secretary will note this—are grossly weighted in favour of the State. If a private business, no matter how large it is, decides to compete with the Tory Government in issuing index-linked securities it is crippled from the start, because it is not allowed, as the law stands, to charge as a business expense the cost of making those indexed capital repayments on the bonds. How unfair can one get?

There is a point of fact here which I should not like the hon. Gentleman to get wrong. If a company borrows on an index-linked bond and rolls up the interest until the bond reaches maturity and then pays that interest, it is deductible against corporation tax.

That does not help at all. I am not talking about interest, any more than the Government talk about interest when they issue a prospectus for an index-linked gilt. I am talking about index-linked capital payment at the end of the life of the bond. That, without any doubt, is treated by the Revenue—correctly, as the law now stands—as a capital item which the company is not allowed to deduct. [Interruption.] I am glad to see that experts on the Conservative Back Benches are nodding in agreement with me. We intend to try to repair the defect in Committee, and I hope that in that respect, if in no other, we shall have support from hon. Members on both sides.

As a whole, the Bill is a vehicle for an increasingly shaky and uncertain financial policy. Although for a few months longer the Government may clothe it with the new "in" word "pragmatism", in the end it will be shown to be bankrupt.

6 pm

I want to take up later some of the remarks of the hon. Member for Colne Valley (Mr. Wainwright), particularly in connection with the national insurance surcharge, but I shall start with the speech of the right hon. Member for Stepney and Poplar (Mr. Shore). I had feared that, for tragic reasons outside the Chamber, there would not be much interest in today's debate on the Finance Bill, but the right hon. Gentleman, to his great credit, brought it bounding to life with his description of the Labour Government's attitude to monetarism, and particularly with his statement, which we all enjoyed, that his right hon. Friend the Member for Leeds, East (Mr. Healey) was not really a monetarist because, although he adumbrated monetary targets, he did not actually stick to them.

Clearly an important theological argument is going on on the Opposition Front Bench. Perhaps the hon. Member for Edinburgh, Central (Mr. Cook) will sort out the matter with his right hon. Friend the Member for Stepney and Poplar and then tell his right hon. Friend the Member for Leeds, East whether or not he was a monetarist.

In view of what the right hon. Member for Stepney and Poplar said about monetary policy, it would be interesting to know what he now thinks about the charges made by him and his colleagues in 1975 and 1976 and, I am afraid, by the Secretary of State for Education and Science, that inflation rates in those years were entirely the result of what the previous Conservative Government did to the money supply in 1972 and 1973. Presumably the charges that were made by Labour Ministers at the time—that the previous Conservative Government were entirely responsible for the rate of inflation—did not have the right hon. Gentleman's approval, and he would now take full responsibility for the rate of inflation in 1975 and 1976. I am sure that he will give us that assurance.

I do not want to spoil the hon. Member's fun and games, but let me put him on the right lines. If he looks at the record he will find that the vast majority of those of us who criticised that previous Conservative Government were concerned, above all, about the effect of the indexation of pay in the extraordinarily explosive cost-inflationary circumstances of 1975. Certainly, to that extent, we thought that that Government had contributed greatly to inflation. Beyond that—it is a perfectly fair point to make—there was the particular and unusual effect of the secondary banking proliferation of credit that took place in 1972–73, which was due to very special circumstances, and which I hope has been dealt with in subsequent legislation. None of us took the view—certainly I did not—that there was a direct connection between the money supply, in the sense in which it has been talked about recently, and the rate of inflation.

In that case, the right hon. Gentleman was in a small minority during those years of the Labour Government. We know from the recent admirable book written by his right hon. Friend the Member for Heywood and Royton (Mr. Barnett), the former Chief Secretary, precisely how the right hon. Gentleman used to pursue his own economic arguments with great force and skill at that time, but I do not recall him detaching himself from his colleagues' views in the way that he now suggests. I do not recall, for example, the Labour Party voting against the threshold agreements that he now denounces.

I gather from the extraordinary explanation that we heard just now that the reason for inflation in 1975–76 was apparently the high pay settlements. The first election in 1974 was fought on the question whether the miners should have more pay—as the right hon. Member for Stepney and Poplar thought—or less pay—as was thought by my right hon. Friend the Member for Sidcup (Mr. Heath). This is a new departure. It is the second new doctrine that we have had from the right hon. Gentleman—first, that monetarism does not matter, and, second, that the excessive pay rises in 1974 were the causes of the inflation of 1975.

I thank my hon. Friend. I seem to have brought many people into the discussion of these matters. The views of the right hon. Member for Stepney and Poplar on pay are clearly enormously flexible. We not only have his attitude to pay bargaining and the miners' strike in 1974, but we have the whole question of NEA, the national economic assessment, which he did not even flirt with today. I shall come back to the matter later in my speech, because it is the hole in the right hon. Gentleman's doughnut.

I want to deal with three matters which arise in the Finance Bill before coming to the Bill's impact on the economy as a whole. The first matter concerns the Customs and Excise clauses in part I. A number of hon. Members have mentioned indexation, and it was mentioned in the speech of my right hon. and learned Friend the Chief Secretary to the Treasury. I welcome the moves that were made by both the Labour Government and this Government to introduce greater indexation into our taxation and financial systems. In my view, indexation is the basis of an honest tax system. I also welcome what the Treasury and Civil Service Select Committee said about indexation, particularly its invitation to the Government to express a view on their long-term objectives for indexation. It is important that the Government should do that, and I am not sure that the remarks of the Chief Secretary in that connection today entirely fill the bill.

In practice, we have introduced indexation into a number of our direct taxes, but we have not really introduced it into our indirect taxes, except loosely. As the Chief Secretary said, my right hon. and learned Friend the Chancellor of the Exchequer attempts to raise each year the same amount through indirect taxes in real terms as he raised in the previous year. However, there is a scatter of percentage increases which is quite wide and seems to me to be rather random. This year, for example, there was a 14¼ per cent. increase in car licences, a 13¼ per cent. increase on beer, an 8½ per cent. increase on cigarettes and a 6½ per cent. increase on spirits. In some years the duty is held down because of political pressures, and in the next year it is allowed to increase substantially because those political pressures have lessened.

That approach distorts the market. It is hit and miss and it is unfair. It leads to all sorts of nonsense. We see how beer has been treated over the past two years, as compared with the treatment of spirits. I have no particular axe to grind—if that is the right expression to use about beer—on behalf of the brewing industry, but it seems to me unfair to treat beer in that way, after the 38 per cent. increase in the duty last year.

We know perfectly well that that happens because of the political pressures for Scotland, which this year were particularly acute. I should have thought that by now Ministers would have learnt that however they respond to those political pressures for Scotland makes no difference. That happened with the last Government with devolution—a far more important constitutional matter—and it has happened with this Government with the balance between beer and claret, on the one hand, and spirits on the other.

That is all nonsense. It would be far more sensible for the industries concerned if we had valorisation of duties—if they increased automatically each year in line with the rate of inflation. One could still alter the relationship between the taxation of different products and commodities. It could be done by allowing the duty on them to increase by slightly more than the rate of inflation. The valorisation approach would enable one to operate on far more logical grounds, and political pressures would not produce as many absurdities as at present.

Secondly, I turn to capital gains. I wish to declare an interest. Anyone with a private pension or an interest in private insurance could equally declare an interest. I am employed part time as a consultant to a firm of stockbrokers. Therefore, it may be thought that capital gains tax has a particular interest for me. The Government have been right to index gains on disposals. In doing so, they have removed the injustice of the taxation of inflationary gains.

The move will make it more attractive for individual investors to hold equity. That should mean that companies do not find it as expensive to raise equity capital, and find it easier to issue indexed corporate debt. Companies may therefore be less dependent on borrowing from the banks than they are at present. Those moves are sensible but I cannot see why, in principle, if we index the gains we do not index the losses. It would be far more sensible administratively. The present proposals are exceptionally complex. I hope that hon. Members who are fortunate enough to be conscripted to serve on the Standing Committee will examine the indexation of losses as well as the indexation of gains.

I turn to the national insurance surcharge. I have rarely made a speech in the House on the economy without referring to the surcharge. I welcome the 1 per cent. reduction in the surcharge in clause 128. It is a small step towards abolition, which I hope we shall manage before the next election. I should have like the Government to do more in the Budget on this. A 2 per cent. reduction would have been preferable.

The argument that is customarily adduced against a reduction in the surcharge is particularly absurd. It is argued that the national insurance surcharge cannot be reduced any further because of the possible feed-through into wages. In other words, such a reduction would have an inflationary effect on wage settlements. Yet at the same time we are told that Government strategy is inducing greater realism in pay bargaining, and in attitudes to productivity. If that is the case, we should not be too concerned about the effects of a reduction in the national insurance surcharge. Indeed, as I have been arguing for some time, we should use reductions in the national insurance surcharge to underpin and to reward more responsible pay bargaining. I agree with my right hon. and learned Friend the Chief Secretary about the importance of responsible pay bargaining, particularly if we are to stand any chance of substantially reducing unemployment in the next few years. That is particularly important.

I am not sure whether that is a point of view that is held by the right hon. Member for Stepney and Poplar, even though he has lifted the hem of his skirt in relation to the national economic assessment, and even though he has occasionally mentioned the importance of pay bargaining in the context of his enormous reflationary package. The right hon. Gentleman has mentioned pay bargaining on previous occasions but when he had the opportunity to do so today, when his right hon. Friend the Leader of the Opposition was out of Chamber, he was not prepared to say anything about it.

We have heard about the animal called the national economic assessment but we still do not know how many legs it has. We still do not know any more about it. We look forward to hearing in due course from the right hon. Gentleman, from one of his right hon. Friends, from one of his hon. Friends, from the national executive committee or from a spokesman of the trade union liaison group exactly what the Opposition have in mind for pay, or for the reform of industrial relations, to underpin a more responsible approach to pay bargaining.

Will the hon. Gentleman say what he has in mind to secure responsible pay bargaining other than the fear of unemployment?

The hon. Gentleman has done me the courtesy of occasionally listening to some of my speeches and he will know that I take a view on pay bargaining that is heretical on the Government Benches and heretical on the Opposition Benches. I happen to think that it is difficult to run a responsible economic policy in Britain without an explicit pay policy. I believe that we cannot control public expenditure unless we have a public sector pay policy. We cannot have a public sector pay policy without an understanding on pay in the private sector.

In the longer term it is impossible to reform collective pay bargaining, or monopoly pay bargaining, without making a fundamental change in trade union law, and that is to introduce legally enforceable contracts. There will have to be wider constitutional changes and wider changes in the ownership of industry to sustain this. I am grateful to the hon. Member for Blackburn (Mr. Straw) for giving me the chance to set out some of my heretical views on this subject. I am glad that the hon. Member for Gateshead, West (Mr. Horam) appears to agree with me.

The 1 per cent. cut in the national insurance surcharge, the measures that the Government have taken on energy and their measures to help the construction industry should all assist in job creation over the next year or so. However, as the right hon. Member for Stepney and Poplar has reasonably said, the excellent report of the Select Committee on the Treasury and Civil Service makes it clear in paragraph 37 that with present policies it is unlikely that we shall see any substantial decrease in unemployment over the next three or four years. That should worry us all, especially when we consider the increase in long-term unemployment. There are now over 1 million people who have been out of work for over a year and a quarter of those are in the 18 to 24 age bracket. It is particularly disturbing that unless we can make fundamental changes in the next few years some of those people will never work. That should worry all hon. Members. It is a factor that has an impact on many features in our society, including the rate of crime, and we must recognise it.

I was pleased that my right hon. Friend the Secretary of State for Employment introduced a new training initiative before Christmas to deal with the problem of unemployment. I was pleased that in the Budget my right hon. and learned Friend the Chancellor of the Exchequer announced his community work scheme. That was a modest start and it is one that my right hon. and learned Friend should be prepared to carry a good deal further later in the year. It is similar to the scheme produced by Professor Layard. I hope that he will take another leaf out of the professor's book and introduce a job subsidy scheme as well.

If we press forward on those lines, we can do something to cut unemployment levels over the next year or so. This would not fundamentally undermine the Government's strategy of abating inflation and making British industry more competitive. We can do something to curb and reduce unemployment if we press forward on those Layard or similar schemes in the next few months. Many hon. Members will be looking forward to the Government bringing their proposals back to the House along those lines perhaps before the Summer Recess, and certainly before next winter.

6.21 pm

I am sure that my right hon. Friend the Member for Stepney and Poplar (Mr. Shore) was not surprised that Government Front Bench Members failed to answer a number of his questions. Indeed, the Chief Secretary's comment about the Budget being a month ago raises—as my right hon. Friend said—some serious questions about whether amendments are necessary because of subsequent events.

For example, one might suggest that the PSBR is likely to be somewhat different due to the expenditure that we may have to enter into if we are to reach a satisfactory conclusion. The Prime Minister put forward values in terms of protecting the Falkland Islanders. There may be massive inputs because of that situation, which could affect the PSBR over the next few months.

In addition, the question arises whether the Government are having second thoughts on making financial judgments vis-a-vis Trident as against conventional weapons. Because of Britain's unpreparedness for the Argentine events, the Government might do better to consider expenditure on conventional weaponry as against the £10,000 million that Trident is likely to cost.

A pertinent question arises in my constituency with regard to design engineers, draughtsmen and the highly skilled work force employed by British Aerospace. They are rightly asking whether this is the time to consider the development of the P110. Should that not form part of any financial policy presented by the Government? That issue is not irrelevant to the whole question of employment. Indeed, many hon. Members have said that they tend to judge the benefits of the Government's financial policy by the extent to which it is making an impact on the unemployment situation.

My hon. Friend's point about the British Aerospace work force in Preston is important. Does he accept that representatives of the work force, who have seen himself and myself, made it clear that their deep anxieties were over the wasteful expenditure on Trident and earlier developments towards Trident? That has caused them much anxiety over their job prospects in working on conventional weaponry.

I accept my hon. Friend's point. That is not irrelevant, but is directly relevant to judgments involved on the Second Reading of the Finance Bill.

Is the Government's planned expenditure likely to be beneficial in the long term? On the one hand, that must be considered in terms of our ability to defend ourselves or to protect those in need of protection in other parts of the world. On the other hand, using the Falkland Islands as an example, that also means where we have a measure of British sovereignty.

Only this morning I had a telephone message raising this point with me. Is not now the time to try get from the Government a financial commitment to the development of the P110? I hope that the Government will take this matter on board within a few weeks. Various figures are presented on the cost of unemployment. I do not pretend to have an accurate method of determining those figures. I am prepared to accept—as there seem to be suggestions of £13 billion, £14 billion or £15 billion—a mean of £14 billion. If unemployment is costing the British people such a sum, one is entitled to expect clear indications from the Finance Bill of how the Government intend to attack that problem.

Reference has been made over the past few weeks, at Question Time and on other occasions, to the 400,000 construction workers lying idle in Britain and the 500 million brick stock. I recently raised this question with Government Front Bench Members and I was told that the criterion was that customers' needs were met by producers' decisions. If that is so, clearly the customers, in this sort of situation, are homeless people, desperately in need of housing. There are many of those people in the West and East Lancashire areas.

This is an excellent opportunity for the Government to kill two, three or four birds with one stone—reduce unemployment, put public investment into needed houses and prevent a whole range of social deprivations stemming from the lack of decent housing. The Finance Bill must always consider where it would seek to discriminate in favour of depressed areas. I see below the Gangway the hon. Member for Bebington and Ellesmere Port (Mr. Porter), who comes from Merseyside, which is clearly a depressed area. However, there is no mention of action in the Bill to solve such problems.

At constituency level, the Preston dock is to be developed. To do that, the local authority was forced to go out to private speculators. It had to invite them to put forward proposals to enable that dock to be developed. Unemployment is clearly relevant on this aspect of the matter. There could be a major upsurge for the West Lancashire area if that development went ahead. Public investment would be highly preferable to private speculation which will flow from Preston dock.

The Central Lancashire Development Corporation is to be wound up in 1985 on a decision by the Secretary of State for the Environment. That is happening when we should be seeing more public investment to develop the works of that corporation. It is doing a valuable job in building certain factories and encouraging small businesses. However, much more could be dome to raise the level of demand so that some of those factories, which are presently empty, could be occupied.

Of course, absent from the Bill is any attempt to control or restrict the outflow of capital, which runs at several thousand million annually. We are apparently prepared to allow that to occur at the expense of British employment. That outflow of investment invariably results in productivity in various parts of the world, with imports flowing from it. That enables the monopolies or the multinational companies operating in Britain to close British factories in the interests of maximising profits. There is no attempt in the Bill to control that.

Reference has been made to the whole question of pay and inflation. It is the responsibility of those who argue that there is a close relationship between pay and inflation to show clearly how pay determines price levels. There is tremendous evidence to suggest that oligopolists and monopolies determine the price of goods, often on the basis of restrictive practices and what is likely to be beneficial in the market to the main operators.

If prices rise as a result of supply adjustments made by the few firms that control a market, it cannot possibly be argued that those price increases stem from wage increases. Often the same firms that pursue those policies are the least likely to provide the wage levels that I would consider appropriate. One needs only to look at the Financial Times to see that big business in Britain, generally speaking, is making good profits. Certainly the banks have made remarkable profits in recent months—indeed, for the last year or two.

The Budget, as has been said, through capital gains changes and various other mechanisms, provides another opportunity for the wealthy to grow even wealthier. However, that is not the case for the poor. Unemployment benefit is to be taxed.

Recovery has been mentioned. That strikes me as remarkable in the extreme, immediately following a Select Committee report which shows, on very good grounds, that unemployment in Britain is likely to continue to rise into 1985. How can we possibly talk about recovery when unemployment is rising? If unemployment rose by only a few hundred it would still be completely wrong to describe that as recovery.

I accept that unemployment arising from technological advances is likely to occur in the not-too-distant future. There are signs of that already. That raises very serious questions. In the late 1980s it will be virtually impossible to provide full employment on the basis of a seven-hour day, five-day working week. We are more likely to be talking about a three-day working week.

From that, serious questions of investment for diversification arise; for example, investment in the leisure that will result from the increased number of hours during which people are unemployed. That, in turn, brings us to the question of Government policy on educational and cultural institutions. Here again, all we have had is talk of cutbacks in various parts of the system, not only at primary and secondary school levels.

We are still failing to provide adequate nursery education, and we are cutting courses in polytechnics and universities at a time when, as a result of growing technological unemployment, we should be thinking about making available to an increasing number of mature students—in many cases, mature people who have changed their lifestyle—the opportunity for advanced and higher education.

This is not surprising. It is typical that we yet again face a Budget produced by a Conservative Administration who have indicated their class interests as clearly as they have ever done in the past. This is a Budget for big business. It has nothing to offer the working people of Britain except increased exploitation within a capitalist system.

6.36 pm

I shall not attempt to follow the arguments of the hon. Member for Preston, South (Mr. Thorne), who spent a long time talking about the problem of unemployment.

Let me first put the record straight with regard to my intervention in the speech of the right hon. Member for Stepney and Poplar (Mr. Shore). I was drawing attention to the fact that, while the right hon. Gentleman was criticising forecasts of 3 million unemployed, a Labour Party committee looked into this problem in 1976. The right hon. Gentleman attempted to disclaim any knowledge of that document. I have it in my hand. It was produced by a joint committee of the Home Policy Committee and the Finance and Economic Affairs Sub-Committee in November 1976, and was headed "Medium Term Prospects of the United Kingdom Economy, 1976 to 1980".

One of its principal findings was:
"Thus, if the past trends 1964–1973 are projected into 1976–1980, and allowance is made for the different stance of government policy, unemployment would be of the order of two to two and a half million in 1980."
Thus, the Labour Party came up with a true forecast, because that was just about on target. The underlying trends of unemployment have been rising for the last 30 years at an ever-increasing rate. Therefore, it is sheer hypocrisy for the Labour Party to pretend that this increase in unemployment is the fault of the present Government.

Unemployment doubled while Labour was in power, and it has doubled again since we have been in power. There is an underlying trend, and I think that the hon. Member for Preston, South fully understands the problem. The level of unemployment is due more to the fact that petrol pumps are no longer manned as they once were and also to the fact that modern aids and inventions are causing an increase of unemployment, not only here but throughout the Western world.

I generally approve of the main thrust and judgment of the Budget. I was delighted that our Treasury Ministers were not persuaded to relax, and I am glad that they are sticking to their firm monetary policy. I congratulate them on being able to satisfy those Conservative Members with slightly different views by giving away so little. Therefore, in the main, I fully support the general thrust of the Budget.

I am extremely disappointed that we could not fulfil our election promise of substantially cutting the burden of income tax. I believe that that is something to which we must apply our minds urgently, because the present situation is totally absurd. I am not asking for any giveaway. The Government should reduce income tax dramatically and continue the present balance in the Budget by reducing public sector spending. Only by doing that and reducing the bureaucracy can we get the economy right.

We have not made up for the failure to index to the extent of Rooker-Wise last year, and therefore widows and other pensioners will continue to pay income tax on their pensions. That is totally absurd and wrong. One of my constituents who receives a pension of under £30 a week and who has £197 per year from her late husband's ocupational pension is taxed at the rate of 55 per cent. on that pension. She pays £108 a year in tax out of an income of about £35 a week and we have the audacity to take £2 a week from her. We force many people to rely on means-tested benefits to supplement their income after we have taken money in tax. That must be wrong.

It also adds to the unemployment problem, as there are many hundreds of thousands of people who cannot find a job where they will be better off than if they remain unemployed and rely on supplementary benefit. That is because our tax thresholds are much too low and our initial tax rates are much too high. The Government should concentrate on solving that problem. The Prime Minister was fully aware of the "why work?" problem two years ago. since then we have not heard much about it. I believe that we should solve that problem in order to restore work incentives.

The hon. Gentleman began his speech by propounding the view that there had been a greater increase of unemployment in this country than in other countries because of the introduction of devices such as automatic petrol pumps reducing work. Would he like to explain, while he is still obsessed with the "why work?" syndrome, how he can propound the view that jobs have disappeared?

The hon. Gentleman may laugh, but there are two sides to the problem. Automation causes unemployment, but there are also many people locked into unemployment because it is more profitable not to work than to work, and to ignore that factor is absolute folly. I should have thought that I might have had some support from the hon. Gentleman on that matter.

The Government are locked into a situation where they cannot cut taxation, and the reason is that they spend too much on the public sector. Overmanning in the public sector is the principal cause of our difficulties. The Government quite rightly applaud all that they have dome to reduce overmanning in the private sector, which is healthier and more efficient as a result. What have they done about overmanning in the public sector? Their performance is abysmal. They may have cut the Civil Service by 56,000, but at the same time they neutralised that by increasing the National Health Service by 67,000. They have reduced local Government manpower by only 67,000 out of a total of 3 million people.

Will the hon. Gentleman address his mind to the report published yesterday by Her Majesty's Inspectorate, which said that educational standards may have been permanently damaged as a result of the cuts in public expenditure, which he is praising? Where is the overmanning in the education service?

I shall gladly tell the hon. Gentleman where the overmanning in the education service is. I believe that when there were 600,000 people employed in education in 1960 as opposed to the 1·2 million today, educational standards were much higher than they are now. Throwing extra money and people into education achieves nothing.

All that we have done in almost three years is to reduce by 0·9 per cent. the 5 million employed in the National Health Service, Civil Service and local government. When one makes allowances for the fact that most of those people have index-linked pensions and incremental pay increases, one sees that the cost of the public sector is greater than ever before. We must recognise that to be the principal cause of our difficulties.

I should like to compare that with what happens in France. In the three sectors that I have mentioned, the French employ 3 million people where we employ 5 million. This is why French cars are so numerous on our roads and why there are so few British cars on French roads.

I urge the Government to find a way to reduce public sector manpower. I have said not mentioned overmanning in the Post Office and in the other nationalised services and industries. I believe that the only effective way to reduce public sector manpower is to impose a moratorium on recruitment. Nobody need be sacked. In one year we could reduce public sector manpower by more than half a million. Had we done that when we came to power, we would by now have reduced public sector manpower by more than 1 million. I hope that the Government will take on board the fact that a moratorium must be imposed immediately after they are re-elected. I believe that public sector overmanning places us in a position where we cannot afford the things that we shoud be able to afford. There have been arguments about Trident and the reduction of the Navy, but we could afford proper and adequate defence, both nuclear and conventional, if we were to stop the appalling wastage in the public sector.

There are restrictive practices galore in the public sector. Does it make sense that if a light bulb burns out in a primary school in my constituency someone has to travel often 10 or 12 miles from Cromer to replace it? That is absurd. The restrictive practices that occur within the education system, the National Health Service and other areas of the public sector are paid for to a large extent by those taxpayers to whom I have referred—the low-paid, and pensioners, who are forced to carry an impossible burden of taxation. I hope that the Government will take note of this message and will make amends in the next Budget.

6.50 pm

The Budget and the Finance Bill are not to be judged in isolation. The judgment must be based on the fact that this is the fourth major Budget to be introduced by the Government. I recall the waving of Orders Papers of 1979. In 1980 and 1981, Order Papers were not visible. This year, however, Order Papers were waved again. I could not help thinking about the reaction of the 3 million unemployed had they seen Tory Members waving their Order Papers so furiously in appreciation of a Budget that will go down in history as the Budget in which the Conservative Government accepted mass unemployment as a feature that they did not intend to reduce or eliminate. That is the truth of the 1982 Budget. The wets on the Tory Benches now accept that they cannot achieve a change in policies and that 3 million unemployed will be a plank in the election platform.

The sight of Order Papers being waved was a disgrace to the nation. It does not hurt to reiterate in the Chamber the appalling cancer of unemployment in our society. To those hon. Members who grimace when faced with this problem, I say only that the House should at no time debate financial or economic policy without considering the effect on the people of this country. I never fail to remind myself that the aim of all policies at all times should be to strive to get rid of the evil of unemployment. When we are told that the alternative policies of the Labour Party would pose certain problems, I wonder what problems Conservative Members think that the unemployed face as a consequence of the Government's policies.

There are two underlying strategies behind the unfolding economic policies of the Government. Both are based on divisive theories—that greater inequality will somehow lead to a better society. On the one hand, there is the strategy based consciously on deflation and the theory that greater effort and improvement will emerge from the suffering, necessity or fear of unemployed people and failed businesses. On the other, there is the belief that an increase in inequality will bring about more incentives through the need or the desire to work harder. Those underlying views are behind many of the Government's policies.

The Government have encouraged people to support certain deeply divisive myths that appeal to individuals. Three years ago they argued that the unemployed had no incentive to work. That view was expressed again by the hon. Member for Norfolk, North (Mr. Howell). Yet the hon. Gentleman was unable to supply any instance of anyone who would prefer to be on the dole than in work. We know the truth. If a job is advertised, there are hundreds, not dozens, of applications. Employers are saying to jobcentres "For goodness sake, do not send everyone. You sort out a short list for us."

A public employment service is being carried out for employers because so many people apply for individual jobs. To dress up the position as one in which the unemployed have no incentive to work is to be remote from reality. It is a sickening disgrace that such words should be uttered in the Chamber. I apologise to the hon. Member for Norfolk, North for saying that in his absence. However, I think that hon. Members will understand that, his speech having preceded mine, the hon. Gentleman should have been present to hear any ensuing remarks.

The Government have deliberately penalised the unemployed. They have taken away unemployment pay for the second year of unemployment. They have taken away the earnings-related rule. It makes me sick to hear talk of the unemployed preferring to be unemployed. It has been argued that the highest paid have no incentive because they pay high taxes. A succession of Budgets has given the greatest benefit to the highest paid.

The argument has also been deployed that companies pay too high taxes, too high wages or that they are confronted by too many Government restrictions. As a result, the Government have introduced a series of measures aimed at weakening the trade unions and reducing controls on businesses. Foreign exchange controls were lifted. Was the result more investment in British industry and greater incentives? Investment has fallen. Between £8 billion and £9 billion a year has gone out of the country.

There was also the argument that public spending was excessive and that a bloated bureaucracy could be cut without damage. What is the truth? As my hon. Friend the Member for Bishop Auckland (Mr. Foster) remarked, our education service is suffering from deeply damaging cuts. Morale in the Civil Service is the lowest for many years. There has been an obsessive attack on the public services. That has not produced a fraction of 1 per cent. of additional growth in the economy.

What has been the result of the three-year attack on equality and upon a social, caring society? Unemployment has not fallen. It has risen by 1·7 million. Industrial production is not higher. It is not even stagnant. It is 10 per cent. or 20 per cent. lower. That is the truth of the greater incentives to the unemployed, the higher paid, the businesses and the local authorities. Living standards are not stagnant. They are falling.

The Treasury and Civil Service Select Committee points out in its report that the Government's policies make sense—they were not spelt out in the Budget speeches—only if one assumes that public sector workers on average will have a fall of 4½ per cent. in real terms in living standards this year and a 3 per cent. fall next year—a total of 7½ per cent.

There are those in the private sector who have accepted not only stagnant but, in some cases, cuts in wages in the last year. As a result of incentives, they will be rewarded by not a growth, but a fall in living standards. In addition to falling living standards in the last quarter, business failures have been at a record high. For Conservative Members to wave Order Papers in delight and pleasure at a record that has led to such disasters is plainly nonsense.

When the Labour Party puts forward alternatives, Conservatives attack them as unworkable saying that there are problems and difficulties. When the Labour Party suggests that there should be an increase in spending so that workers and firms can sell what they could produce if only they had work, we are told that that would present problems—as if 3 million unemployed and 20 per cent. lower industrial production are not a problem. When the Labour Party says that we must ensure that most of our increased spending creates jobs for British workers and that means examining how we plan trade, we are told that it entails problems—as if the existing situation does not also have problems.

When the Labour Party says that exchange controls make sense and that millions of pounds of savings should be invested in British jobs rather than abroad, we are told that that would create problems. But what sense does it make to the 3 million unemployed for millions of pounds to be diverted to foreign stock exchanges rather than to our industries?

When the Labour Party says that, as part of its alternative, there should be a national investment bank to channel some of our long-term resources into industry as part of industrial planning, Tories say that there are difficulties. Of course there are difficulties. But surely those are honest attempts to advance policies which, in the Opposition's view, will help the country back towards full employment and growth. Existing policies have manifestly failed.

The hon. Gentleman is speaking in all honesty, but does he agree with what his right hon. Friend the Member for Stepney and Poplar (Mr. Shore) said a few weeks ago about the national economic assessment? Will he spell out in a little more detail the relationship between his views on pay bargaining and the type of reflationery package that is being advocated by the Opposition Front Bench?

I believe that if we are to make any progress, some way must be found to get workers and businesses to agree to recognise the relationship between demands on the economy and what is produced in it. One of the biggest warning shots across the Government's bows is that they have done nothing to change the climate of industrial relations and pay bargaining. All the signs are that, with the slightest move towards a reduction of unemployment, pay and prices will rise. Indeed, I understand that, even in the present depressed state of the economy, businesses have increased prices, although wage costs have not been the cause. In other words, when businesses have the opportunity, they will go for price increases and workers will tend to demand wage increases.

My view is entirely consistent with my right hon. Friend's. I have held that view since I first came to the House. The Government, trade unions and businesses must find a way to establish a relationship between production and wage claims. The Government have manifestly done two things. First, they have tried to overcome the problem by mass unemployment. Secondly, there is not the slightest sign of a change in approach, view or attitude towards price or wage setters.

In this Finance Bill, as in its predecessors, the Government have given to the wealthy and taken away from the majority of people. That is not a statement of class view. It is a fact. It must be agreed that that is what has happened. The Government are obsessed not with fairness, as the Chief Secretary to the Treasury alleged, but with giving to those who are already wealthy and own capital.

The hon. Gentleman has wriggled away from the point made by my hon. Friend the Member for Bath (Mr. Patten). He may have done so to his own satisfaction, but not to mine or that of the House. He says that there must be some way in which we can establish an understanding between employers, employees, the Government and trade unions on how wages should be related to the demands of the economy.

If the hon. Gentleman does not accept the example that has been taken, which he says has clearly failed, will he cast his eye across the Irish Sea where there has been an understanding between the wise men and suchlike? The hon. Gentleman should examine that economy. Perhaps he will then say whether he believes that he can find a way. If so, will he please tell us what it is?

If a supporter of the Conservative Government, who, for their own policy purposes—and good luck to them—have consciously increased council house rents significantly as a proportion of earnings and deliberately increased energy prices, talks disparagingly about agreements on prices and wages, all I can say is that he should carefully examine the Government's policies.

It falls ill from Ministers' mouths to say that Government policies on taxation are fair. My right hon. Friend the Member for Stepney and Poplar (Mr. Shore) referred to those who have been unemployed for more than a year and have saved small sums of money during their working life. I remind the House of the effects of unemployment on people. There are now nearly 1 million people who have been unemployed for more than a year. People who have worked for 30 years and saved a pittance, by the standards of most hon. Members—say, £3,000 or £4,000—find that after one year's unemployment they cannot receive one penny of help for their household.

The hon. Member for Norfolk, North has much to answer for. What does he think about the plight of those who have saved small sums during many working years and now find that they have no income? People are amazed how hard it is to be out of work. The overwhelming feature of my experience during the past two or three years is of people saying to me "I never realised how hard it was to be out of work, financially, spiritually and emotionally." That is the truth of unemployment.

I share the hon. Gentleman's concern for any persons who are out of work. I realise that there are great problems for them. However, he is misleading the House by implying that unemployment benefit is withheld because people have savings. That is not so. Only supplementary benefit is withheld.

I have just made that point. After a year, unemployment benefit ceases as a result of Government policy.

Supplementary benefit is then withheld because a person has saved a small sum of money. I was comparing that with the Finance Bill——

—which makes concessions in capital transfer and capital gains legislation to those who already earn hundreds of thousands of pounds. The Government give concessions to people earning hundreds of thousands of pounds, but they will not give a small concession to those who are out of work and have no means——

I shall not give way. I have given way several times.

Finally, I comment on one feature which I was disappointed to find was again omitted from the Budget and also from the Minister's speech today, although perhaps for more understandable reasons. I share the concern of my right hon. Friend the Member for Stepney and Poplar that the Western world has increasingly fallen into a recession brought about and increased by cumulative deflationary policies. That is producing a genuine and worrying threat in the form of counter-productive protectionist policies. That is a matter of concern throughout the world, to which the House does not afford recognition comparable with the size of the problem.

I refer to the appalling situation suffered by the Third world in the 1970s and now in the 1980s due to increases in the price of oil and the depressing effect of policies adopted by the industrial nations. I suspect that the Western nations will not solve the serious unemployment problem that they face unless there is agreement on how to overcome the difficulties. I hope that in winding-up or in the debates after Easter the Government will give a far clearer statement of their thinking in terms of international economic policy.

I hope that the House will reject the Bill. The Government's policies have brought nothing but industrial decline and misery in living standards. The Budget is no more and no less than an attempt to give to those who have and to take away yet again from the majority of people. It is a divisive Budget from a divisive Government. I hope that the Bill will be rejected.

7.12 pm

I do not propose to become embroiled in arguments about the virtues or otherwise of money supply, indexation and so on, because I know that if I give an economic problem to five economists I shall probably end up with six solutions. I merely put it to the House that inflation costs the lives of more companies and thus more jobs than anything else. Every year the relationship between the size of the PSBR and inflation is reinforced. All the fancy theories and ideas cannot get away from that.

Will the hon. Gentleman elaborate on that clear relationship between the size of the PSBR and inflation? It has certainly defeated the rest of us, and I understand that it has defeated the Select Committee, members of which are present today.

When I came to the House in 1976, the rate of inflation was 20 per cent. and rising, and the Labour Government were borrowing £1 in every £6 or £7 that they spent. Inflation is now 11 per cent. and falling, and we are borrowing about £1 in every £11 or £12 that the Government spend. Moreover, the Governmnt are carrying the interest charges on the vast increase in the public debt. To me, that is incontrovertible proof.

I do not wish to become embroiled in all that, however. I wish to deal with the effects of the Bill on the small business sector. I believe that it can almost be described as a tombola Bill, with a little bit of something for every section of industry. I welcome that, because in the past we have learnt to be excellent spenders and consumers, but we have been less good at earning and not quite so hot on producing. Naturally, therefore, I am pleased that the Government have yet again produced a Budget to support the small business sector. Over the past three years, we have achieved about 90 measures to aid the small business sector. I am pleased to see that in this Budget some of those measures have been updated—for example, by the increases in the VAT threshold and the loan guarantee scheme.

In the Budget debate, the right hon. Member for Down, South (Mr. Powell) said that the solution to the country's problems lay with the people. I echo that sentiment. There has been an apparently widespread belief, which the Opposition seem still to echo, that the Government can solve all the country's problems without there being any individual effort or involvement. That is patently wrong. Of course the Government can remove the barriers, provide a little more opportunity and make effort a little more attractive, but basically it is the efforts of the people of this country that can bring about the improvements. That is especially true in the small business sector.

In the past, whenever I have spoken of the small business sector, I have ended up like Oliver Twist, asking for more and more. I shall probably do the same today. If I do, however, I do not wish to give the impression that I am dissatisfied with what the Government have done. I ask for more because I believe that the small business sector—and probably only that sector—has the ability to adapt to changing circumstances and the speed of reaction necessary to provide growth and employment in our economy.

I must tell the Opposition that Conservative Members are equally concerned about unemployment. We are desperately worried about it. The Government's scheme for the young, which begins in 1983 and is the first coherent training programme in this country, must be evidence of that desire to try to help.

The hon. Gentleman draws our attention to the scheme for young people. Will he address himself to the problems of business people in his previous constituency of Workington? [HON. MEMBERS: "Oh".] Yes, I invite the hon. Gentleman to comment on a problem in my constituency, which he knows well. The other day, 460 men—not 16 to 18-year-olds, but mature men, the working population—turned up to apply for one job. Will he comment on the opportunities provided by the Government for the 459 who were rejected?

I do not think that it is right for me to discuss the hon. Gentleman's constituency problems in the House.

When I had the privilege to serve the constituency of Workington, I was extremely concerned about the restrictive practices and the overmanning, which caused so many problems in producing the right product or service at the right price and at the right time. I refer the hon. Gentleman to a specific example. When the management at the rail-producing plant at Workington wished to install a rail-straightening machine so that rails could be produced more cheaply and quickly, they met with desperate resistance. Yet only through genuine orders will real employment rise and not be whittled away by the need for more and more and more public money and more borrowed money, which must eventually be paid back. So let no one say that Conservative Members do not care about unemployment. We are desperately concerned, but we want the solution to be based on real jobs, real opportunity and real growth and not artificially subsidised by more and more borrowed money which the taxpayer must ultimately pay back.

I apologise for having been somewhat diverted from what I wished to say about the small business sector. I support all the efforts being made to help that sector, not just because of its speed of reaction and its ability to seize new ideas and new opportunities, but because I believe that it has a political stability. I make the point about political stability deliberately.

It is well known that the Continental and industrial countries which compete with us in the export world support their small businesses. They give them a lot more money and opportunities than we do. They do so not only for their economic growth, but for political stability. They broaden the economic base and provide a buttress against political extremes.

One has only to compare the strike rates, walk-outs, and aggravations in public industries with the record of small businesses to see that the genuine work relationships exist there, rather than in the highly artificial and stylised manoeuvrings of some of our trade unions.

Turning to specific measures in the Bill, my right hon. and learned Friend the Chancellor has provided the necessary tax changes to the measure allowing companies to buy in their own shares. I am especially delighted that he is going down the capital gains route and not down the advance corporation tax or the income tax route. The House knows from the Companies Act, which was brought into operation on 26 February of this year, that those tax proposals will complete the whole operation. A great deal has already been said about the virtues of allowing a company to buy in its own shares. I still do not think that it has been fully appreciated just what an effect it will have on encouraging investment, and just what a restriction has been removed from our private companies.

Over the years, more and more people will be prepared to invest in private companies, knowing, and possibly planning with the directors from day one, that they will be able to reclaim their investment at the end of the day without forcing a sell-out of the company or accepting a very much reduced price from the other shareholders. I am sure that the measure will give a steady and sustained boost to companies' investments over the years.

I can appreciate the Inland Revenue's desire to ensure that a genuine share sales takes place and that this measure is not used to avoid tax on the traditional dividend route. However, I should like to see the present proposals defined so that if a genuine disposal of a smaller part of a shareholding takes place tax will still be levied on a capital gains basis. The company may want to purchase those shares in small parcels to ensure that its cash flow is not unduly affected.

When the start-up scheme was introduced last year, my right hon. and learned Friend the Chancellor made a clear statement on how it would operate. He said:
"It will be a striking new incentive to channel investment into small businesses."—[Official Report, 10 March 1981; Vol. 1000, c. 781.]
Alas, when the proposals finally came out they were so hedged around with restrictions and caveats that the confidence of the accounting profession in promoting such a new idea was severely weakened.

We must accept that the person who will invest in such a scheme will already have placed his financial affairs in the hands of an accountant to guide him in the taxation labyrinth. If that accountant feels that the scheme will be too restrictive, too complicated, the advice will be "Hold back. Do not go ahead". We must now win back the confidence of those accountants. I welcome the increase up to £20,000 in one year. I hope that it will encourage more people to take the plunge. However, I put forward the plea that when this measure emerges from Committee it should be taken up extensively and not ignored, as I fear is happening at present.

This is not the time to go through all the reasons why the start-up scheme is being ignored at present. However, it is odd that employees in a firm are unable to take advantage of this particular measure. They can invest in other firms, but they cannot invest in their own. Therefore, that change should be introduced.

I remember when the industrial buildings allowance was introduced in 1980. I very much welcomed the 100 per cent. allowance that was to be given for the construction and conversion of small workshops. During the past two years many companies have taken advantage of that. However, it has become obvious that the distinction between industrial and service use precludes many would-be occupiers. I do not know why, but the impression has been gained that manufacturing industry is good and that service industries, while not exactly bad, are not quite in the same class, which is strange in a country that earns more per head from its services than most of its competitors do.

I am delighted that certain service operations will now qualify, but—in life there is usually a "but"—I am still worried that the service activities permitted will be too restrictive. Therefore, I plead with the Treasury not to make sheep or goats out of the small firms that would like to get started in small business workshops.

I deal next with the £130 million innovation package. I pay tribute to the Under-Secretary of State for Industry, my hon. Friend the Member for Norfolk, South (Mr. MacGregor), for the work that he has done in the business opportunities programme and for the visits that he has made round the country, telling business men what the Government are doing to help small businesses. I also pay tribute to the Minister for Industry and Information Technology, my hon. Friend the Member for St. Marylebone (Mr. Baker), for his work on information technology. Such technology will increasingly dominate our lives. My hon. Friend's efforts to make the nation aware of the earnings and employment potential of information technology are most welcome. I know that foremost in his mind is the knowledge that the Japanese believe that in the next decade information technology will provide more jobs and opportunities than any other business sector.

Perhaps I might now mention one item away from the small business package. In last year's Budget my right hon. and learned Friend the Chancellor of the Exchequer announced a new tax, the supplementary petroleum duty. He said that it would last only until June 1982. One of the reasons given was that it had not proved possible to carry out a thorough reform of petroleum revenue tax in the time available. Immediately after last year's Budget there were warnings that the addition of supplementary petroleum duty to the existing North Sea oil tax regime would severely reduce the development rate of the North Sea oilfields. I accept that the oil companies can rightly be accused of often crying wolf, but the introduction of that tax last year was one tax step too far and it placed a definite brake on the North Sea's development rate.

Obviously I welcome the announcement that the tax regime is to be reformed. I hope that the details of that reform will reveal that the incentive to explore and to develop has been restored, especially in the marginal fields where the production profile makes them extremely vulnerable and where secondary and even tertiary recovery methods will have to be brought into play at an early stage.

I wish to thank my right hon. and learned Friend for resisting the siren voices calling for vast reflation on borrowed money, without any attendant demands on productivity. He has provided an increase in the incentives to companies to improve profitability and productivity without sucking in vastly increased imports, which has happened so many times in the past. I am sure that he has laid the basis for recovery of business confidence in 1982, which will lead to an increase in consumer spending in 1983.

7.30 pm

I was interested in what the hon. Member for Hertfordshire, South-West (Mr. Page) said about small businesses, because he reflected accurately the mood of small business men who are, in my experience, impatient with the red tape, small print, general rules and regulations and the timidity of the Government's schemes, valuable though they are and fundamentally right though they are.

That brings home the important lessons of the failure of successive Governments. If we have a good idea we must go hard for it. Very often Governments have not taken a sensible idea and given it the right sort of approach. They have been too suspicious that industry and business, both small and large, will take the Civil Service for a ride. That must be stopped at all costs. If we can change that suspicion, which is endemic in all ranks of the Civil Service, we shall have done a great deal. I am sorry that the Treasury Bench has not done more to meet this general but important point.

I do, however, disagree with the hon. Member for Hertfordshire, South-West about the level of borrowing and the public sector borrowing requirement. The Chief Secretary to the Treasury said that the public sector borrowing requirement is the heart of the Government's strategy. They have consistently taken the view that if we keep a small, absolute amount of public borrowing and a reducing amount of public borrowing in terms of the gross domestic product, we can have lower interest rates, lower rates of inflation and increasingly, as industry runs into employment and output difficulties, we can help with industrial costs.

The problem is that that view is fundamentally flawed. Like the M3 and other monetary targets, the PSBR is an intermediate target. It is not an ultimate objective of Government economic policy such as price stability, employment levels, output growth or the general objectives in which we have been used to seeing Government policies stated for many years. It is a means to an end. The Government have tried to operate on the intermediate targets because the general objectives have been difficult to control. As the Government said in their memorandum to the Treasury and Civil Service Committee as long ago as 1980, they have deliberately not set their targets in terms of the ultimate objectives of high price stability, output and employment, because those are not within their direct control. Instead, they set a target for the money supply, which is more directly under their influence.

As we have seen all too readily in the past few years, the indicators on which the Government chose to rely turned out to be more difficult to influence than they could have foreseen. As the right hon. Member for Stepney and Poplar (Mr. Shore) said, at no stage have the Government met their money supply targets. He produced a figure of a 55 per cent. growth in the money supply since the Government came to power.

It may be that the so-called Goodhart law is correct. This states that, as soon as one selects an indicator upon which to concentrate, it immediately becomes erratic and perverse in its behaviour, because it was not designed to carry the weight that the Government put on it. However, faced with that, the Government have tried not to improve the accuracy of their aim but, quite logically, to increase the number of their targets, in the hope that they hit something, even if it is not M3. We now have four additional targets at which the Government can aim, so perhaps they can achieve some consistency in what they say.

I am sure that what the hon. Member for Gateshead, West (Mr. Horam) is saying is true, but does he not welcome the increasing flexibility and the move towards pragmatism that the Government showed in the Budget and in the Red Book? Does not his party believe that control of the monetary aggregate is a necessary, even if not a sufficient, tool of economic management?

I agree that it is not a sufficient means to achieve the objective of price stability to concentrate simply on narrow monetary dogma. I welcome the more relaxed approach that the Government, under pressure of events and total failure to meet the tighter objectives that they originally set themselves, have pursued during the past few months. The fact is that they should never have gone for such narrow selective targets. The hon. Member for Enfield, North (Mr. Eggar) would probably agree with me on that.

The business of following such intermediate targets, whether money supply or the PSBR, is not only fundamentally intellectually suspect but counterproductive. It leads to the Government taking measures that will have a favourable effect on the PSBR or the money supply, although they palpably have an unfavourable effect on the real economic objectives. Thus we have them nearly doubling VAT, raising nationalised industry prices, cutting the rate support grant so that rents and rates rise, and many other such actions, in the name of price stability. We had the extraordinary spectacle of the present Secretary of State for Defence, in his previous incarnation as Secretary of State for Trade, maintaining week by week at the Dispatch Box that doubling VAT did not increase inflation because it reduced the PSBR. It also substantially increased prices in the shops for ordinary people. That is the sort of nonsense that the Government's policy has produced.

The Chief Secretary's brother would probably agree that we must return to examining economic policy in terms of ultimate objectives and adopting a view about the desirable real growth output and the desirable level of inflation. We must try to consider those intermediate targets in that light and settle, in a relaxed way, how we can meet those larger goals.

Quite apart from the inherent merits and common sense of such an approach, we might also reduce the economic jargon that proliferates our debates. If we can get away from sterling M3 and PSBR, we might begin to conduct a debate in which ordinary people can take an interest. It is a matter of profound importance that trade unionists, employers and politicians, as well as City commentators, should understand our economic debates. Ernest Bevin said, before the Second World War, that the members of the Transport and General Workers Union would make only such progress as they were allowed to by their own understanding of economic reality. If we wrap it up with jargon such as M3 and PSBR, they will never understand economic reality.

That point applies forcefully to the debate about the nature of the PSBR. The Government's central point is that they wish to reduce the PSBR both absolutely and as a percentage of GDP step by step and year by year. That policy profoundly misconceives what is necessary at this point in the economic cycle. I have no doubt—several Opposition Members have made the point—that we must now improve demand in industry.

I had a meeting today with some representatives of the chemical industry, who told me that they could increase production by 30 per cent., if there was demand, with no increase in manning or other overheads. The absence of that 30 per cent. represents a massive loss, if one adds up the loss made by the chemical industry during the past 12 months compared with the profits made in previous years. That is the marginal effect that they need to make a profitable business. They must take measures, which we would all regret, as a result of the difficulties in which they have been placed by the Government's failure to sustain demand at a reasonable level. To do that we will probably need a higher nominal PSBR.

The Government ought to set out clearly some of the effects and consequences of looking at PSBR in the way they do. First, the way in which the Government set out the PSBR takes no account of the effects of inflation. Inflation massively erodes the real value of debt. We all know that in times of rapidly rising inflation it is better to be a debtor than a creditor. We know that from our personal experience. That is equally true for the Government.

In its quarterly bulletin of June 1981 the Bank of England made an estimate of the effects of inflation-proofing the nominal PSBR. At that time the PSBR in nominal terms was over £12 billion. In real terms that became £0·2 billion. A 6·2 per cent. PSBR percentage of gross national product in nominal terms became a PSBR of 0·1 per cent. in real terms.

If one does the same calculations for the present level of PSBR, one finds that it was negative in 1981–82, that it will be negative in the current financial year, and I have no doubt that in the two years to come outlined in the Red Book the Government will do no real net borrowing defined in those terms.

The total national debt is a much larger figure. Its percentage of GDP was no less than 85·3 per cent. in 1964. We did not hear much about that at the time. That percentage has come down steadily and now is about 48 per cent. Our economic fortunes have declined almost in parallel with that steady reduction in the total national debt as a percentage of the GDP.

Secondly, as set out by the Government, the PSBR figures take no account of the state of the economic cycle. However, that has an enormous effect. We know that each person who is unemployed adds £5,000 to the PSBR. There are about 3 million people unemployed. Therefore, about £12 billion is added to the PSBR, which is larger than the target for which the Government are aiming this financial year. If one begins trying to do something about unemployment by cutting taxes or increasing spending, one will reduce the PSBR. That is a major factor in the vicious circle that the Government have entered in the last few years.

Finally, the PSBR, as it is presented by the Government in all the economic documents, tells us nothing about what the borrowing is for. It makes no distinction between whether the borrowing is for current or capital expenditure. If the figures were divided, one could see readily that the PSBR is less than the gross capital formation in the public sector.

If we looked at the figures in that way, we would be looking at them in a straightforward, businesslike way, which even the most conservative financier could understand. No one would lose by that. It is a pity that the Treasury Ministers are stuck with out-of-date fashions that conceal more than they reveal about the true nature of public finance.

The Government's final argument is that it is all very well to talk about distinctions—which are sensible public accounting distinctions—but at the end of the day the Government must find the money. They borrow, the PSBR increases, the Government have to sell more gilts, which means that interest rates generally will rise. Unfortunately, that is as equally untrue as all the other simplistic assertions that have been made by the Government in connection with the PSBR.

The assertion blurs the distinction between the behaviour of gilts, which are long-term debt, and money market rates, which are short-term debt. Money market rates are what matter to the industrial borrower. They behave independently of gilts. Often gilts follow the money market rates rather than the other way round, which one must accept if one believes the Government's view of those matters.

That is why there is no correlation between the PSBR and the level of interest rates. There has been no correlation over the past 10 years. There was a high PSBR in 1974, 1975 and 1976, when it was running at about 10 per cent. of GDP. Interest rates were roughly the same as they are today. Often they were lower than they are at the moment—at levels such as 7 per cent., 8 per cent., 9 per cent., or 10 per cent. That shows that there is no correlation between those two variables, on which the Government have staked their all.

Surely the hon. Gentleman is ignoring the other side of the equation, which is the exchange rate. During the period to which the hon. Gentleman refers, the exchange rate of the pound against the dollar was going down like a stone.

That is not relevant when the Government are proclaiming from the rooftops that what matters in keeping down interest rates is the level of PSBR. That is the fundamental point. It was as true at that time as it is now.

Apart from the level of money market rates, it is open to question whether gilt yields rise if the PSBR rises. It all depends on the way in which the Government of the day present their case. If the Government go round saying that they will not pay any attention to inflationary consequences of their policies and that the only important thing is to reflate the economy, that will affect sentiment in the market, gilt yields will rise and there will be higher interest rates. That is the danger in the Labour Party's position. The right hon. Member for Stepney and Poplar said that he did not care much for money supply—I forget the exact exclamation or gesture that he used. That showed his fundamental approach to the aggregates.

If one adopts that approach, and if that is widely known, one will take the consequences in the market. That is inescapable. However, if one has a clear policy about containing the rate of inflation, but one is prepared to reflate, that will probably have a more favourable effect on the market. We all know that to be so from the way in which the market behaves.

Therefore, it is possible, by means of a skilful approach to the aggregates, to pursue a policy which, on the one hand, contains inflation, and, on the other, gives industry some hope. The tragedy is that the Government have never tried it.

7.47 pm

In general I strongly support the Government and their economic policies. Therefore, in general, I strongly support the Budget and the Finance Bill.

In particular I support the increased allowances that will boost employment in the construction industry and therefore encourage private investment in construction. I support the help for distressed areas—the £70 million urban aid programme. I support the innovation package for space technology, robotics and teletext. I also support the exemption of mobility allowance from tax for charities and the needy.

I strongly support the completion of the move to allow companies to buy their own shares. I agree with my hon. Friend the Member for Hertfordshire, South-West (Mr. Page). I heartily support what he said about small business in general, particularly what he said about videotex or the information technology industry. I agree with many of the remarks that were made by the hon. Member for Gateshead, West (Mr. Horam) on that subject. He is absolutely correct.

I note the freeze on gas prices. I ask my hon. Friend the Financial Secretary to consider whether the prices of all State-owned monopolies should be subjected to the Monopolies and Mergers Commission. If we are to have State-owned monopolies, which I believe are damaging to the economy, and which exist because it is difficult to sell them—because of the index-linked pension fund nobody can buy them—their prices should be submitted to the Monopolies and Mergers Commission, as they would be if such a monopoly existed in the private sector.

Is the hon. Gentleman not aware that it was not the British Gas Corporation that forced up gas prices but the Government?

I was not saying that. Gas prices had been frozen to cook the books of inflation for several years. This Government said that prices should reflect the real gas price plus 10 per cent. I do not go wholly along with that because I think that the gas price should not just be set by the Government but submitted to the Monopolies Commission.

I should like to give way but I shall not because Mr. Speaker will not let me speak again for ages if I speak for too long.

On monetary targets I noted with interest what the hon. Member for Gateshead, West said. I agree with him partly on that as well. The Government were correct to de-emphasise the high profile of monetary targets. This is a much more realistic approach. Monetarism, as I understand the definition of the word—and I am a monetarist—is that it is all about Government spending. It is the control of Government spending that is critical, not the control of money supply.

I have never believed that money supply, if there are free exchange controls and a free banking system of credit, is in any way in the control of the central bank or the Treasury. I cannot follow a Government policy which fixes a Government target for money supply in such a free market. I heartily approve of the de-emphasising of the targets.

For instance, the money supply responds—rises or falls—merely in relationship to the demand for credit. If a manufacturer or a wholesaler wishes to build a new warehouse for £5 million and he borrows £4 million on an equity of £1 million to build the warehouse, then money supply—M3, or if he borrows it in sterling, sterling M3—will rise by £4 million. If he does not make that investment decision, at the margin, sterling M3 stays at the same level. Therefore, the Government directly are not in any way in control of money supply, but their policies influence the growth or fall of money supply.

Governments are responsible for, although not always in control of, Government spending. This is the most important point that I should like to bring out and that is why I heartily approve of the de-emphasising of monetary targets.

I say I am a monetarist because in my view monetarism is about Government spending, not monetary targets.

I should like to refer to two remarks made by the right hon. Member for Stepney and Poplar (Mr. Shore) when he opened the debate for the Opposition. First, he made a great point of illustrating how our country was so much worse in terms of output than competing countries in the OECD. I should agree with that but it is not a fair statistic and it is not fair to blame the Government for that.

I shall try to explain to the hon. Gentleman if he will let me have the time.

The United Kingdom was far less competitive than other nations. This was because we had inflated our economy and accepted overmanning to a grotesque degree.

This was a result not just of two or three years but of 30 years' decline, with accumulated overmanning and increasing inflation. This is a false argument because output is not a basic statistic. Output reflects another basic statistic and that basic statistic is sales.

It is no use producing if one is not selling one's product. Therefore, sales are the key. They reflect the competitiveness within a given level of world demand. If overmanning and inflation are rife then we are less competitive. If we are less competitive we achieve fewer sales, regardless of the world recession. In a deep recession the fall in sales is magnified. If there are fewer sales a wise business man has less output because he does not want to finance endless inventory. So the key is competitiveness. That is what the Government have set about increasing. That is the key to their policy. They want to improve our competitiveness by reducing inflation and overmanning. Therefore, it was unjustified of the right hon. Member for Stepney and Poplar to level the charge that our output fall is related to the performance of the Government.

Secondly, the right hon. Member for Stepney and Poplar mentioned a fall in world demand and blamed it on Governments. He asked why they were not boosting their economies to take care of it. This was easy to do a few years ago when one started from a relatively stable world OECD economy, but the root cause of the present severity of the world recession is that we are reacting to the synthetically over-stimulated economies of the 1960s and the 1970s. It is the past excessive inflation policies of OECD Governments that have increased the severity of the present world recession.

This brings me to the question of inflation and indexation. In the old days we used to have rotten boroughs in which politicians paid for votes.

At least, they paid with their own cash. They bought those votes with their own money. Today and in recent history politicians have used our cash to buy votes. They have done it by over-taxing and then borrowing, with a net result of inflation. Inflation has been used by Governments over the past 20 years to buy votes. That is why it has been so popular.

Inflation is the second greatest economic con trick and I hope that I have shown that responsibility for it lies mainly with Government. It lies not with the unions, or trade union members, or business, or management, but with Governments. The greatest economic con trick of all is indexation, particularly indexation that is itself indexed to inflation. I should accept indexation if it were indexed to productivity or the gross national or the gross domestic product, but I have grave disagreements with the Government on their policy of indexation. Indexation to the rate of inflation is merely an aspirin or a painkiller. It tends to dull our minds to the pain of inflation.

Indexation merely makes inflation easier to live with because it insulates everyone that benefits from it, either completely or partially, from inflation. With pay, tax, social security, and pensions indexed inflation is easy to live with. If a person is fully insulated from inflation he has a vested interest in the continuation of inflation. If part of a society is index-linked and part is not, then there is a huge economic benefit to those who are index-linked if inflation continues.

Such people will then vote for any politician who comes along with inflationary policies. The fundamental danger to which my right hon. Friends are exposing the country is that by extending indexation linked to inflation we are diminishing the will—it is hard enough anyway—to reduce inflation by a painful reduction at the grass roots level. If 60 per cent. of the country is index-linked, which party will ever be voted in again if it wants to come in on a policy of reducing inflation?

The hon. Gentleman is preaching the wickedness of indexation, but will he allow me to ask whether his fees as a consultant to the Midland Bank—I think—are index-linked or whether they are a flat fee?

I had not expected to have the opportunity to say anything on this subject. I have declared my interest in the Register of Members' Interests as a consultant to Barclays Bank. It is a flat fee, and it has not been raised since I have been in Parliament, let alone index-linked, because it is a flat contract.

The real evil of indexation is that it cements inflation into the economy. It is for that reason that I believe that the Government should reappraise their present strategy. Instead of rolling back indexation and inflation, the Budget and this Finance Bill are extending indexation, thereby building in inflation.

I may be asked "What about the indexation of capital gains? Surely that is a good thing." If we are to have indexation, then we must have the indexation of capital gains—but why not all capital gains? Why just this year? Why have capital gains tax at all? It is a low yielding tax—it yields 1 per cent. of the revenue—and it involves an enormous amount of wasted mental energy on the part of individuals, companies, stockbrokers, lawyers and accountants. It is a totally unproductive tax, it creates a great deal of aggravation, and it discriminates against investment in British industry.

In my humble opinion, the extension of indexation, especially to the gilt-edged market, is outrageously irresponsible. The argument that indexation will encourage financial responsibility would apply only if indexation were linked to the gross domestic product. Frankly, the reverse will be true if indexation is linked to the rate of inflation. I agree that index-linked gilts offer a Government a new source——

Does the hon. Gentleman appreciate that in the last two years that would have meant a substantially increased tax burden on capital gains tax payers—not a decrease in their burden?

Yes, of course. It is an interesting point. However, it will not apply, because the indexation is starting only from now. That is the point. If we go back two years, why not go back to 1965 and take the genuine case? Why take two isolated statistics, to give the lie to the point? What the hon. Gentleman says does not help the discussion.

Index-linked gilts offer the Government a new source of relatively low-cost funding. A huge amount of money can be raised, at a nominal rate of perhaps 2½ per cent. to 3½ per cent., but who will pay the bill when those gilt-edged securities come to maturity in 1988? That is the real problem. On the surface, it looks like cheap and ready money for the Government, but who will pay, in the absence of a sinking fund? If the Government intend to have index-linked gilts, they are morally bound to provide a sinking fund that adjusts with the rate of inflation for repayment at maturity.

All hon. Members know that I am an ardent supporter of the Government. It therefore hurts me greatly to have to say that I can accept indexation of gilts only if a sinkng fund is provided. I can accept the extension of indexation only if I am genuinely convinced of its advantage in the national interest, as opposed to the Government's interests. If I am not convinced of that, it is unlikely that I shall support the Government on the Third Reading of the Bill. Meanwhile, I shall support Second Reading in the hope that my right hon. Friends will accept amendments, either in Committee or on Report, that will render the Bill financially responsible and in the long-term interests of the nation.

8.7 pm

I am glad to follow the speech of the hon. Member for Winchester (Mr. Browne). I enjoyed his entertaining, creative and interesting analysis of our economic problems. I enjoyed, too, his repeated statements of how ardently he supported the Government, and then proceeded to demolish the main leg of their financial strategy.

There seem to be few defenders of the Government's financial strategy, although we may hear one shortly. No respectable economic opinion seems anxious to sustain the strategy. We have witnessed the final discrediting of that strategy in the Budget Statement and in the Finance Bill.

In the early months of this Government, we were sickened by being told that inflation could be defeated simply by controlling the money supply and that inevitably—perhaps after 12 months, 18 monts or two years—there would be a reduction in inflation. The experience of the last three years has denied that proposition. The hon. Member for Winchester welcomed the Government's change in emphasis, saying that he welcomed the present flexibility. He defined monetarism as the will to cut public expenditure. He said that it had nothing to do with controlling the money supply. I do not know whether the Government feel comfortable when they hear that.

I did not say that it had nothing to do with the money supply. I said that the money supply was not under the Government's control and that therefore the Government should not imply that it was.

I thank the hon. Gentleman for reminding us that the money supply is not under Government control. We have certainly had plenty of experience of that.

What was initially put forward as a new and radical financial strategy has turned out to be good, old-fashioned deflation. The emphasis has been more and more on reducing wages and the power of the unions so that real wages can be forced down. We shall see more of this anti-trade union legislation, and we shall hear more Government statements about how important it is to restrict pay increases. Initially, there were no statements about the need to control pay increases—it was purely the money supply that would achieve that. It did not even matter whether wages in the public sector were controlled—the money supply was sufficient to do the whole job.

I am sorry that the hon. Member for Bath (Mr. Patten) has left the Chamber. He has been here for most of the debate. The hon. Gentleman made an interesting and constructive speech. It was interesting to observe the animation in his speech when he talked about pay bargaining and unemployment. I could not help but reflect that it was sad that he and his fellow wets sold their birthright for such a small mess of potage at the time of the Budget. They were bought off at a small price to accept what they previously claimed was the need to reflate the economy, and what we now know to be at least a neutral if not a further deflationary Budget.

The Guardian report of the report of the Select Committee on the Treasury and Civil Service, which was published yesterday, states:
"The Government's forecast of 2½ per cent. a year economic growth is based on 'precarious assumptions' and could involve unemployment rising above three million during the cyclical upswing."
The Select Committee underlined what we said at the time of the Budget—that the Government were assuming that unemployment would rise by a further 300,000. The Government have denied that that was a forecast or a prediction. Nevertheless, it is an assumption on which public expenditure—certainly on the social security Vote—is based. No one can deny that. The Select Committee emphasised that the Government's present policies may result in an increase in unemployment beyond 3 million.

The Select Committee report also states:
"That the assumed rate of growth over four years of a cyclical upswing is insufficient to reduce unemployment significantly is clearly disturbing, as it suggests a trend of increasing unemployment over the cycle as a whole."
Unemployment is the greatest moral, political and economic challenge of our time. We shall be judged harshly by history as the complacent men and women of the 1980s, just as we regard those who handled our affairs in the 1930s as failing to tackle the problem. The Government have created a no-hope and a no-future society for many of our young unemployed. Of the under-25s who are now unemployed, 440,000 have been unemployed for more than six months. An increasing number of under-25s have now been unemployed for more than a year. Once they have exhausted their entitlement for consideration for special programmes, they are propelled on to the dole. There is seething anger, bitterness and disillusionment. The thin veneer of civilisation that covers our society was brittle under the weight of rioting that occurred in our inner city areas last summer. We must warn again that, unless the Government accept their responsibility for 3 million unemployed and begin to act, we—society—will hold them responsible. We expect them to act. It is no longer sufficient to say that nothing can be done. We shall be condemned by history if we do not tackle this problem.

All we have done for the 3 million unemployed so far is to reduce their benefits and hound them with the DHSS fraud squad. If the Government insist on taxing the unemployed, they must restore the 5 per cent. abatement. I know that this is a matter about which a number of Conservative Members feel strongly. I hope that in Committee there will be amendments by Conservative Members that the Opposition can support on the restoration of the 5 per cent. abatement.

The North of England has suffered greatly under the Government's economic policies. We were looking for a stronger regional policy, but the Government have made industrial development certificates completely ineffective. Ministers have confessed with disarming frankness that they expect new industries to bypass the old industrial areas. Where does that leave the North of England? If we are not to benefit from new industries, must we look to small business development alone for the regeneration of jobs in the region?

I am keen on small business development. I have welcomed most of the measures that the Government have introduced to assist such development. However, the Government have destroyed more small businesses than they have created. I shall produce evidence from the Department of Industry to support that contention. The Government must recognise that in the North of England it will be extremely difficult to generate small businesses. The Government introduce one or two tax incentives and, lo and behold, small businesses flourish in the South. That does not happen in the North of England. For example, only about 3 per cent. of all the applications for loans under the loan guarantee scheme have been taken up in the North of England. When we begin to look behind that fact, it becomes clear that the infrastructure for small business development in the North of England does not exist. It will have to be recreated, and that will have to be done by more Government intervention. There lies the Government's fundamental mistake.

A report that appeared in the Financial Times on Friday showed that more than 35 per cent. of the companies set up in 1980 were based in the South-East, whereas poorer areas, such as Northern Ireland, East Anglia and the North of England, had about 3 per cent. each. The greatest proportional loss was in the Northern region, comprising Teesside, Durham, Northumberland and Cumbria. There were 5,500 company deaths and 4,200 births, which resulted in a net loss of 1,200—about 2 per cent. of the total stock of companies. That is a serious state of affairs. I hope that Ministers will listen to my plea. If they are looking to small business development in areas such as the North of England to generate more jobs, they should take note that the region is losing them faster than they are being created. The Government must do something about that problem.

In spite of all their boasts about reducing taxation, the Government have increased the burden of taxation. My hon. Friend the Member for Blackburn (Mr. Straw) rightly said that before the Budget the average family in receipt of average income was paying about £29 more per week in taxation than in 1929. The Government have clearly increased the burden of taxation. In spite of all their feverish attempts to reduce public expenditure, we find that they have increased it as a percentage of gross domestic product.

It often seems to the Opposition that these feverish attempts have simply meant that public expenditure on essential services has been reduced and that the money has been diverted into funding unemployment. About £15 billion has been spent in funding unemployment. That is more than the PSBR and about double the North Sea oil revenues. What a waste of financial as well as human resources.

My hon. Friend the Member for Blackburn stated that we had lost about one-fifth of manufacturing output in a slump which has been more severe than that between 1929 and 1931. I understand that we are now producing about one-fifth less than during the three-day week imposed on us by the previous Conservative Government. What a disastrous record. Yet the Government have been allowed to get away with it. It has taken the Falkland Islands crisis to bring the Government to their knees. However, the 3 million, or perhaps 4 million unemployed, have made little or no impact on the Government.

Our complacent acceptance of mass unemployment is a severe condemnation of the whole of society. I hope that in the next Budget and Finance Bill the Government will come to terms with the greatest problem that we face.

8.22 pm

Much has been said about the reports of the Select Committee on the Treasury and Civil Service. These reports are wheeled out in every Budget debate as though they were some sort of Holy Grail or shibboleth to bash the Government with, or to lend prejudice or support.

One sits on that Committee for many hours. The most important things that come out are the evidence that the Committee takes and the answers that it gets. Many comments have been passed on the 1982 Budget document. The Committee cross-examined witnesses, including the Chancellor of the Exchequer, Treasury officials and Gordon Richardson. When one reads the evidence and answers given to some questions about the PSBR, M3 and so on, one finds that comments made in the House, and often in the press, are more concerned with people's prejudices and the criteria which they wish to set than with those tightly set by the Government in the shape of the Chancellor.

If anybody bothers to read the reports, he will find—as some of my hon. Friends might agree—that we go into the MTFS, FSBR, PSBR, and all other "BRs" ad nauseam. In the last debate on this issue the hon. Member for Colne Valley (Mr. Wainwright) cross-examined the Chancellor at some length on the Government's strategy. The Chancellor has not laid down one sheer guideline that one factor must be taken into account. The hon. Member for Colne Valley was puzzled about what criteria the Government were adopting. The words "training" and "hybrid" came into the matter. In answer to a question, the Chancellor said that there was not one "friend" among all the factors, but that there were three well-known friends among a number of friends.

The Chancellor was trying to say that he was attempting to find a way—as everybody in a sensible frame of mind was trying to—of reading what the monetary aggregates really were. I served for almost two and a half years on that Committee. The Chancellor has not been trying to set a firm target, but has been trying to get a sense of reality into what the vast sums circulating in our economy and in world economies meant in the sense of value and of trying to keep a balance between inflation and what should be good for Government and private expenditure.

Economics is not an exact science. Indeed, it is not a science at all. It is basically an art. It would be far better if, in writing about these things, people did not automatically assume, as some econometricians do—and as a member of our Committee obviously thought—that if one could get figures together and feed them into a computer, all the answers would come out and all would be perfect.

The great problem with which any practical Chancellor must deal is the great imponderable of people's expectations. In the end it depends upon the changing face of people's expectations. The hon. Member for Batley and Morley (Mr. Woolmer), who was a valued member of the Treasury and Civil Service Committee for some time before he became a shadow spokesman, made one or two points that do not have a basis in reality. He talked about the Western world deflating, so causing the problem, as if there were some great capitalistic or governmental conspiracy to deflate by cutting Government expenditure so that people would be brought to the harsh realities of the world in which we live.

On pages 16 and 17 of the Red Book, there is no sign of Government expenditure being cruelly cut. The only figures that I see are that Government expenditure will grow from £107·9 billion in 1980–81 to £119–5 billion for 1981–82, and from £131·5 billion for 1982–83 to £148 billion in 1984–85. It has been said that inflation makes the PSBR negative in real terms. The point was made that volume growth can be nil. However, in the end the world pays its debts in cash. It is no good assuming that, somehow or other, like indexing, one can index something away by saying that it does not exist, because in the end cash does exist.

The one thing that we cannot index away, or keep in line with all our hopes of indexing this and volume terms that, is growth. There is no automatic balance. There is no automatic growth, whether it is Guest Keen and Nettlefold or the shop on the corner. The only automatic aspect is the Government asking people for money that they have not earned. That is what causes the imbalance. If some great guru could produce the idea that companies could somehow or other index their sales, that would be true, but in the real world, with all this talk about volume, inflation-adjusted costing and the idea that somehow inflation is a miracle that negatives the PSBR, it is not. If one owes £10,000 million, one still owes £10,000 million whatever terms apply.

The Budget rightly makes no false promises. The hon. Member for Bishop Auckland (Mr. Foster) made the point that growth assumptions are precarious. Of course, Government assumptions are precarious. They are based upon a precarious world and there is nowhere more precarious than the United States at the present time. In the end, all the Western economies' hopes depend upon that country. If America goes sour, one may assume that the rest of the world will go sour with it. The problem in the United States is that real interest rates are higher than they have ever been in its history.

The hon. Member says that that is because America is following Britain's monetarist experiments, but it is not. The Americans had a budget deficit of $58 billion in 1981. It will be $109 billion in 1982, and the forecast is that it will be $157 billion in 1983. That assumes that the American economy grows by 4½ percent.

Many people say that unless America follows a more sensible policy and reduces the extraordinary high level of real interest rates, there will be bankruptcies on a scale that will test America's financial credibility to withstand them. Therefore, America is not a country that is following a hard monetarist policy. It is spending too much.

In following a sensible public expenditure policy the British Government are trying to make sure that interest rates really come down. We must change people's expectations that, somehow or other, the Government can index everything away and that, as long as inflation continues, by sleight of hand the Government do not have to pay money back.

Obviously the pound is under pressure at this stage. It always is whenever there are international imponderables. To the financial world, a fleet setting out for foreign waters is not the best news that it could ever think of. Because the £ sterling is now falling, the worst response that the Government could make would be to adopt a rigid policy of adjusting interest rates to bolster the pound.

It is important that industry should not suffer at a time when the fragile growth that is so necessary and vital—and based on excellent figures that show that inflation is falling—is beginning to appear. It would be a cruel blow if we used interest rates precipitably to defend a pound that does not need defending, because basically it has a great strength behind it.

Certainly the figures show that what has happened to the pound could be good news for industry. Every percentage point decline in interest rates is meant to mean about £250 million to the corporate sector, yet responsible people have calculated—and I agree with them—that every 1 per cent. decline in the exchange rate yields the corporate sector up to five times more. Some people say that if the level of the pound falls too much it will cause inflation. My view is that at this kind of level the pound will cause growth. Therefore, good can come from that.

I hope that the Government will press ahead with their policies. They have been painful and have caused some of the unemployment from which we are now suffering, but the idea that Government policies have caused 3 million unemployed is not borne out by reality, because even the best pundits have suggested that if we spent another £2,500 million we might just reduce unemployment by 150,000. It is a difficult policy on which to be steadfast.

Too many Governments have always gone for the short-term advantage and forgotten the long term, which we are now picking up. I believe that this is the right strategy. The Government are showing a pragmatic reality that one should not stick rigidly to a doctrine, but should keep firmly in mind that we must not spend what the country has not earned. It is difficult to get that balance right, but I believe that the Government are doing it in the right way and at the right time.

8.34 pm

The debate has been marked by two distinct strains. The first has been the view expressed by Conservative Members and their reservations about the principle of indexation. I see that as a defeatist view of economic policy. Where wealth is being developed and the Government promise to expand output and create jobs indexation should be afforded. When I hear hon. Gentlemen express those reservations it is as if they accept that it is impossible for Governments to deal with the problems of falling output and increasing unemployment.

The second thing that I recall tonight is the brilliant contribution—I can only describe it as that—of my right hon. Friend the Member for Stepney and Poplar (Mr. Shore) when, in the middle of his contribution, over a space of ten minutes he demolished the Government's position. It was a sheer demolition job. I only wish that the people could have heard what he said when he outlined the disaster of the Government in output and the effect of that strategy on unemployment and then compared our record with those of our competitors abroad. Unfortunately, as we know, thanks to the media the people will not know what he said and we shall have to look forward to another day and opportunity to say the same again.

I recall, too, the Government's euphoria and indeed, perhaps, the popular euphoria outside this Chamber, when the Government's budgetary measures were introduced. Many people believed that the Budget would be beneficial. Anyone who examined the national newspapers the following morning, who understood what was happening, would have been horrified because of the reservations that were to be expressed and had been expressed by the right hon. Member for Chesham and Amersham (Sir I. Gilmour), that unless the Government conceded the case for reflation, there would be no material effect on unemployment. Unless people heard that contribution and understood it they would have been fooled. Even today there are people who believe that the Budget will be beneficial.

I have a list of all the measures that have been introduced over the past couple of years, as Government Members go into their arguments about the need to expand and develop small businesses and other forms of enterprise: the new enterprise programme, the business opportunities programme, the enterprise zones business start-up schemes, the small company innovation fund, the loan guarantee for small businesses, business counselling, tendering for Government contracts, advice for small businesses, business incentives and loan finance arrangements for small companies. All those measures, many of them excellent and supported by us in Standing Committee debates on successive Budgets over the past three years, are worthless unless the Government are willing to reflate.

That is the message that comes to every Member of the House when he goes into his constituency and talks to representatives of manufacturing industry. They know the truth. The Confederation of British Industry knows the truth. The Institute of Directors proposed higher inflation than was involved in the Budget, which was not reflationary. My right hon. Friend the Member for Stepney and Poplar at the beginning of the Budget debate pointed out not only that the Budget was deflationary but that if one took the year-on-year position the Government would have had to increase expenditure by £5 billion to bring public expenditure up to the volume that it was at April 1981.

Over the past 12 months there has been a severe deflation of the economy which, according to the report of the Select Committee on the Treasury and Civil Service, is perpetuated in this Budget. According to that Committee, the truth is that Government spending today under those proposals will remain roughly what it was in 1981 and the Government's revenue raising will be roughly what it was last year. Therefore, the flexibility that has been shown in the medium-term financial strategy will have little impact on the economy.

I wish to refer to crucial words contained in the report that many outside the Chamber will use in coming months. It said that the growth rate
"suggests a trend of increasing unemployment over the cycle as a whole. It is all the more disturbing when that rate of growth is itself based on precarious assumptions".
To hon. Members representing constituencies like those in the Northern region with high levels of unemployment, that statement, according to my understanding, means that we shall have to live with those high levels of unemployment until the Government are removed from office. It means that my constituency in Workington has to live with nearly 5,500 people out of work because the Government have built into their financial strategy and their economic programme no measures that can help to relieve those high levels of unemployment. The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) may shake his head. The hon. Gentleman will perhaps indicate what measures in the Budget strategy may put those 5,500 people in my constituency and the 22,000 people out of work in Cumbria back to work.

The main strategy is surely to get inflation properly and permanently down from the rocketing levels that were previously seen. The decision over national insurance surcharge is meant to help to put the money back into industry that the Labour Government originally took away. It is also meant to change people's expectations and the idea that one can have what has not been earned. When that is right, the people of Workington and Birmingham will go back to work in permanent and sensible jobs. The Government are not planning for high unemployment.

The hon. Gentleman will have heard my hon. Friend the Member for Bishop Auckland (Mr. Foster) point to a 2 per cent. contraction in the number of companies in the Northern region. Nearly 40 per cent. of the new firms that have been set up during the Government's period of office have been established in the South-East. The hon. Gentleman fails to represent the interests of his constituents in Birmingham if he is willing to sit back and watch the free market strategy of this Government create jobs in the South-East at the cost of jobs in Birmingham and to an even greater extent in the Northern region. That is the practical reality of the application of this policy. There is no evidence to suggest that any jobs have been, or will be, created. I again invite Conservative Members to tell me how 5,500 people in my constituency will be put back to work.

I happen to know the Workington area reasonably well. It is not dissimilar to my own area in East Yorkshire. There has been a considerable take-up of vacant factories in places such as Malton. Most of the pre-built factories in Malton have been spoken for. In Pickering, the nearest town to where I live—it is not in my constituency—all the factories have been spoken for. There has also been a considerable uplift in Thirsk. I should have thought that the small business start-up schemes about which the hon. Gentleman has been cynical and critical have proved of considerable assistance to areas such as his and mine. Has he not found this to be the case in Workington?

The hon. Gentleman talks about the use of industrial factories. I can take him to parts of my constituency where whole industrial estates are empty and where factory shells stand empty because there are no takers. This is because the Government are unwilling to reflate and so create precious manufacturing jobs. Some small firms have set up but this has not occurred on anything like the scale needed to solve unemployment in the Northern region.

I believe that the economy is moving out of equilibrium and out of balance. One of the most distorting factors has been the exploration of oil in the North Sea in recent years. It seems that oil, by boosting the balance of payments, has somehow given the country a grossly misplaced judgment of the real wealth being generated by active people. It has created two types of person in society. That is certainly the case in my constituency. There are the relatively well-paid industrial workers and those who are not well paid or who are unemployed and have no chance of employment. Opposition Members wish to promote not an oil-based economy that leaves 3 million or indeed 4 million people to languish in unemployment but one which uses precious human resources and what people have to offer the economy.

During the past 15 years, under successive Governments, there has been a period of decline. To some extent, I include the last Labour Government. The Labour Party was in power only until 1976. Thereafter we were compromised by an alliance such as many people and some hon. Members now wish to recreate. That form of alliance politics fails to understand the deep and clear decisions that must be taken by Government. That is why I strongly advocate the alternative economic strategy advanced by the Labour Party both in the House and outside. It provides solutions to longstanding problems. It will enable the next Labour Government to take decisions which the last one and successive Governments since the mid-1960s have failed to take.

I shall agree with much of what Tory Members say when I see them chart the slow decline of the British economy. They fail to realise that the compromise politics of the early 1970s and the late 1960s will not resolve the problem. That can be achieved only by the new politics of the 1980s which casts aside the dogma of the 1960s and the 1970s and demands the necessary intervention to resolve the country's problems.

One major reason for that decline is that successive Governments have failed to intervene in the class divisions in British society. Society is divided by privilege in education, in health and in the rights of people at their place of work as a result of the complete unwillingness to introduce measures in industrial democracy. That society will not grapple with the problems of the 1980s and 1990s. Class, and the failure of Government to intervene in privilege, is at the heart of the problem that now exists. If the next Labour Government fail to intervene in those areas, they will be equally unsuccessful. At the heart of our analysis and our resolution of the problem in the future will be our willingness to intervene in areas where, historically, Governments have feared to tread.

The lack of investment in manufacturing stems from the dogma of parties that are unwilling, for whatever reason, to take, for example, banks into public ownership. That would remove many of the restrictive practices in the way in which they lend money. If I had more time, I could cite substantial evidence given by representatives of 16 companies in my constituency who attended a meeting sponsored by the Department of Industry in a local hotel. That was only a few weeks ago. Many of them referred to the problems that I now describe and said that they were at the heart of the companies' difficulties. Representatives of manufacturing industry in my constituency at that meeting said that they believed that the banks should be taken into public ownership as the banks were incapable of responding to the problems of those companies.

Successive Governments have not cared to intervene in that area. I believe that we must intervene. We must cast aside our prejudices about public ownership and bring it about when it can be seen to be in the interests of industry. Many other countries have been willing to intervene in very Socialist ways, but have not sought to identify their approach in terms of Socialism. The Japanese do not call it Socialism when they take their banks into public ownership, any more than the French do. They simply do it because they believe that it is in the national interest. Yet whenever the Labour Party puts forward propositions that the Conservative Party can label Socialist in some derogatory way, Conservative Members merely undermine the case of the people whose interests they are sent here to represent.

As the system increasingly fails them, the people of this country realise that the only reasons why they are out of work is that international bankers are trying to balance their books after the oil price increases of the past eight years. Millions of jobs are being lost and companies are closing simply to fulfil the requirements of the bankers to reduce consumption. The free banking system is imposing on the British working man a demand and a price that he cannot pay. The accession of the next Labour Government is the only way in which his problems will be resolved in his best interests.

8.51 pm

The Government were elected to change radically the attitudes of people to their work and to their responsibilities to their families and friends. The Government started out to try to change the way in which we saw ourselves and the way in which we could help ourselves. They are doing what needed to be done many years ago. We depend upon ourselves on our initiatives and on the way in which we work at our workplace. The fundamental base of all economics is people and the way in which they work and are encouraged to work. Over the years we have learnt that for the State to try to take care of people from the cradle to the grave simply means that we take care of nobody. We lose self-respect, dignity and the ability to create the very wealth on which ordinary people must depend for their progress and their hope.

Today, I wish to speak about unemployment. I and many of my hon. Friends give quarter to no one in our concern about unemployment and the great difficulties that it involves, not just in the South-East, in which I have the privilege to represent a constituency, but throughout the country. I believe that the Budget and the Finance Bill radically increase and improve our ability to provide work, to enable individuals to use their ingenuity and enterprise to start new companies and to make a greater contribution to their existing companies to expand production and to be more productive. That is the Government's great achievement. They have changed attitudes to work in the workplace.

On taxation, I shall deal first with personal reliefs. I do not hide the fact that I believe that personal reliefs should have been indexed last year, but this year we have done it. This gives people an incentive to work. Many examples could be given. I cite the case of an unemployed girl in Stevenage, who is living on social security. Prior to this Budget and the changes in personal reliefs, she found that she was better off staying at home than going to work at the McDonald's hamburger place in an adjoining town. She will be better off working under these personal reliefs.

I hope that the Government will make it their ambition to raise the personal reliefs, not just this year, but next year and always, when inflation is eating away at real value. That measure is designed to increase the incentive for people to look after themselves when they are able to do SO.

Clause 42 deals with contributions to local enterprise agencies. We must seek ways in which we can find some kind of cure and hope for those who are unemployed. The hon. Member for Workington (Mr. Campbell-Savours) listed, and threw the papers on to the Benches in a dramatic fashion, a large number of excellent enterprises and initiatives that have been taken to encourage businesses. He has dismissed them as irrelevant. The hon. Member for Bishop Auckland (Mr. Foster) did likewise.

Consett, for example, was totally destroyed by the closure of the steel mill because it was a one-industry town. However, with the assistance of the special British Steel company designed to set up new businesses in Consett, there has been a mushrooming of small businesses and an enormous increase in employment. That has come about as a result of the combined efforts of the local authority, the former employer, British Steel, and the various Government taxation enterprises. That British Steel enterprise has introduced 29,000 new jobs into former rundown steel areas. This is another example of contributions to local enterprise agencies under clause 42.

It is said that all the unemployment is in the North. However, my constituency has 12·6 per cent. unemployment, and that is likely to rise to 15 per cent. The new attitude that the Government have been engendering means that Stevenage has to help itself. This clause will enable existing companies to assist new companies to set up business.

Stevenage is fortunate in having the Control Data Company. Its proprietor, Mr. Norris of Milwaukee, saw precisely the same de-industrialisation process taking place there. It is the Government's philosophy that those of us who are employed, and those companies that are prosperous, have a responsibility to try to help those who are not employed and to bring new enterprises forward. The Control Data Company has indentified 900 new areas of business and has put together the basic data needed to start such new businesses.

By setting up a new local enterprise agency and attracting money in the way that the British Steel Corporation managed to do to Consett, we will be able to create new industries and put in new money. One hears talk about banks not assisting in such matters, but I have had promises of money from banks for unemployed people for an interest-free period, without personal security. That is the way in which businesses will be created. That is the only true way to mop up the unemployment and provide hope for our people. It is no good thinking that large corporations will do it. As has been demonstrated by speaker after speaker tonight, large corporations are generally trimming back and reducing their work forces considerably.

Clause 59 deals with the industrial buildings allowance for small workshops. That is precisely what is needed for those wishing to start small business. Workshops of 500 sq ft will be set up at low rentals. I agree that we need a certain amount of governmental intervention to provide small workshops at the lowest possible rental. In that way firms will be able to use proper premises with the right health and work standards, and they will get off to a good start. Railways arches are one thing, but they do not offer the right means for starting a modern industry.

Even further assistance is given in clause 113, which reduces duty on conveyances and leases. Again, that will help small businesses. Clause 128 provides for a reduction in the national insurance surcharge. That will reduce the costs not only of small businesses but of large companies. I am parliamentary consultant to International Distillers and Vintners, and I wish to make a plea to the Treasury. The manufacturers of Scotch whisky have to pay duty three or four months before it is restored via the purchaser of that spirit. For many years that has been on the Treasury's agenda for Finance Bills. Five years ago, a compromise was reached with the Labour Government. The industry was to be permitted to delay the payment of duty for six months. I hope that the Government will give that matter serious consideration.

Ludicrously, it has been decided that Outward Bound schools must pay VAT. That will inhibit the training given and will hinder those who attend the schools from gaining the self-confidence and dignity that they need when setting out on the difficult tasks in life, particularly in an era when unemployment is rife and when they are being asked to go courageously into their own small businesses. That is much more difficult than joining a large enterprise.

The Finance Bill takes us another step along the road to a self-reliant Britain which, through its enterprise, initiative and the ingenuity of its people, set free, will begin the slow task of mopping up unemployment and producing a country of which we can all be proud.

9.3 pm

We are coming towards the end of our debate on the Second Reading of the Finance Bill. In the Bill we have seen the fine detail—the legislative precision that will implement the Chancellor of the Exchequer's Budget decisions.

In the Budget the Chancellor of the Exchequer dreams his dreams of the sunlit upturns, where small businesses start and thrive and economic miracles blossom in the happy air of the Candy mountain. However, the Finance Bill shows where the money really goes.

Year by year, during the Government's lifetime as Finance Bills follow one another, we have seen a clear shift of direction. As a result of the Government's policies, more than 95 per cent. of taxpayers are paying a higher proportion of their income in income tax. Only those with the very highest incomes are paying less. There has been a clear shift of direction out of the pockets of many of people into the portfolios of the wealthy. That has been the pattern of the four Finance Bills that have been introduced by the Government. My hon. Friend the Member for Batley and Morley (Mr. Woolmer) drew attention to that aspect.

We started with the Finance Act 1979, which doubled VAT and introduced reliefs, especially for those with higher incomes. In 1980, we removed the lower rate band of 25 per cent., which applied to the first £750, and increased reliefs on the taxation of capital, with great relief on capital gains tax and capital transfer tax. The Finance Act 1981 dismembered capital transfer tax, raised the bands of taxation and every 10 years wiped the slate clean for those paying capital transfer tax. Furthermore, it failed to index the Rooker-Wise personal allowances. It also brought about the sequestration of tax on the unemployed and those on strike. When one compares that with what has happened under schedule D, where people pay tax up to one year or even more years later, that was a severe imposition on those least able to defend themselves.

In the light of those precedents, this fourth Finance Bill is fully comparable to the previous three. It continues the emasulation of the capital transfer tax and the work of converting it into what The Sunday Times has called a voluntary tax. The Bill also starts the work of demolition on the capital gains tax—a matter to which my hon. Friends the Members for Workington (Mr. Campbell-Savours), Bishop Auckland (Mr. Foster) and others referred.

By introducing indexation as well as all the other reliefs, a tax which at present produces £600 million will reduce in the first full year to a revenue of £350 million. The further costs of indexation, as it is stated in the Red Book, are said to be "substantial". It is clear that, with the high costs of administration of this tax, its long-term future will not be in doubt because it has no future. So small would be the revenue and so high the administrative expenditure that it would shortly be on its way out. That is the position that the hon. Member for Winchester (Mr. Browne) considered.

Taxation must apply to capital as it applies to income, because there are two different forms of investment. One has the intention of obtaining a capital gain and the other has the intention of obtaining a considerable income. Capital gains have a low rate of tax at 30 per cent., while investment incomes have a higher rate up to 75 per cent. For example, if I lend £100 to my local authority, I should receive about £14 interest each year. The reason that I get so great an interest is that next year the value of my £100 will decline. With inflation running at 10 per cent., my £100 capital, on which I obtain £14 interest, will decline to about £90 in real terms. The reason for the £14 interest is to compensate for the decline in my capital.

The indexing provision of the Bill does not apply to such capital. Not only does it not apply, but I pay income tax upon the notionally high income from it. For as long as capital gains tax remains in existence, I shall be taxed on the income on my loan to the local authority or, if I go for capital gains tax advantages, I shall be taxed on some alternative asset that I would have bought at the level of the capital gains tax.

There was some rough balance between the sorts of investment that I made, whether for high levels of interest—as in the local authority example—or for some other capital-producing asset. By introducing partial indexation, that balance has now been shifted.

In that case, why did the Labour Government, of which the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) was a member, issue a Green Paper suggesting either tapering or indexation for capital gains tax? Did they mean not to implement it even if they found a way of doing it?

The Financial Secretary is wrong. There is a case for indexation, to which I shall refer. I am objecting to the partial indexation that the Government have introduced. They have said that there is a particular sort of asset or income-producing asset that should be indexed. They have chosen the assets that they believe qualify. I believe that the range can be wider. I shall try to explain that.

We must ask why the Government have produced the bias between the income-producing asset and the capital-producing asset. If the Government believed that indexation was right and that it should be based, as all indexation is, not on a particular asset, but on the declining value of the pound, which is always altering, they could have proceeded in that way. It is peculiar that a Government who claim that they are conquering inflation should be so concerned about the consequences of inflation that they claim to have overcome.

The motives that the Government have expressed are lofty, but the consequences of the policies are predictably selective. They are to assist the holders of wealth and to assist greatly the holders of great wealth. If the Government are so convinced about the fairness of indexation, why have they turned their attention only to the capital taxes? In his Budget Statement, the Chancellor of the Exchequer, in introducing this indexation, talked about the injustice to taxpayers. That is not the only injustice in the tax system as a result of the failure to index. Why has the right hon. and learned Gentleman picked on capital gains tax and capital transfer tax? There are other injustices. The problem is that someone can ask: why should a person who buys a house in Spain or in the West Indies receive an allowance for capital gains tax based on the United Kingdom retail price index? What has that to do with the asset that that person might want to buy?

As a result of the shameful 1981 legislation, the tax refund for a person who becomes unemployed is not payable until he is fortunate enough to obtain another job. If he does not, the refund will not be made up until the end of the financial year. We must ask ourselves the important question: will that amount be indexed? It could be £1,000 or £2,000 for a person who has been unfortunate enough to become unemployed. That sum could be critical to the life of the family. Not only is that his money, but it is withheld and it is not indexed. The Chancellor of the Exchequer said that he could not allow the injustice to capital gains tax holders to continue; he found it intolerable. What about the injustice to the unemployed?

Apart from the reduction of 5 per cent. that has been filched from the unemployed in lieu of taxation, they suffer the injustice of becoming unemployed. They suffer the injustice of having their tax refunds withheld. They suffer the injustice of their tax refunds being repaid up to a year later in debased currency. They suffer injustice upon injustice. If anyone's conditions are intolerable, those of the unemployed certainly are. It seems as if the Government will do nothing about them.

Before the Government index capital taxes they jack up exemptions so that, before they take account of inflation, they start from a high base. We can spot a number of anomalies in the actions taken by the Government. We know that wealth is eminently suitable for taxation. It provides assured income, and it is taxed in nearly all European countries. This indexation is not being provided for fairness. If that were so, we could think of many others who have greater claims. We have to look for some other motive—possibly an economic motive.

Do these taxes impose restraint upon our economy? This question can rightly be placed before the Chancellor. If we reduce taxes on capital and convert them into minor optional taxes, will our industrialists bound forward in the way they did when the highest rates of tax were reduced to 60 per cent. in 1979? The answer is that, if they believed that, the Government would be concerned to lighten the burden on those who could create fortunes but not on those who inherited them. A number of studies have pointed out quite unequivocably that inheritance is the major determinant of wealth inequality. In the great majority of cases the large fortunes of one generation belong to the children of those who possessed the large fortunes of the previous generation.

The proposals on capital transfer tax have been designed to assist in the maintenance of such fortunes. No other reason can be put forward for the provision last year to wipe the slate clean of the capital transfer tax provisions every 10 years. The measure enacted last year benefits those who have wealth at an early age and can take advantage every 10 years to pass it on.

We have had capital taxes since 1894. It was expected that over a number of decades the great accumulations of wealth would gradually decline and the differences that remained would become socially and politically acceptable. Those great fortunes have not declined. Whereas there is general bipartisan agreement that taxes should be effective—that is seen year by year in amendments to the Finance Bill to make our taxes effective—in the matter of capital taxes there is no such unanimity. The great estates continue in existence because, when the Conservatives are in power, the integrity of the capital tax structure crumbles. The ghostly fingers of the landed dukes guide the Treasury pens that bring about the emasculation of this legislation before the House.

The giant family fortunes continue. Families with names such as Beaufort, Devonshire, Lonsdale and Northumberland have lands worth hundreds of millions of pounds each—quite apart from the stocks of art treasures and other investments. There are other names with similar estates in the centre of this great metropolis of ours where the sums involved are ever larger.

We have to examine why this is happening. When we consider the way in which this comes about, we have also to consider the way in which the Treasury and the Treasury Ministers have gone about their legislation. We know that the noble Lord Cockfield has been the Minister responsible. If we examine the lists of ministerial responsibility within the Departments, every year we see the name of Lord Cockfield. He was appointed on 6 May 1979. The other two Treasury Ministers were appointed about six or seven months ago. It is Lord Cockfield who deals with major policy questions on income and corporate taxation and casework on capital taxation. He is responsible for this legislation. I understand that he has now been transferred to another Department. I heard that about half an hour ago.

I hope that this will be the last time that a Minister of State in the House of Lords is responsible for legislation. He cannot be brought before the House to answer for it, although he is primarily responsible here. Lord Cockfield has expertise that outmatches that of his colleagues. I am not denigrating his right hon. and hon. Friends on the Front Bench. It is clear that his knowledge, experience and background make him far more expert than anybody else. He devised this legislation, and he is the only Minister in the Treasury who is answerable for it to Parliament. It is a wholly unsatisfactory situation. I hope that it will not recur. The Opposition should ensure that it does not.

Many of these debates have echoed uncannily and eerily debates which took place on unemployment in the House 50 years ago. It is almost as though a number of actors here were reading the parts devised at that time. The problems are the same, and the arguments about them are the same. The record of our times—the most accurate of our country's chronicles—is to be seen in the bound volumes of Hansard, which fill many of the shelves outside the Chamber. There we read about Sir Stafford Cripps confronting Neville Chamberlain in 1933. In a debate on unemployment, he said:
"If it is desirable for private enterprise at this moment to build houses … it is just as desirable for municipalities to build houses. It does not matter two pins whether the bricklayer is employed by a contractor who is working for private enterprise or by a contractor who is working for a municipality. It can make no difference."
In the same debate, Harold Macmillan, as he then was, pointed out that the key to the problems of unemployment
"lies, not in South Wales or in Durham, but in Downing Street and Threadneedle Street."
Even more topically, because it is an echo of what the Chief Secretary to the Treasury said today, the Board of Trade said that the actuarial calculation of unemployment was based on 2½ million souls. It was not a forecast; it was an actuarial calculation.

What was said in those debates was as little believed then at it was when the identical claim was made by the Chief Secretary to the Treasury today. It is all there in these debates—gloomy, threatening, with the blinding memories of the First World War unable to avoid the Second World War. In unemployment it seemed that one disaster was enough, and that a second catastrophe might be avoided. However, it seems that there is a maximum period in which the memory stays green. When such time is exceeded, a fresh reminder is necessary so that the lesson may be learned afresh. That is what is having to be rediscovered at great expense to us all.

The Government, by their unemployment policies, will create a new and debilitating pessimism which, to our nation, is grievously dangerous and should never exist. It is only by having some confidence in our future that we as a people can ever regain our proper industrial place in the world. But how can confidence be acquired when 3 million able and employable citizens lie hidden away in their homes each day, or wander the streets with their thoughts and frustrations and, finally, their anger? The real wealth of our nation—it has nothing to do with the PSBR—lies in the talents, abilities and character of our people, and it is being squandered by the Government.

In the precipitous decline of British industry over the past three years, we have seen manufacturing output drop by 18½ per cent., we have seen manufacturing investment drop, and we have seen company liquidations increase by 139 per cent. The Government believe that only the useless industries are closing. They point to the good ones which survive.

What dismays us is that the Government are wholly unaware why that has happened. If a pestilential wind is sent through the factories and work places of our country and starves them of their livelihood, of course only the best and the fattest will survive. However, that is no reason for sacrificing one-fifth of our manufacturing firms—good firms, firms which may be in temporary difficulties as a result of the Government's policies, firms which in any other country would have a future, and firms which are valuable and should be respected.

Much is made of industry in Japan and Germany. We understand their pre-eminence in electronics and machine tools, but those are not their only industries. I hear of no international prizes being given to the German shoe industry, for example. There is no admiration for Japanese furniture manufacturers. These industries and many others are not world beaters. Their products appear indifferent and rather expensive. However, the companies that engage in such industries form a large part of the total industry of each of those countries, and they expect to continue and obviously hope to improve their products.

It is time that we adopted a similar attitude to such industries in Britain. In Tameside a survey was undertaken two and a half years ago and a check was made to see how many were in existence in October 1981. It was found that one in four had gone. These were small firms in highly skilled sectors of manufacturing. They were engaged mainly in engineering. On the whole, they were not world beaters, but some of them were extremely good. They had an honoured and respected place in the industrial life of the area. Given suitable conditions, they could have advanced in their particular spheres. They feel, and the whole community feels, that the Government have closed them down. It is prosperity, wealth creation and the subdivision of that wealth with which we are concerned.

The Government's economic strategy is based upon inflation as being the barrier to break, and that, once inflation is under control, growth can be resumed. I am not sure how that process works. Any Government who inflict such lasting misery upon so many and who are willing to accept the unemployment of 3 million as the necessary industrial dereliction through which we must pass on the road to prosperity must have a corresponding certainty that that road is the right one. The "certainty" that we have to endure now will produce, so we are told, the eventual success that will justify the agony, but that "certainty" does not exist. However, it is claimed to justify the temporary, but continuing, agony. The report of the Select Committee observes:
"the assumed rate of growth … is insufficient to reduce unemployment significantly is clearly disturbing, as it suggests a trend of increasing unemployment … It is all the more disturbing when that rate of growth is itself based on precarious assumptions."
About a year ago we heard of the famous 364 economists. There were many in the House—I suppose that I was one of them—who had a hearty chuckle at the thought of 364 economists jointly writing a letter. The Government and most of the House seem to have accepted the first four recommendations of the economists. First, the economists claimed that the Government's policies would deepen the depression. No one can doubt that now. Secondly, they claimed that the Government's monetary policies should be rejected and that money supply did not lead to the control of inflation. That is agreed. Everyone agrees with that now. Thirdly, they said that there were alternative policies. I do not seem to hear much about TINA now. Fourthly, they claimed that there was no basis for the Government to believe that deflating demand would bring inflation under control.

That is exactly what the Prime Minister's advisers are now telling her. Some of them are telling her that deflating demand will not necessarily result in inflation coming under control. Professor Hayek, in effect, says that monetarism is not enough or, alternatively, that deflation is not enough. He claims that the fault lies with the unions. He is, in effect, saying "Control them, legislate against them and restrict them." That is the alternative economic policy advanced by the good professor, whom God preserve.

We are now on familiar ground. We do not need to rely on economists, however distinguished or numerous. We certainly do not need to rely on Professor Hayek. On these matters, the House of Commons knows as much or as little as anyone else. Our experience tells us that when demand starts to pick up, any trade unions' weakness, any humiliation they have suffered or any pay claims they have forgone—or those that they think they have forgone—will be made up to reverse the loss.

There will be nothing permanent as a result of this policy. Trade unions feel that their time will come. The economists are right. Deflating demand does not mean that inflation will be brought under permanent control. That simply creates a contest. That contest will take place later, and there will be great bitterness. That ranks among the greatest errors in peace time.

The Government have introduced misery into millions of homes. They have lost great national industrial assets. They have been losing the cohesion of the nation—probably our most valuable asset. They have done all that to bring about a temporary decline in inflation. That is not an economic policy. It is economic nonsense, and tonight we should show it up for what it is.

9.32 pm

I shall try to emulate the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) and pick up the many points made in the debate. I shall try to refer to speeches of my hon. Friends and Members of the Opposition.

I shall start with the theme that seems to have come through about the Bill—taxation. The theme of indexation is about whether what the Government are doing is good or bad and the Government's long-term intentions. The Select Committee on the Treasury and Civil Service asked us to do that.

I shall divide my remarks into four parts. First, there is a tendency to index the thresholds of taxation—to "Rooker-Wise" them. The right hon. Member for Heywood and Royton (Mr. Barnett) referred to that as the "truth" in taxation. It was suggested that the rate bands for capital transfer tax and the exemption limit for capital gains tax should also be indexed. It is helpful to consider tax problems, in inflationary times, each year from the basis of new indexed thresholds. That is just a starting point for considering what should be done. That is what the Government do and I suggest that the House and country would also like to do that.

The second part of the argument is what we do about thresholds. Parliament has often been asked to, and has, overridden the threshold. It did that last year. The Bill increases all income tax allowances by more than inflation would have required us to do. In parenthesis, I tell my hon. Friend the Member for Norfolk, North (Mr. Howell) that the Government put a high priority on raising thresholds. As he knows, it is simply that the economic circumstances must make enough money available before more can be done. It is always a regret to the Government if they cannot get the thresholds higher. I pay tribute to all that my hon. Friend has done.

Does my hon. Friend accept that we could raise tax thresholds if we reduced public sector spending, and that overmanning is a principal problem in this area?

Of course I accept that, but we have done a lot to reduce manning levels. We have achieved a reduction of 57,000 in the Civil Service, which is not a bad contribution from the Government. We also look for contributions from local authorities and nationalised industries. We did not revalorise excise duties. They are 3½ per cent. less on tobacco and 5½ per cent. less on spirits than was necessary. Some thresholds have increased by more. For example, the supplementary capital disregard has gone up from £2,000 to £2,500—more than revalorisation.

Stamp duties have also gone up by more than revalorisation, but there are many thresholds that we have not increased—for example, the £25,000 ceiling for mortgage interest relief, the £8,500 fringe benefit level and the DLT threshold of £50,000. In practice, the two main things that we have moved exactly in accordance with this year's index are wine and petrol duties. That is because every Chancellor wants flexibility. My hon. Friend the Member for Bath (Mr. Patten) may wish to deny that, but I believe that we must retain some flexibility. After what I have said, I think my hon. Friend the Member for Winchester (Mr. Browne) will appreciate that we have not done quite so much indexing as he might have thought.

The third way in which we have looked at indexing is in relation to the new index-linked bonds. I want to say something to my hon. Friends the Members for Winchester and for Croydon, South (Sir W. Clark) about how these are accounted for in the Government's accounts. There is no sinking fund anywhere for the Government, because the Government account entirely on cash annually. They do not have any balance sheet or provision of that sort. They run all their accounts on the pay-as-you-go basis.

The same is true of index-linked pensions in the Civil Service. Although they entail a liability at some stage in the future, there is no sinking fund to cover that liability. It is not, as it were, funded, because the Government cannot fund their own obligations. There is nothing wrong with that. Even if one considers the issue of ordinary non-dated high coupon stock, the mere obligation to pay interest is a future liability, as are many other Government liabilities, which at some stage will have to be met.

Fourthly, there is the indexation of capital gains tax.

My hon. Friend says that there is no Government funding of any pension fund. However, I think that there is a fund, which is actuarially sound, for teachers' pensions.

That may be an exception, but of course that is partly a local authority responsibility as well.

Will the Minister respond to the Treasury and Civil Service Select Committee comment that private industry is at a disadvantage when competing with index-linked gilts, because of tax considerations?

Perhaps we can explore that in depth in Committee, because a lot can be said about it. In some cases it is not so. It depends on whether one goes the income route or the capital route. If one goes the income route, it is perfectly possible for the advantages to be equally matched with the private sector. If one goes the capital route, there are advantages in the Budget to the lender but not to the borrower. Perhaps we can explore this matter in greater depth at some other time.

As to the indexing of capital gains, it will cost £150 million in a full year to index the price of acquisition. The hon. Member for Blackburn (Mr. Straw) asked what it would cost eventually. It depends entirely on the rate of inflation. The higher the rate of inflation, the higher the paper gains made by people and the higher the tax that could be charged on those paper gains. Therefore, by indexing, one loses more tax. I do not know whether that satisfies the hon. Gentleman, but it just proves what a bad tax it is.

Will the right hon. Gentleman accept that since the real rate of return over inflation for the past 15 years has been 2 or 3 per cent. the bulk of the yield of capital gains tax, now about £600 million, arises from inflationary gains, and therefore it is highly probable that the bulk of that yield, once this change is fully operational, will be lost to the Treasury?

I would not entirely accept that. I have given the hon. Gentleman the figures. It depends upon the rate of inflation. If it is true that the bulk of the yield of the tax arises on inflationary gains, the hon. Gentleman makes my case that we should not really be in the business of charging it.

It is difficult to know what the Opposition are getting at. I remember the paper of 14 July 1977, published by the Labour Government. When we were debating that paper the right hon. Member for Llanelli (Mr. Davies) said:
"We recognise that there is a problem here and I hope that in next year's Finance Bill we can bring in something along the lines of this kind of relief."
That was indexing or tapering. They did not do it. They hoped and wanted to do it and they tried to sell their own Green Paper. I hope that we shall not now have a volte face, with the Opposition Front Bench trying to say that we should never have done what they themselves sought and failed to do. I believe that the problem will be much more for my hon. Friends—whether we have done enough.

My hon. Friend the Member for Bath asked whether we should allow losses to be set off. My right hon. and learned Friend the Chancellor has made a big and expensive change and we cannot have everything. We should have liked to do something retrospective about gains, but the cost would have been more than twice the cost of that particular relief. I think that my hon. Friend will agree that that would be unfair to those who have made their gains and paid their taxes.

Can the right hon. Gentleman explain whether, under the Bill, if in the relevant year or years the RPI fell, that would mean that the tax charged would be correspondingly increased?

I believe that the cost of acquisition of the asset would be reduced by the fall in RPI. As there would therefore be no gain, no tax would arise. I do not see how there could be a capital gain when the RPI fell—yes, there could be. The tax base would be reduced by the fall in the RPI, but I speak subject to correction.

Some of my hon. Friends have proposed that we should index down the sales price, but I suggest that if one does the calculations for indexing down the sale price and then converts the gain into current money value terms, one will find that it makes no difference to the gain. That calculation is just more complicated without producing a different result.

It has been proposed by some hon. Members that indexation of existing assets should be by reference to the 1982 market value and not original acquisition costs. That would increase the cost of indexation beyond what the Chancellor considered could be afforded this year. It would also increase administrative costs. It is a matter that we can debate in greater detail when we come to those clauses in Committee.

I say only one thing to my hon. Friend the Member for Croydon, South about "bed and breakfasting". The Bill does not make that impossible. It merely requires that it be done across the Stock Exchange account instead of within it. That is necessary with regard to the year's delay before uplift starts.

The Opposition have sought to suggest that the changes that we have made in the capital gains tax will be of considerable benefit to the better off. That argument needs examination. First, the Opposition are in favour of indexing capital gains tax. Secondly, it is not always the better off who pay either of these taxes. There are many people who would not consider themselves among the better off but who pay capital gains tax.

I wish to refer to capital transfer tax. The cost of the changes in this Budget, as opposed to making no change over 1978–79 when the Government came to office, is an extra yield of £5 million. If one compares the yield of capital transfer tax in the coming year with 1975 rates, when the tax was introduced, one sees that the extra yield is £90 million a year. That is made up of £ 190 million extra tax from the bigger estates, less £100 million which is remitted to the smaller estates. The actual effect of my right hon. and learned Friend's proposals on capital transfer tax is to take another £190 million a year from the bigger estates. I suggest, therefore, that we hear no more of this silly argument from Opposition Members, who have not done their homework.

Has the hon. Gentleman taken account of the 10-year wiping clean of the slate, when it was stated that this amount would not be known for years to come?

I advise the right hon. Gentleman to do a little homework. I am talking of the yields. I shall give him some of the rates. The equivalent today of the 50 per cent. rate brought in by the right hon. Member for Leeds, East (Mr. Healey) at £100,000 to £120,000 would be £260,000 to £315,000. My right hon. and learned Friend proposes in the Bill figures of £165,000 to £200,000. The equivalent of the top 75 per cent. rate, brought in at £2 million, would be £5·25 million. My right hon. and learned Friend is proposing only £2·5 million. So that piece of nonsense from the Opposition has to be dropped.

The hon. Gentleman is surely not trying to pretend that the Government have not given away hundreds of millions of pounds of tax benefits to the rich. through income tax, capital transfer tax and capital gains tax. This amounts to £2,600 million in the last three Budgets and £555 million in this Budget, at a time when the Chancellor refuses to find £60 million to repay the 5 per cent. cut in unemployment benefit when it was to be introduced with taxation.

The hon. Gentleman would have done better to keep his mouth shut. One of his main wickets has been destroyed. I shall now destroy another. A useful little book, a new "Bible" for Finance Bill debates, has been written by the right hon. Member for Heywood and Royton. Every hon. Member serving on the Finance Bill Committee should have a copy beside him. One quotation from "Inside the Treasury" reads:

"I also wanted to reduce the ridiculously high top rate of 83 per cent. on earned income and 98 per cent. on investment income, but to no avail. It was thought to be psychologically the wrong time for the TUC and the Labour Party"
That is what the Chief Secretary to the Treasury in the Labour Government thought.

I should like to refer to other matters that I regret are not included in the Bill. The first relates to agency workers. They are not included in the Bill because we are not going to do anything in legislative terms. I have today answered a written question that makes it clear that we shall try to make sure that tax is properly collected from agency worker companies by means of existing powers under section 16 of the Taxes Management Act. These will enable the Revenue to seek regular returns from agencies of payments made to agency worker companies. The returns will allow systematic monitoring of the position and an opportunity to improve tax compliance. That is clearly an area that needs to be kept under review, and this will be done.

I deal next with a point raised by the hon. Member for Colne Valley (Mr. Wainwright). The new clauses to be moved in Committee include four important new clauses dealing with tax avoidance, as I think I should call it, by the banks. The reason why the four clauses are not yet in the Bill is that they are complicated and require consultation with the industries and interests concerned. In each case, we thought it better to ensure that that consultation was properly carried out. Nevertheless, the draft new clauses will be published in good time and will, of course, be dealt with at the end of the Committee stage.

The first new clause relates to international leasing. We need to act, because well over £500 million worth of international leasing was done in 1981, most of it foreign to foreign leasing. In other words, there was a United Kingdom Exchequer subsidy for a lease by a company in one foreign country of equipment made in another foreign country. In 1980 we reduced the rate of capital allowance for international leasing from 100 per cent. to 25 per cent., but even that has not significantly reduced the incentives. It is therefore proposed to reduce it to 10 per cent., which I believe will remove any investment incentive in foreign to foreign leasing.

The position with regard to ships is complicated, but it is similar, in that our concession last year to allow time chartering abroad to assist the United Kingdom shipping industry to escape the reduction from 100 per cent. to 25 per cent. capital allowance has also been exploited. I shall not go into details now, but large amounts of tax are at stake and it is potentially possible to wash the whole world shipping fleet through the United Kingdom corporation tax. We must take steps to deal with that. We are discussing it with the industry. It is likely that it will be proposed to reduce the rate for time charters to 10 per cent. except in cases of genuine United Kingdom shipping companies.

The same is true of films. There has been a growing tendency for foreign film industries to wash their films through London to obtain corporation tax relief even though the films are for overseas showing. The Exchequer subsidies here have been frightening. We propose to end the first-year allowance for films and to provide a new regime under which United Kingdom films are written off in a way that more accurately reflects their income-producing life, and at the same time to bring in transitional protection for genuine United Kingdom film industry products.

Finally, there will be legislation in Committee to deal with the problem of double taxation relief when banks lend overseas. I shall not go into details, but conversations are still taking place with the banks. I hope that the House agrees that that should be done.

I shall deal with one other matter as it appears in clause 52. The Government will deal with what are known as section 233 loans. That is a form of avoidance of corporation tax that has been growing considerably. It has, at the same time, been used by some banks to start small business start-up schemes and to provide loans for small companies.

Judging from the kind remarks made by my hon. Friends the Members for Hertford and Stevenage (Mr. Wells) and for Hertfordshire, South-West (Mr. Page), they appreciate all that we have been trying to do for small companies. We can exempt existing loans under £100,000 from the new arrangements. That will include the Barclay start-up scheme. The exemption will also apply to cases where firm negotiations for a small start-up loan had begun but had not been finalised before Budget day. In those cases, it will be a condition that the loan is completed before 30 June 1982. An appropriate amendment will be tabled in Committee.

Before the Minister leaves those matters that are not contained in the Bill, will he explain why no steps were taken to deal with international tax avoidance by British companies? Will next year's Finance Bill do something about company residences, tax avoidance havens and upstream loan avoidance schemes?

My right hon. and learned Friend the Chancellor of the Exchequer dealt with that matter in his Budget speech. We want to get things right. We are determined to do that, but only when the details are right. The hon. Gentleman would not wish us to damage British industry.

I remind the right hon. Member for Stepney and Poplar (Mr. Shore) that he will not gain the confidence of the House by abandoning money supply targets. He should remember that in 1977 he was a member of a Government who were encouraged to adopt such targets by the IMF. That Labour Government reduced the rate of inflation from 23 to 9 per cent. It was only when they let go of their control over the economy—just before the election—that inflation took off again, reaching, at its peak, 21·9 per cent. We had to turn the situation round and reduce inflation.

The right hon. Gentleman operated the money supply targets that reduced inflation in the mid-1970s. However, this afternoon he told the House that the right hon. Member for Leeds, East merely adumbrated money supply targets and did not intend to follow them. He said that they were merely a piece of IMF "rigmarole". In other words, he said that the letter of intent was a fraud and that the Government did not believe in it.

The right hon. Member for Stepney and Poplar now talks about a £9 billion reflation. One of his predecessors, Hugh Gaitskell, was called a desiccated calculating machine. The right hon. Gentleman is not desiccated, but dripping wet. He cannot calculate. He does not know what the result of that reflation would be. There is no need to speculate on what such a massive reflation would do. Why look into the crystal ball when one can read the book?

Let us consider what has happened in France since the lau