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Pre-Budget Statement

Volume 301: debated on Tuesday 25 November 1997

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3.30 pm

The purpose of this, the first annual pre-Budget statement, is to report the Government's assessment of the economy, to outline our Budget aims and to encourage an informed debate of the detailed choices before us. To achieve our national economic objectives, high growth and high levels of employment, the next Budget must address three challenges.

The first challenge is to increase our productivity. Britain today is some 20 per cent. less productive than our main competitors and has been for years. The second challenge is that of employment. Some 3.5 million working-age households—almost 20 per cent.—include no one earning a wage. The third is the challenge of stability. For 40 years, our economy has had an unenviable history under Governments of both parties of boom and bust. Stop-go has meant higher interest rates, less investment, fewer successful companies, and lost jobs. It has been the inevitable result of a failure to take a long-term view.

So the real choice facing Britain in the coming Budget and beyond is between muddling through as we have done for decades from one stop-go cycle to another, or breaking with our past, burying short-termism and securing long-term strength through stability, sustained increases in productivity and employment opportunity for all. This is not a challenge for Government alone. It is a challenge that must also engage both the understanding and the commitment, indeed the energies, of all of us— Government, investors, managers, work forces—together.

So at the heart of this pre-Budget report is the recognition that only by greater openness and informed debate can Britain achieve that shared understanding of the tasks ahead and that shared sense of national economic purpose that has eluded us for too long.

First is stability. The major industrialised countries are expected to grow by 2¾ per cent. this year and 2½ per cent. next year, despite the recent turbulence that we have seen in Asian economies and financial markets. It is imperative that Governments and central banks around the world remain vigilant, but at all times it is the task of Government to ensure a long-term stable framework— exactly the approach that the Government are pursuing.

When we came to power, the economy was already facing yet again the very pressures that have produced the boom-bust instability of the past. Consumer demand was accelerating. It was growing three times as fast as industrial production, as more than £30 billion was released in building society windfall payments. Inflation was predicted to go far beyond its 2½ per cent. target, and was expected to rise towards 4 per cent. next year.

All that was happening because the necessary decisions on monetary and fiscal policy had not been taken. It is because the Labour Government have learnt the lessons from past instability, when interest rates rose into double figures to 15 per cent. in the last economic cycle that, starting in May, we put in place a new monetary and fiscal framework.

Following our reforms at the Bank of England, long-term interest rates have come down, and no one doubts the Bank of England's determination to achieve the Government's inflation target. With our five-year deficit reduction plan, public borrowing, which was £23 billion last year, is now forecast—excluding the windfall tax revenue—to be £12 billion this year and £6 billion next year.

We said in our manifesto that we would work within existing spending limits, and this we are also achieving as we promised. The deficit has fallen from 4½ per cent. of national income just two years ago to just 1½ per cent. this year, and it will be ¾ per cent. next year, well within the Maastricht criteria.

There is a risk that the structural deficit, which takes account of the economic cycle, may turn out to be larger, so we shall be both cautious and prudent. I can tell the House that we will not make the mistakes of 1988, when it was wrongly assumed that the structural deficit had disappeared, and the penalty was the return to boom and bust.

Although I recognise the concern of exporters about the exchange rate, I understand that what companies fear most of all is a return to that boom-bust instability of the past. So this summer and autumn, hard decisions have had to be taken on both interest rates and deficit reduction, and I am now more optimistic that we are on course to put the economy on track for stable and sustainable growth.

It is to reinforce our commitment to the long term that we shall publish proposals for a code of fiscal stability. We shall legislate so that there is a duty on Government to report to Parliament on how they are meeting their fiscal rules; in that way, everyone can plan for the future on a much clearer and better informed basis.

Let me explain why meeting our fiscal rules matters so much—why they are essential preconditions for long-term social and economic progress. It is because the borrowing levels that we inherited are costing the country £25 billion a year in interest payments alone, which is more than our country's total budget for schools, that we had to act. Our aim is to reduce the huge sums spent simply servicing debts, so that more of our money can be spent on meeting the people's priorities.

The prize for this country, valued especially by a Government who are committed to good public services, is sustainable public finances that allow consistent and long-term investment in our priorities.

By reallocating resources, we shall be investing an additional £2.3 billion in education over and above that planned by the previous Government; and this year we shall be investing an extra £300 million in patient care in the national health service and next year an extra £1.2 billion over and above what the previous Government planned. I can tell the House that, as our comprehensive spending review reallocates resources towards higher-priority areas, there will be real year-on-year increases in spending on front-line patient care.

The key to strong public services is long-term prosperity through higher productivity. Government, industry and people must work together to systematically remove all barriers to high productivity—in product markets by encouraging competition and innovation, in capital markets by measures to enhance investment and growth, not least for innovative small businesses, and in the workplace by encouraging the creativity and flexibility of inventors, of managers and of the work force.

After our successful Budget initiative in July to encourage one of the most neglected of our creative industries—film—it is time to do more to encourage other creative industries where, from science, computer software and communications to design, fashion and music, our British genius for creativity has made Britain a world leader. This year, entrepreneurs in small and medium-sized companies can draw on £200 million, as we have doubled capital allowances to invest in new technology. From next year, the National Endowment for Science, Technology and the Arts will make grants available to encourage creative talents and industries.

I can also say today that, in advance of the Budget, the President of the Board of Trade and I are examining how to improve productivity, how we can help leading-edge businesses to gain funds to develop new technologies, how we can improve Britain's poor historical record of investment in research and development, and how we can make it easier for small businesses to draw on venture capital to create jobs in a more entrepreneurial culture. It is to encourage and reward long-term investment that we are completing a review of capital gains tax, the conclusions of which will be announced in the Budget.

Our poor record of investment in Britain also reflects a low level of national savings. Half the national population have hardly any savings. To encourage more people to save, we will be introducing from April 1999 new, individual savings accounts, the details of which will be put out to consultation next Tuesday in advance of the Budget.

However, there is one decision on investment that should not be delayed. In July we implemented the first stage of corporate tax reform. We cut the main rate of corporation tax by 2 per cent. to 31 per cent.—its lowest level ever. Following the abolition of payable tax credits we began to consult, as promised, on the second stage. Advance corporation tax, it has become abundantly clear, is now a hindrance to sensible business planning and investment decisions. Britain needs a reformed system that matches the needs of modern companies and favours the long term.

To allow companies to plan ahead I can confirm today that, in April 1999, advance corporation tax will be abolished. At that point we shall begin the move to paying corporation tax by quarterly instalments. Small companies will be exempt from this change; special arrangements will be made for medium-sized companies; we shall phase in the change over four years; and we shall substantially preserve companies' expectations for using their existing surplus ACT.

This afternoon the Inland Revenue is publishing full details of the proposed changes and we shall now start consultation on their implementation. In order to help ease the transitional costs and to take one stage further our pro-business and pro-investment agenda, in the Budget the main rate of corporation tax will be cut again by 1 per cent. to 30 per cent. from April 1999—that will be the lowest tax rate of any major industrialised country.

The July Budget started from the understanding that the greatest waste of our economic potential and the most serious cause of poverty is unemployment. It denies opportunity to 3.5 million working-age households where nobody works. In July, we said that, instead of simply compensating people for unemployment, our priority is to tackle the root causes of unemployment and poverty by providing new opportunities for work.

In the past few months, with the help of Martin Taylor, the Government have been systematically addressing all the obstacles that prevent people taking up and benefiting from work: the absence of workplace skills, the failure of the tax and benefit system to make work worth while, the poverty and unemployment traps that for too many people mean that work does not pay, the lack of employment opportunities and the scarcity of affordable child care.

We have concluded that, to help people move from benefits to wages, nothing less than a comprehensive tax and benefit reform and the modernisation of the welfare state are now required. This strategy involves three basic elements: providing skills for work, making work pay and creating new job opportunities.

First, in order to offer skill for work, my right hon. Friend the Secretary of State for Education and Employment will shortly publish his proposals for individual learning accounts and for the university for industry.

Secondly, I want everyone who can work to be better off in work than on benefit, so the Government now propose an integrated tax and benefits plan involving action at every level. In order to maximise the rewards from work, a 10p starting rate of tax and a reform of benefit tapers will be introduced when it is prudent to do so. To ensure that work pays for families with children, we propose a working families tax credit, backed up by affordable child care. To ensure that the rewards of these reforms flow directly to the employee, we are committed to a statutory national minimum wage.

We shall now consider in detail the working families tax credit—cash paid through the wage packet directly to families on low incomes, side by side with the national minimum wage. The proposal would build on the successful elements of family credit, and would involve better help through the tax system for child care costs.

We will now also consider the future structure of national insurance for the low-paid. Under the current system, some low-paid employees face marginal tax rates of more than 100 per cent. To improve the rewards from work, to simplify administrative burdens on employers, as we want to do, and to encourage them to take on more people, it is now right to consider the scope for bringing the national insurance structure for the low-paid more closely into line with income tax.

Finally, there are men and women who have been excluded for too long, and who need extra help to get back into work. In the Budget, we made our start by announcing a new deal worth £4 billion that provides jobs for young unemployed, the long-term unemployed, lone parents and the disabled. The new deal for the young unemployed will start in January in pilot, and extend nationwide in April, with the support of some of our best known companies.

I can announce today that some of Britain's leading rail and bus companies have agreed to play their part, by introducing a new travel pass for young people on our new deal, cutting by at least 50 per cent. their travel fares to work.

Disabled men and women who want to work should also have the right to work. As the first step in implementing the £195 million programme for people with disabilities, my right hon. Friends the Secretaries of State for Education and Employment and for Social Security will now be inviting bids for the first wave of new projects to start in spring 1998.

Helping lone parents into work is the most effective long-term way to tackle their family poverty. The new deal for lone parents began in eight areas in July. Already it is yielding results where it counts—in higher living standards for lone-parent families. From next year, our welfare-to-work programme will be extended to help every lone parent who wants advice and help, and from April every lone parent coming on to benefit will be offered help to find work, if that is what he or she wants.

Lone parents need, and have a right to expect, affordable child care. Since May, my right hon. Friends the Secretaries of State for Education and Employment and for Social Security have been working with the Treasury on plans to make a reality of a national child care strategy. Paramount in this family policy are the interests of the child. Tomorrow, my right hon. Friends will announce a five-year plan to extend out-of-school child care clubs to every community in Britain.

Funds will be available to set up as many as 30,000 new out-of-school clubs, which will provide places for almost 1 million children. The total cost over five years is £300 million, which is now budgeted for in our plans and represents the biggest ever investment in child care. The cost will be shared between the Exchequer and the new opportunities fund.

To staff these new clubs, 50,000 young people across Britain will be offered training as child carers through our welfare-to-work programme. Under our plan, every lone parent who needs it will be able to find an out-of-school club in his or her community. A national child care strategy is no longer the ambition of workless parents; it is now the policy of this country's Government.

While one in five working-age households have no one working, we also, unfortunately, have extensive skill shortages throughout our economy. The proportion of manufacturing firms reporting skill shortages is up 70 per cent. on a year ago.

We will now introduce pilot projects nationwide, under which any employer who takes on and trains a young or long-term unemployed person and keeps that person on can receive up to three quarters of the new deal allocation up front, thus giving immediate help with training costs. In the case of young people, that will be about £1,700, and for the long-term unemployed, £1,500 for their training.

Those skill shortages are a clear sign of the short-term pressures in the economy that must be tackled. At around this point in every recent recovery, when inflation and interest rates have started to rise, a second wave of wage inflation has brought a recurrence of stop-go instability. Past Governments have allowed themselves to be diverted from their long-term aims because of their inability to deal with these short-term pressures.

This time, we must do everything we can to make sure that the long term takes priority. It is because the previous Government held a simplistic and over-rigid view of the relationship between levels of inflation and levels of unemployment that they told us that high unemployment was a price worth paying.

However, there are three reasons to believe that, provided reform and responsibility go hand in hand, it is possible to lay the foundations to deliver both low inflation and high employment in the long term. First, the more our welfare-to-work reforms allow the long-term unemployed to re-enter the active labour market, the more it will be possible to reduce unemployment without increasing inflationary pressures.

Secondly, tax and benefit reforms that remove the barriers to work and structural reforms that promote the skills for work—in other words, Government intervention to create a more responsive labour market— can make possible long-term increases in employment without fuelling inflationary pressures. The more people return to the world of work and the more we tackle skills shortages, the less pressure there is on employers to bid up wages in the short term.

Thirdly, the reality of the more complex and flexible labour markets of Britain today is that pay decisions are made not by the few in smoke-filled rooms, but by millions of employers and employees across the country. The more we all take a long-term view of what the economy can afford, the more we will be able to have job creation and keep inflation and interest rates as low as possible. So we must all be long-termists now.

The reforms that we are introducing will, of course, take time, but it is in no one's interests if today's pay rise threatens to become tomorrow's mortgage rise. The worst form of short-termism would be to pay ourselves more today at the cost of fewer jobs tomorrow and lower living standards in the very near future. So wage responsibility is a price worth paying to achieve jobs now and prosperity in the long term: it is moderation for a purpose.

The choice is between responsibility and reform that would give us higher growth and more jobs, and short-sighted short-termism that will inevitably mean less growth and fewer jobs. In our forecasts for the coming two years, we demonstrate clearly the choices that we all face. If the economy works in the same way as in the past, growth might be 2¼ per cent. next year. If we can combine our reforms with responsibility across the economy, it is possible to achieve growth of 2¾ per cent. next year. Similarly, growth can be 1½ per cent. or 2 per cent. in 1999–2000. In either case, the Bank of England will ensure that the Government's inflation target is met.

So the more successful we are in tackling skills shortages and ensuring the success of the new deal for the unemployed and the more effective the exercise of responsibility in pay determination, the more we can achieve our goals of sustained growth and employment.

I have today submitted this new evidence to the public sector pay review bodies and met the chairmen to explain the choices before us. Just as the Government are offering leadership with responsibility in monetary policy and the management of public finances so that we can achieve those higher levels of growth and employment, so must business leaders and work forces match that with responsibility throughout the whole economy. That means responsibility not just on the shop floor, but from Britain's boardrooms outwards, where, in the interests of all, there must be moderation, not excess, and where an example should be set.

We recognise that, if we are to achieve our long-term goals and secure that new sense of economic purpose, fairness and openness must be at the heart of the approach to every Budget. Tax avoidance harms those who pay their fair share of taxes. 1 give notice today that the Budget will introduce those measures that are needed to root out tax avoidance. A fair and open approach to taxation will also be central to our Budget consultations now under way on North sea oil; on alcohol, where the review will conclude early next year; and on charities, where we are working towards a consultation document next spring.

In securing the long term, nothing is more important than our approach to the environment. On Thursday, the Deputy Prime Minister will publish a consultation paper on ways to help with water pollution, with a view to making proposals in the coming Budget. Together we are also looking at how the tax system can reflect our environmental objectives, and we shall do so in light of decisions taken at Kyoto.

In this pre-Budget statement, we are consulting in all areas where it is right and appropriate to consult, we are taking action in all those areas where action is needed immediately, and we are putting to the country the choices for debate—choices that can be made only by us all.

I promised to make one other announcement today. Following a review by Customs and Excise, which will be published tomorrow, I have decided that VAT on the installation of energy-saving materials under existing grant schemes, such as the home energy efficiency scheme, will be cut from 17½ per cent. to 5 per cent. in the spring Budget of 1998. That means that the funds under the schemes will go further and will help to insulate 40,000 more homes per year. The Government will now explore with our European partners the possibility of a reduced VAT rate for a wider range of energy-saving materials.

Our spending review, like our tax policy, is based on allocating resources according to priorities of investment, employment and fairness, so already, within the Government's tough spending limits, we have redistributed resources to priority sectors: from assisted places to cutting class sizes; £4 billion from the windfall tax paid by the utilities to creating jobs; another £1 billion to repairing our schools; from the defence and nuclear programme to the national health service. After the publication of the national asset register yesterday, there will be new scope to reallocate resources to high-priority capital investment.

I can announce one further reallocation today. I now expect our net payments to the European Union to be some £400 million lower than budgeted. Our pensions review is examining the long-term future of pension provision in Britain, including how we can do more to support Britain's poorest pensioners. We must help the thousands who do not claim benefits, but who need them most.

My right hon. Friend the Secretary of State for Social Security and Minister for Women is announcing today that she will finance several projects to find the best way in which to encourage improved benefits take-up by the poorest pensioners, so that they receive what they need.

We have already cut VAT on fuel and power to 5 per cent., as we promised, but it would be wrong to wait until we have the results of our pensions review to take action to help elderly people with winter fuel bills. Although the poorest do receive some help through cold weather payments, they go only to those on income support, who generally have to wait until after the cold weather for help to be available. The payments are no help at all to most pensioners, including the 1 million not receiving income support entitlements and those on the margins of poverty, and they are of doubtful help even to those who do qualify, who often do not know whether they can afford to spend extra money on fuel when it is cold.

My right hon. Friend the Secretary of State for Social Security and I are simply not prepared to allow another winter to go by when pensioners are fearful of turning up their heating, even on the coldest winter days, because they do not know whether they will have the help they need for their fuel bills. The pensions review will report next year, but we must act in the meantime to help pensioner households.

For this winter and next, every pensioner household will receive £20 extra to help with their bills and every pensioner household on income support—nearly 2 million households—will receive £50 extra. The cost will be met from reallocating the savings on our contribution to the European budget.

The money will be paid in time to meet winter fuel bills, so every pensioner household in Britain will have the benefit of the Government's cut in VAT on fuel, our abolition of the gas levy, new and tougher regulation and competition in the utilities, and the Government's new fuel payment to pensioners. As a result of those changes, the average pensioner household will be helped by up to £100 a year, and poorer pensioner households on income support will be helped by up to £130 a year.

In contrast with the previous Government, who put VAT on fuel, this Government keep their promises and are prepared to take action where it needs to be taken. It is a Government who are meeting the people's priorities, even as we confront the difficult choices that our country must make to build for the long term. In 1997, we have made a start and we will do more year on year. Our approach to the coming Budget shows that we are already setting a new course for Britain, and building a united country where everyone has opportunity and a contribution to make. I commend the statement to the House.

I begin by welcoming some aspects of the Chancellor's statement. In particular, I welcome the good economic news that underlies the Chancellor's forecasts that were published today—stronger economic growth bringing higher tax revenues, lower spending as unemployment falls and the consequent reduction in borrowing. Are they not the result of the golden economic legacy that we bequeathed the Government—the fruit of 18 years of Conservative reforms, every one of which the Chancellor opposed?

Does the Chancellor agree with the last Labour Chancellor, the noble Lord Healey, who said:
"We must remember that rarely, if ever, have a Government had such cause to be grateful to their predecessor when it comes to the economy"?
Will not the figures that the Chancellor has published today prove that his July tax-raising Budget was unnecessary? He did not need to break the Prime Minister's solemn election pledge:>
"We have no need to raise taxes at all".
He did not need to raise 17 taxes or impose a £5 billion-a-year pensions tax on people's savings. The simple truth is that he was determined to increase taxes in July, so that he could increase spending later.

In his statement and in the document he has published today, the Chancellor has promised us a fiscal stability code. We are happy to welcome that, but can he confirm what his officials are reported as telling the Financial Times: that it will not involve him publishing any information that the Government do not publish anyway? Does not his real motive have nothing to do with what happened under a previous Conservative Chancellor but all to do with what has happened under previous Labour Chancellors, all of whom have been engulfed by the spending demands from their Back Benchers? Previous Labour Chancellors have also tried similar devices to strap themselves to the mast of fiscal rectitude. The code seems to be an even flimsier cord, which will break under the strain of the demand from the Government Back Benches.

The Chancellor hints that he will reduce taxes soon. Is not the truth that none of his proposals will do much to help the typical home-owning family facing £650 a year in higher costs as a result of his mortgage increases, the cut in mortgage tax relief that he introduced and the tax on pension funds that he announced earlier this year, to say nothing of the £1,000 in tuition fees that every family with a student at university will have to pay?

In his document, the Chancellor proposes introducing a 10p basic rate of tax. The Opposition welcome any reduction in tax from a Chancellor who, so far, has broken his clear promise not to raise taxes, and has increased 17 taxes. We shall want to see that any new tax band results in a real tax cut, and is not paid for by messing around with personal allowances.

We shall not allow the Chancellor to get away with a pretence that the reduction is focused on the poor and those on benefits. Will he confirm the figures from the Institute of Fiscal Studies which show that a 10p lower-rate band that was worth £6 a week to a wealthy couple such as the Prime Minister and his wife would be worth only 9p a week to a family on in-work benefits? What other measures does he plan to introduce to benefit those on low pay?

Why is there not more detail in the Chancellor's proposal about the earned income tax credit? Has he cleared his proposal with the Minister for Welfare Reform, who is on record as opposing the payment of family credit as an earned income tax credit because
"more money will get to children … if we pay the money to mothers rather than to fathers".?—[Official Report, Standing Committee B, 18 March 1986; c. 949.]
However sceptical Opposition Members may be about the Chancellor's make-work schemes and welfare-to-work proposals, we want to see them work. Nothing would give me greater pleasure than to have my scepticism disproved. However, will he confirm that—so far, before his scheme has even got off the ground—the previous Government's dynamic labour market reforms and the jobseeker's allowance have succeeded in getting off the dole half the young people he wanted to help?

Will the Chancellor confirm that he has now abandoned the pledge made by the then employment spokesman, the hon. Member for Makerfield (Mr. McCartney), that a Labour Government would abolish the jobseeker's allowance, and that that pledge has gone the way of so many others?

The Chancellor mentioned the position of disabled people. Opposition Members have always believed in getting able-bodied people into work. We realise, however, that most disabled people cannot work, and deserve extra help, through the disability living allowance, the disability working allowance and severe disability premium. The previous Government introduced those benefits, and we were proud to increase spending on the disabled to four times the level spent by the Labour party. Will he say, here and now, that he will rule out cutting, taxing and means-testing benefits for the disabled, despite the prevalent rumours that are worrying disabled people?

The statement contains remarkably little on tax reform. What it does contain is an announcement that the Chancellor is abolishing advance corporation tax for those who pay dividends, but that he is introducing advance payments of corporation tax for everyone. The announcement merely shows that the pensions tax announced in his Budget had not been thought through. Nothing in the changes will reduce by a penny the £5 billion-a-year burden that he has imposed on pension funds.

It is clear also that the Chancellor has not thought through the consequences of the pensions tax on encouraging people to opt back into the state earnings-related pension scheme. Is he aware that many pensions providers were hoping today to have an assurance from him that he will increase the rebate, to make it worth while for people to stay outside the state scheme and inside personal and occupational schemes? Is he aware that, without such an assurance, pensions providers will advise all their customers to opt back into the state scheme? Is that what he wants?

We welcome the proposals for environmental, green taxes, if the revenues he raises from them are recycled to reduce the costs of employment, and to ensure that more people get jobs.

Does the Chancellor realise that most outside observers will think that his statement today is disappointing? It contains so little detail on future tax reforms, despite what we have been promised, so little to reassure savers who have been disturbed by his proposals and so little to clarify the confusion surrounding all his welfare reforms.

Above all, home owners, savers and taxpayers will be disappointed that there is nothing in the statement to undo the cost to them that the Government have already inflicted by five interest rate increases, 17 tax rises and a cruel tax on their pension funds.

After hearing the shadow Chancellor, the country will understand how fortunate it was to get rid of the Conservative Government in May. On 1 May, the Conservatives were not fit to be the Government of the United Kingdom; after Winchester last Thursday, they are not fit even to be the Opposition. The shadow Chancellor talked about statistics deteriorating since May, but the biggest deterioration has been from minus 2 to minus 21,000 in Winchester.

The shadow Chancellor spoke for some time, but he did not mention once what the Government have done for pensioners and their fuel bills. Why does he not congratulate us on doing what the previous Government failed to do on tackling fuel poverty? Even now, why does he not apologise for the previous Government putting VAT on fuel?

As for economic policy, the shadow Chancellor suggested that he agreed with what I have been doing, but he opposed our monetary policy reforms and even now he cannot tell us whether he would make the Bank of England independent or stop it being independent. He opposed our five-year deficit reduction plan, and even now he cannot tell us whether he thinks that our figures are too high, right or too low. He opposed our windfall tax to pay for the welfare-to-work programme; so, much as he says that he wants it to work, he would have done nothing to make it possible.

As for stability under the previous Government and what the shadow Chancellor hopes will be achieved under this Government, the people of this country will never forget what happened during the last recession, when interest rates went up to 15 per cent. and inflation went up to 10 per cent. The previous Government squandered the surplus they had, and destroyed thousands of businesses and 1.5 million jobs through their economic mistakes. Until we hear something that persuades the House that the Opposition would not make those mistakes in the future, it is hardly worth the shadow Chancellor coming to the House to give us his views.

As for taxation, the shadow Chancellor suggested—at lunchtime today—that we are responsible for 17 tax rises. Half of those are the closing of tax avoidance loopholes that should have been closed long ago. The others, such as petrol duty rises, are supported by the Conservative party.

Will the right hon. Gentleman congratulate us on cutting corporation tax, first in May and again today? Will he congratulate us on another cut in VAT on fuel? Will he congratulate us on cutting VAT on energy-saving materials? Will he congratulate us on abolishing the gas levy? Will he congratulate us on our proposals for a 10p tax rate and on improving the tax position of low-paid workers, whom the previous Administration ignored for 18 years?

It is not the Labour party that is not trusted on tax: it is the Conservative party that will never be trusted on tax again. The shadow Chancellor should think again about his proposals before the election, which he has not withdrawn, to remove tax relief from pension contributions paid by millions of people.

Finally, I shall deal with the other points that the shadow Chancellor made. [Interruption.] I am happy to speak longer and to give the Opposition a lecture on economic policy. On the question of the unemployed, does the right hon. Gentleman not realise that 370,000 young people under 25 are still out of work? Does he not realise that 400,000 people have been unemployed for more than a year? Does he not realise that 3.5 million families have nobody working? Surely he should support not only our welfare-to-work programme but the action we took, through the windfall tax, to make it possible.

As far as the disabled are concerned, it was not the Labour party that cut invalidity benefit for the disabled and changed it into incapacity benefit: it was the Conservative party. I should have thought that the shadow Chancellor would welcome the fact that we will provide opportunities for many disabled people who were denied the right to work under the previous Government.

On 1 May, there was a vote of no confidence in the Conservative party, which was repeated in Winchester. The Conservative party is divided and without policy. It is incapable of telling us what its policies are for the future, and it has nothing to offer the country.

The Liberal Democrats welcome this consultative Budget, which we think should help to improve the quality of the real Budget. We intend to submit our proposals to the Chancellor shortly, and we hope that the Conservative party will do likewise, to make this a constructive exercise.

We also welcome the code of fiscal stability, which we advocated last year; the proposals for the integration of tax and benefits, which we have long advocated; the cut in VAT on insulation materials; and the help for pensioners. I am happy to thank the Chancellor for those proposals.

There are a couple of points of concern in the Chancellor's economic forecasting. He has revised down the growth forecast for 1999–2000 by 0.5 per cent. and has revised up the inflation forecast by 0.5 per cent.— well above his inflation target. That suggests that there are some storm clouds ahead. I should be grateful for a comment on that. Should not Budgets involve expenditure as well as income? In that sense, is not this a Polo mint of a statement, with a hole in the middle where the spending plans ought to be?

Why is the Chancellor's press office briefing that the long-term objective of a 10p starting rate of tax should be delivered by next March, when the short-term pledges of bringing down NHS waiting lists and class sizes will have to wait until later in the Parliament? He has found the money for cuts in income tax and corporation tax. How can he find the money to cut taxes, but not the money to spend to stop hospital waiting lists rising or class sizes reaching a 20-year high? Are not those the people's priorities that he claimed to be fighting for?

The consultative Budget is a welcome innovation, but we need action to improve the NHS and education this year. Will the Chancellor confirm the figures that his colleague the Chief Secretary gave me last year, showing that there is £2 billion unallocated in the contingency fund? Should not that be used to meet the immediate needs of health and education? Will he also confirm that the control total is coming in lower than was planned by the Conservatives, which also gives him room to manoeuvre? Does the earned income tax credit require the ending of the independent review of taxation of husbands and wives?

I represent an area with a high engagement in oil and gas activity. Will the Chancellor accept that a review of taxation for oil and gas will not prejudice the long-term investment and financial viability of that vital industry? Will he acknowledge that, until he drops his Tory spending plans, national health service patients and those who rely on our state schools will be forced to conclude that, although the Tories are no longer in office, they are still in power in his Department? By the way, I think that he should be reminded who won Winchester.

I am grateful to the hon. Gentleman for supporting our code for fiscal stability, our reforms at the Bank of England—reforms that the official Opposition cannot support—and our intention to have an open consultation process on the Budget. I assure him that he and others will be able to contribute fairly to the review of North sea energy.

However, I have to part company with the hon. Gentleman when he says that we have not switched resources. We have transferred resources to health from defence and the nuclear programme—£300 million this year. We have transferred resources from the assisted places scheme to school class sizes. We are transferring resources next year to education, along with £1.2 billion to the health service.

The Liberal Democrats proposed £1 billion over two years for health. We have put in £1.5 billion— £500 million more. The Liberal Democrat proposals for the schools capital investment scheme—[Interruption.] They may be embarrassed, but they should hear this. They proposed putting in £500 million. We have put in £1.2 billion, which will rise to a great deal more with private capital. I also remind the hon. Gentleman that he opposed the windfall tax that is raising the money for education and employment.

I remind the hon. Gentleman that, during the debate on the Queen's Speech in May, the leader of his party said:
"If we tighten our belt now, we have a real opportunity to get to grips with the huge hangover of debt left behind by the Conservatives."—[Official Report, 14 May 1997; Vol. 294, c. 74.]
The leader of the Liberal Democrats said that there had to be fiscal prudence, but the Treasury spokesman goes to every by-election promising millions of pounds more, without giving anyone a clue about how the money can be raised. In their literature for the two by-elections last week, did the Liberal Democrats mention the lp extra on income tax, the 10p increase in the top rate of tax or their new environmental taxes? They have suddenly become coy about the means by which they would pay for their programme, and we do not see it in their election manifestos.

It is all very well to will the end, but if the Liberal Democrats are not prepared to will the means, by taking tough decisions about the use of resources as the leader of their party suggested he wanted to do— [Interruption.]
—they are not fit even to make their presence felt in the House in the way that they are suggesting. They should go back to their constituencies and prepare to adopt reality.

I congratulate my right hon. Friend on publishing a pre-Budget report. It is high time that we moved away from the doctrine of pre-Budget purdah and had a more civilised, informed and open discussion of ideas and policies. Of course, the Treasury Select Committee will want to talk to him about the issues that he has raised in his statement, but may I now warmly welcome the help that he has announced for pensioners, which will be most welcome in my constituency? May I also strongly support the idea of a code for fiscal stability, which I believe will help good housekeeping and improve accountability?

I shall be happy to work with the Treasury Select Committee, and my hon. Friend knows that he will receive whatever evidence he needs so that the Committee can make comments before the Budget.

Is the Chancellor aware that, after announcing some small and, on the whole, welcome spending increases and skipping over the spending cuts that he proposes to make in benefits for the disabled, defence and elsewhere, he has still announced public sector borrowing requirement figures that show him reducing public sector borrowing at a rapid rate, and even likely to hit a period of debt repayment that he never intended, despite the fact that we have one of the lowest debt to GDP ratios in the western world?

Does the right hon. Gentleman not accept that that underlines the fact that his July Budget was unnecessary, and that the most courageous social step he could have taken was to reverse his taxation changes affecting pension funds? That would have been the most significant announcement on social policy for the longer term that he could have made today.

As for the other changes in the forecast, has the Chancellor noticed that the Bank of England now forecasts that, as a result both of rapid increases in interest rates and the increase in the exchange rate that has resulted, and of tight fiscal policy, it expects economic growth to fall away very rapidly next year, and possibly to disappear? Does he accept that nothing he has announced today could have a significant effect on that?

Does the right hon. Gentleman really stake his reputation on the forecast of 2.75 per cent. growth next year, which seems highly unlikely? Will he stop justifying what he says with constant references to the late 1980s, when circumstances bore no relation to what we see now, earnings were running away at 8 per cent. per year, there was a balance of payments crisis, and economic growth of 4 per cent. had been running for two or three years?

Before the right hon. Gentleman revives the myth that the Conservative Government were profligate big spenders, reckless on inflation—that was not what he said in opposition—will he not accept that he inherited stable growth with low inflation, falling unemployment and public finances that have surprised him by how rapidly they are improving? Will he go back to the drawing board and consult genuinely on a more constructive long-term economic policy that might protect living standards and jobs?

I am grateful for the chance to continue my debates with the right hon. and learned Gentleman. I do not know which will happen more quickly—his reaching the leadership of the Conservative party or the Conservative party's no longer existing to be led.

As for the right hon. and learned Gentleman's three points, first I shall tell him why my July Budget was needed. First, it was needed to cut VAT on fuel, which he had refused to do. Secondly, there was the introduction of the windfall levy that was necessary for our welfare-to-work programme. Thirdly, I had to introduce measures for stability that he had failed to introduce during the three years that he was Chancellor.

The right hon. and learned Gentleman wants to create a myth about the difference between his record, which he wants to promote, and that of Lord Lawson, whom he is happy to see remain in a difficult position. I have to tell him that, when we came into office, we were told that inflation was forecast to rise way beyond the target. Therefore, it is hardly surprising that the Bank of England was telling him for six months before the general election that, on its understanding of the position, interest rates should have risen.

I was not prepared to go back to a situation, as in the late 1980s, where interest rates had to rise late because the action to tackle inflation had not been taken, forcing the country into the stop-go instability of recession. Let us remind the Conservatives that, in 1990, interest rates went up to 15 per cent. and wages had gone up by 10 per cent.—[HON. MEMBERS: "ERM."] That was before the ERM. Inflation was at 10 per cent. We are not going back to those conditions.

The right hon. and learned Member for Rushcliffe (Mr. Clarke) said that our changes to pension funds were unnecessary. Let me remind him that his special adviser on tax before the election has written an article in the Financial Times, supporting our reforms. From what he said in that article, I believe that he will support the further reforms in advance corporation tax announced today.

The tragedy is that the former Chancellor was in power for three years and could—and should—have made these reforms in the interests of long-term investment in this country. We will take no lectures from a Chancellor who should have raised interest rates before the election, but did not do so for political reasons.

Is my right hon. Friend aware that the costs incurred in earning a living have always been under-estimated, and are very large indeed? He should be warmly praised for what he has done to tackle the problems of child care—an essential part of earning a living. The arrangements he has made for transport are a beginning, and we should look at other areas to see how the tax system can be used to deal with some of the large costs incurred in getting work in the first place.

I am grateful to my right hon. Friend, whose work in the Public Accounts Committee on matters such as this and the use of public money has been invaluable.

I think that people will look back on today's statement, and the further announcements which will come tomorrow from the Secretaries of State for Education and Employment and for Social Security, and will say that, at last, a Government have taken on board the concerns of parents about child care costs, provision and facilities in every community of this country. The investment of £300 million over five years to do so is more than any previous Government have contemplated. Side by side with the reform of the tax and benefits system, our child care measures will ensure that child care is affordable, particularly for lone parents who need it.

My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) referred also to transport costs. Making sure that travel costs to work are low enough for young people joining the new deal will allow them to have more choice of the jobs that they take up.

If our productivity deficit by international standards is now 20 per cent., by the same calculation what was the figure in 1979?

I am answering the question.

As I said in my statement, this has been the case for years. We are 30 per cent. behind some of the best countries in the world, and we must do far better. The right hon. Gentleman will understand the comparison with 1979. In 1979, we were 13th in the world of industrialised countries in terms of national income per head. Now we are 18th, as a result of the failure of the previous Government to bring us up the economic league. We are prepared to take action to do so.

As someone who has campaigned loud and long for warmer homes for pensioners, may I warmly welcome the increased payments and the reduction in VAT on insulation material? May I draw my right hon. Friend's attention to the fact that his figures make it clear that it is not necessary to abolish benefits for lone parents? As the abolition of those benefits will impoverish the poorest children, deepen the poverty trap and provide a disincentive to work, will he look again at this matter, bearing in mind always the fact that not only economic growth but children's growth is damaged by poverty?

I am grateful to my hon. Friend for supporting our initiative on cold weather payments. These go to every pensioner household in the country, with more going to those in the greatest poverty. I welcome what she has said about child care, but I remind her that child benefit is rising every year under this Government. The previous Government did not increase child benefit for two of the years after 1988 in which they were in power. Child benefit will rise. We are announcing the figures: there will be an additional £250 million this year.

The priority must be to enable lone parents to obtain work if they want it. That is why we have said that the £200 million that we have spent on the employment programme for lone parents will now be complemented by millions of pounds that will be put into the child-care element, so that lone parents can choose whether or not to work. From April next year, every lone parent who starts receiving benefit will, if he or she wants it, be given advice on work and training, as well as advice on how to collect money through the Child Support Agency.

We have had to make a decision. What is the priority for this Government? The priority must be to give choice to lone parents who never had it under the last Government, because training, child care and employment opportunities were not made available. We are giving them that choice: that is our first priority.

As the Chancellor of the Exchequer has repeatedly appealed— with increasing desperation—for congratulations, may I indeed congratulate him on one of his prophetic economic forecasts? Does he recall that, this time last year, he was assuring us that a new Labour Government would reshape the British economy along the lines of the Asian tiger countries? Is that still his intention?

The hon. Gentleman may search the libraries if he wishes, but I cannot remember saying that I wanted us to be like Korea or Thailand. What I have said is that we must increase our productivity, and what I did say was that we had fallen from 13th to 18th in the world industrial league.

As for the Asian economies, I said earlier that we must be vigilant. I believe that there are problems in relation to the disclosure of information, as well as the regulation of institutions, that will have to be dealt with on both a regional and international basis; but the most important thing we have learnt from the Asian economies, and from what has happened over the past few weeks, is that the economic fundamentals in every country must be sound.

I congratulate my right hon. Friend on the way in which he has changed the terms of the debate, and not least on the way in which he has combined economic efficiency with social justice. May I add my appreciation of the way in which he has involved parenting and child care with the efficiency of the economy? Some of the measures that he has announced will take time to work, but others will work much more quickly. They bear sympathetic consideration, and I congratulate my right hon. Friend.

I am grateful to my hon. Friend, who I know has been involved in campaigning on the issues that he has mentioned for a long time.

I have always believed that the proper provision of child care is not just a good social policy, but integral to a good economic policy. It is not a side show; it is central to the way in which we conduct our economic affairs. When people look at the figures that will be published tomorrow, they will see that work is to start immediately. It is a five-year programme, providing 30,000 out-of-school child care centres in all communities. That is an ambitious target, but one for which the money is now available.

For a green Budget, this is so short on detail that it could be described as a damp squib. Will the Chancellor reassure the many worried family businesses and family farms that, when he talks of reducing tax avoidance, he is not talking about reducing the inheritance tax reliefs that are so valuable in helping to keep family farms and family businesses in operation?

Will the Chancellor also apologise to pensioners? What he has given them back today is peanuts compared with the £5 billion that will be taken out of their pensions this year, next year and every year.

I suggest that the hon. Gentleman hold a poll among what I understand to be the 19,000 pensioners in his constituency. I urge him to ask them whether they support the last Government's policy of putting VAT on fuel, or whether they support the policy that I have announced today. I think that he will find that our policies, which have included cutting value added tax on fuel, abolishing the gas levy and introducing a new winter allowance that is far more generous than the cold weather payments scheme under the previous Government, are widely supported. He will find that his right-wing, free market views, which would do nothing to help pensioners, do not commend themselves to his constituents.

The Chancellor made a great point of employment, but is he aware that press reports suggest that the Government are not prepared to help the mining industry, and that up to 50,000 jobs could be lost in mining and associated industries; that the Governor of the Bank of England, when he came to the House of Commons last week, said that he expected interest rates to have an adverse effect on growth, for internal reasons and because of the higher pound; that the forecasts concerning British membership of the single currency suggest that unemployment in the European Union could rise above 18.5 million if the convergence criteria were imposed; and that instability in the global markets could certainly have an adverse effect?

There is a total absence in the statement of any reference to redistribution, although over the years the gap between rich and poor has widened, and it would appear that the poor are especially targeted in some of the cuts proposed.

I do not know what my right hon. Friend means about redistribution, because we redistributed £5 billion from the excess profits of the privatised utilities to job creation in some of our poorest and most deprived communities; if that is not an example of the proper reallocation of resources, from those who did not need them to those who do, I do not know what is. He should congratulate us on it.

The Labour party has always believed in a balanced energy policy, and we have always done what we can for the mining industry.

I am glad that the Campaign group and the Governor of the Bank of England are getting together to discuss issues of mutual interest. We are determined to avoid a return to the instabilities of the past, as when we had interest rates of 15 and 16 per cent. under the previous Government. We hope that by taking early action, with interest rates having had to rise to 7¼ per cent., we can avoid a return to the situation of the past.

My right hon. Friend asked me a similar question about economic and monetary union, which I answered, during the EMU statement. One of our economic tests for EMU is the effect on jobs. I have said that we will apply the tests strenuously, considering the effect on industry, jobs and investment, and we will insist that there is a clear and unambiguous answer in favour before joining a monetary union.

My right hon. Friend should look at what we have proposed, including the help for pensioners, and go back to his constituency and support it.

Will the Chancellor answer a factual question: other than the reduction in the deficit, what measures in his statement does he think will lead to greater convergence in the criteria in the Maastricht treaty, and what costs will that have for employment or for the economy generally?

The meeting of the convergence criteria is in itself right for Britain. I said in the House a few weeks ago that it is a question not only of meeting the nominal criteria on interest rates, inflation and deficit but of having real, sustained and durable convergence. That means that we are seeking improvements in productivity, structural reforms that will increase our economy's ability to grow, and greater investment. Those are all important factors in judging convergence. The measures are right in themselves, and achieving convergence would be right for Britain.

May I note with pleasure that, notwithstanding our commitments on tax and spend, it has been possible to provide a welcome improvement in benefits to help pensioners with their heating bills, and express the hope that my right hon. Friend will use some of the resources that are apparently available to cut corporation tax to provide the small amount that will be needed to prevent the cuts in lone-parent benefits? Lone parents will get no increase in their child benefit: it has been frozen, so there will be a cut in real terms. It is essentially an in-work benefit, and cutting it is contrary to our welfare-to-work programme.

May I welcome the Chancellors's statement on research and development, and the importance that he gave it, but also draw his attention to concerns in industry and the business community about the parlous state of our public sector research infrastructure? I hope that he will look at the recommendations from Dealing and the CBI that we should consider the way in which the Treasury accounts for such investment.

I am grateful for those questions. My hon. Friend mentioned corporation tax. Of course we cut it, but people know that the pension fund reforms that we introduced in July meant a gain to the Exchequer, not a loss.

On lone-parent benefits, let me remind my hon. Friend that we have put £200 million into new measures to create job opportunities for lone parents. At the same time, we have put £300 million today into child care, which is the best in-work benefit for lone parents, to enable them to work, in addition to raising child benefit.

We have to make up our mind about our national priorities. We stopped the iniquitous housing benefit change proposed by the former Secretary of State for Social Security. We decided that it was right to use the resources we had to encourage many hundreds of thousands of lone parents to enable them to get more income in work. The average difference between out-of-work benefits and in-work wages is £50 for a lone parent. That is what we want to encourage.

The right hon. Gentleman's proposals on cold weather payments will be much welcomed in the northern parts of the kingdom, certainly in Northern Ireland. They will at least do away with the inequities of the old system.

The right hon. Gentleman has announced a very large spending programme today. As the windfall tax on the privatised utilities and the return of extra money from Europe are one-offs, how will his programmes be financed in future years? It seems unlikely that the growth that he seeks in the economy will be sufficient to pay for them, so he will not be able to achieve a balanced Budget or repayment of capital debt unless he increases taxation. Can we take it for granted that the taxes that he intends to increase are taxes on capital? If so, will the Budget resolutions be framed so as to refer back to today rather than to the date of the Budget?

I am grateful for those questions. The payment to pensioners to deal with winter fuel bills will come out of the reallocation of money from the European Union payments, which we budgeted for but from which we can use £400 million. Those payments will be made this year and next year, until the conclusions of the pensions review produce results for pensioners right across the country. We levied the windfall tax this year and next year at £2.6 billion a year. Hon. Members will be pleased to learn that substantial cheques are being paid by the utilities into the Treasury this week.

That money will be used over the five years of this Parliament to create jobs. It is a fund that will be available for giving help to the young, the long-term unemployed, the disabled and lone parents to get back into work and is ring-fenced in that way.

I warmly welcome my right hon. Friend's announcement of extra help for pensioners this winter, which will warm not only the homes of pensioners but the hearts of all socialists, wherever they can be found in these post-modern times. On the same principle, can he confirm that the Tory spending plans that he accepted were based on the expectation that, in the first two years of this Parliament, there would be a public sector borrowing requirement of some £31.5 billion?

As my right hon. Friend has announced this afternoon a PSBR some £13.5 billion less than that, can he confirm that there is a significant sum in the current spending plans that is no longer required to service that higher level of debt? If so, can he explain why that unexpected windfall cannot be used to stop the planned cuts for lone parents, people with disabilities and students?

May I correct my hon. Friend on some points of detail? The spending totals are £266 billion for the control total, £274 billion next year. The full totals are £315 billion and £325 billion. Those are the totals that we are working within. They have not been reduced. As he would welcome, we have reallocated the money that became available from defence and nuclear programmes to the health service. We have reallocated money today from the European Union programme to help pensioners.

On the PSBR, bringing down public borrowing means that, over time, the £25 billion that we pay in interest payments—which we regard as something that should be reduced—will be reduced far more quickly. That means that, instead of one-off gains in public spending that cannot be continued, we will have sustainable public finances that will enable us to afford the regular, continuous increases in resources for health and education that we want.

Our aim is sustainable finances. We are not going to do what previous Labour Governments did: spend in the first two years, and then have to retrench in the last three. We will have sustainable public finances that allow us to improve health and education over time.

Why cannot the right hon. Gentleman bring himself to say thank you to his predecessors for the extraordinarily strong economy that they left behind? What is his answer to the question put to him earlier about the fact that, according to the Bank of England, under his regime the economy is set to run downhill?

I will not thank the Opposition for what they left behind. They left behind a £23 billion borrowing requirement; they doubled national debt to £360 billion; interest rate payments were £25 billion; and inflation was starting to rise again. We were going back to the old British disease. It remained for us to take action to create a new monetary and fiscal framework, which the Opposition have yet to tell us whether they support.

I welcome my right hon. Friend's statement, which is all about long-term planning to improve people's lives, especially for those who need it most. I particularly welcome the announcement on out-of-school clubs, which, like the West End Kids club in my constituency, will offer a safe and constructive environment in which children can learn and be cared for. Does he agree that, if it is good for children, it is good for parents and for the economy?

I am grateful to my hon. Friend. The generosity of her welcome contrasts with the way in which Opposition Members have failed even to welcome our measures for pensioners. On child care centres, we propose to have nearly 30,000 out-of-school centres, built and available as a result of the decisions taken today; £300 million is available, and potentially nearly 1 million children will benefit.

I am pleased that the model in my hon. Friend's constituency is one, among others, that will be looked at as we expand child care throughout the country. We must learn from the successful partnerships that are making child care possible in some communities, and we must provide a nationwide service for all mothers.

In welcoming the consultation exercise on which the Chancellor has embarked, I hope that he is listening to points of view that are being expressed.

What does the right hon. Gentleman have to say to exporters and manufacturers who are greatly troubled by the strength of the pound and higher interest rates, and the dangers that they cause to their business prospects? Does he recognise that, as public finances have improved, there is room for additional public expenditure to deal with the fact that NHS waiting lists are not improving and that many people on low incomes will have to suffer even more under this Government?

The announcement on payments to pensioners was welcome—unlike the Conservatives, I am happy to welcome it. Does the right hon. Gentleman accept that that announcement was caused by the utter arrogance displayed by the Department of Social Security in refusing to apply the wind chill factor in cold climate payments?

We have taken the right measures to help pensioners—far better measures than were ever proposed under the previous Government. My right hon. Friend the Secretary of State for Social Security inherited a review in progress that would have made little difference. Our changes in payments mean that every pensioner household benefits: the poorest pensioner households get £50 and, taken with all the other changes—for example, in VAT on fuel—the typical pensioner household could be up to £100 better off next year.

As for the hon. Gentleman's other questions about the exchange rate, I said in my statement that I recognise the concerns of exporters, but I would put it to him that what they are most afraid of is a return to the stop-go instability of the past. We will not take measures that prejudice the economy as a whole and return us to the boom-bust conditions of the past. If the hon. Gentleman examines the forecasts, he will see that exports are rising in volume by 7 per cent. this year, and are expected to continue to rise by 5 per cent. next year.

As for public spending, if the situation is healthier, that is because of the action that we have taken. The hon. Gentleman should also congratulate us on reallocating resources to the health service, with £300 million this year and £1.2 billion next year; and to education, with £1 billion next year and the £1.2 billion school capital investment programme from which many constituencies will benefit. It is about time the Opposition parties, who were asking for these things—in the case of the Liberal Democrats, asking for far less—congratulated us on what we did.

I congratulate my right hon. Friend the Chancellor on every detail of his pre-Budget statement, but may I question him more widely about interest rates? As we move towards joining the single currency, we need convergence on interest rates. How will my right hon. Friend produce the economic climate that will allow interest rates in Britain to fall from their current 7.25 per cent. to the 3.3 per cent. of Germany and the rest of Europe?

By getting stable and sustainable growth and tackling inflation, we will get interest rates down. Our interest rates will come down as we take the tough action that is necessary. My hon. Friend asks about monetary union, but we have yet to hear an answer to the question put to the Conservatives: do they support the principle of monetary union—yes or no?

Is the Chancellor aware of the real fear engendered among people with disabilities and disability groups that the Government will cut disability benefits through means testing, taxing benefits or a reduction in lifetime rights? Will he answer the question asked by my right hon. Friend the shadow Chancellor, allay the fears of people with disabilities, clarify the Government's position, and state categorically that the Government will not in any way reduce disability benefits?

Our proposal is for a comprehensive spending review that is fair—that is the underlying principle. Today, I explained how we were spending £200 million on helping men and women who are disabled and want to work, to do so. Criticism of the Government comes ill from an Opposition party that, when in government, blocked the Civil Rights (Disabled Persons) Bill, and then cut invalidity benefit for thousands of people.

Is my right hon. Friend aware that, at the end of last year during the coldest weather, a group of Labour Members of Parliament, including me, went to 10 Downing street and pleaded for help for poorest pensioners, and were refused? I therefore welcome the announcement today, which will certainly help many pensioners. Despite the justifiable points he has just made about disability and the sheer hypocrisy of the Tory party, is he aware of the concern felt by Labour Members—which is genuine, unlike that expressed by Tory Members—about any taxing or means-testing of disability benefit?

Will my right hon. Friend bear in mind the comments made over the weekend by Lord Ashley and Lord Morris of Manchester—two Members of Parliament who fought bravely and honourably in the House against strong Tory opposition on behalf of the disabled? Those two men know what they are talking about, and I hope that my right hon. Friend will note their words.

I am grateful to my hon. Friend for his first comments about cold weather payments. I assure him that, if he turns up at No. 11, or indeed No. 10, Downing street, he will be invited in, rather than kept outside as he was under the previous Government.

As for the comments of Lord Ashley and Lord Morris, I and many people throughout the country have great respect for their work on behalf of the disabled. Our comprehensive spending review is designed on the principle of being fair, and we will be fair to the disabled.

The Chancellor referred to the strength of the pound and the problems that creates. He may be aware that that is causing particular problems to agriculture by inhibiting exports, bringing in imports far too easily, and depressing the level of support payments. That, combined with the bovine spongiform encephalopathy crisis, is creating a catastrophic situation in areas such as my own in rural Wales, where livestock farming takes place. He will be aware that the European Union has a mechanism for dealing with such situations by providing compensation and that those payments have been made available by all eligible EU countries. May I plead with the Chancellor to access those funds in order to reduce the pressure on farming?

I cannot give the hon. Gentleman any promises, but I shall put his concerns to my right hon. Friend the Minister of Agriculture, Fisheries and Food.

Will the Chancellor give some forecast about the likely risk of slipping, not only down to 1.5 per cent. GDP growth in our third year, but into recession as the high pound continues to erode our export potential? Given the now inevitable devaluation of the yen, coming on top of the devaluation of south-east Asian currencies, and the fact that the deutschmark has led all the European currencies down about 15 per cent., will we not face a major balance of payments crisis unless we do something to bring down the value of the pound, which means tackling interest rates?

I have to tell my hon. Friend that, if we had failed to take action in May and left inflation to rise without taking action on interest rates, that would have caused a recession of the sort he describes. He should therefore support our action in respect of the Bank of England and our subsequent decisions. If he thinks the matter through, he will understand that the very conditions he is speaking in favour of were those that led to the problems the Conservative Government got into in the 1980s.

The Chancellor will, I am sure, agree that the achievement of higher productivity will require not only higher investment but higher savings. The Conservative Government introduced personal equity plans and tax-exempt special savings accounts to increase savings. Will the right hon. Gentleman tell us whether those schemes will be grandfathered in 1999—that is, the amount invested in them will remain under that contract— or whether his statement means that they will be terminated? Seven million people will be affected by the decision.

My aim is to increase the number of people with savings. As I said, half the population of this country have hardly any savings at all, and that will influence the proposals we introduce next week on the individual savings account. I look forward to discussing with the hon. Gentleman those detailed proposals, which will be published in a consultation document next Tuesday.

I welcome today's statement from my right hon. Friend. As the former chair of Working for Childcare, and on behalf of my constituents, many of whom are lone parents, I welcome the proposals on child care and reform of the tax and benefits systems and other measures to help low-income families into work rather than remaining on benefits for the rest of their life. I recently visited a centre in Doncaster for young mothers under 16 that enables them to continue their studies by providing support in child care and transport. What young parents need post-16 is policies of the future, not a re-hash of the policies of the past.

I remind my right hon. Friend that it was the Conservative party—[HON. MEMBERS: "Question."] Will my right hon. Friend comment on the fact that it was the Conservative Government who introduced a tax on workplace nurseries that put back the development of employer-led child care for 10 years? That was their only contribution to child care while they were in power.

My hon. Friend is right, and the jeers from Conservative Members show that they are not interested in child care issues. As she rightly said, there are three elements in our proposals: first, we want to help people to be able to afford child care; secondly, we want to create child care places; and, thirdly, we want to train young people to be child carers. That is why this is the first national strategy for child care, and I hope that, increasingly, hon. Members on both sides of the House will support it.

The Chancellor's statement contained some potentially far-reaching proposals for the integration of the tax and benefits systems. Will he confirm that it is in his mind to introduce any such changes in four months' time, in his Budget? Will he tell us how the Government will carry forward the process of consultation on that potential reform?

A comprehensive integration of tax and benefits is an extremely complicated thing to do. The Chancellor will know that one of the reasons why the interrelationship between the two systems is so often perverse is that past Governments have gone for short-term fixes, with dire long-term consequences.

I am grateful to the hon. Gentleman, who is a renowned expert in these matters, and the Chairman of the Social Security Select Committee. The report and the comments made yesterday about the maze of benefits and the chaos in the tax and benefit system up until now mean that there is a strong case for reform. I can confirm that we are looking at these things.

I told the Committee that we would be prepared to give evidence to it. I hope that the membership of the Committee will join us in examining these issues. We need to find a solution to the poverty and unemployment traps that prevent thousands from benefiting from work. We need to provide a solution that gives as many people as possible who are currently on low pay proper rewards for work.

Is it not true that one of our priorities has been to defuse the inflationary time bomb that we inherited from the Conservative Government—and, indeed, the work of the former Chancellor of the Exchequer? What estimate has my right hon. Friend made of the impact on the British economy if we had not raised interest rates since May?

I am grateful to my hon. Friend. I see that the former Chancellor has gone from the Chamber. I should remind him that, for six months, he was advised that interest rates had to go up. For six months before the general election, he refused to do so.

When I arrived at the Treasury, it was clear that inflation was going far beyond its target range. It was for those reasons that we took immediate action. We raised interest rates immediately, and made the Bank of England independent. There have had to be further rises in interest rates. The reason for those rises is that action that should have been taken was not taken by the previous Government.

Many will welcome the further expansion in child care facilities, but can the Chancellor confirm that what he has really done is raid the funds that the sports, arts, heritage and charities bodies were confidently expecting? Does his announcement not mark the end of the additionality and arm's-length principles? Should we now refer to the national lottery as the Chancellor's back pocket for pet causes?

I disagree entirely with what the right hon. Lady says about the national lottery. As she perfectly well knows, the mid-week lottery increased the amount of money that the lottery was able to provide for good causes by about £1 billion. [Interruption.] The right hon. Lady should listen, because we put the proposal to the electorate and they supported it at the general election. We said that we would create a new opportunities fund to provide help for fitness centres, out-of-school centres and homework centres that would not otherwise have been provided. That is why it is possible to say that the money is being put to good use.

We must now move on. There will be other opportunities to pursue these matters.