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Commons Chamber

Volume 403: debated on Wednesday 9 April 2003

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House Of Commons

Wednesday 9 April 2003

The House met at half-past Eleven o'clock

Prayers

[MR. SPEAKER in the Chair]

Private Business

Transas Group Bill (By Order)

Order for Second Reading read.

To be read a Second time on Wednesday 30 April.

Oral Answers To Questions

Northern Ireland

The Secretary of State was asked—

Small Business

1.

When he next expects to meet representatives of small firms to discuss administrative burdens on business. [107067]

I have met representatives of small business on several occasions recently to discuss various issues of mutual interest. I shall be happy to meet them again in the future, but I am sure that we all hope that it will be a local Minister for Enterprise, Trade and Investment who does that shortly.

I am grateful for that reply. Small business is obviously vital to job and wealth creation in Northern Ireland, and what it needs at the moment is fewer burdens and less red tape. Does the Minister agree with CBI Northern Ireland and the Federation of Small Businesses in Northern Ireland, which are very concerned about the job-destroying agency workers directive? What will he do to try to stop the implementation of that directive?

On red tape, I will not apologise for the Government introducing the minimum wage, improving maternity leave and paternity leave, giving millions of employees the right, for the first time, to paid holidays, and tackling discrimination against the disabled. On the agency workers draft directive, the hon. Gentleman will be aware that we have concerns about it, which are shared by CBI Northern Ireland and throughout Great Britain. We want to make sure that it does not propose disproportionate costs on business, and our negotiating strategy certainly reflects that.

Has my hon. Friend considered the use of the existing regulatory reform procedure for the removal of any genuinely unnecessary and unhelpful burdens?

I thank my hon. Friend for that question. The Northern Ireland better regulation strategy seeks to reduce burdens on business and, as part of that strategy, the regulatory impact assessment has been revised completely. A number of other measures have also been introduced that seek genuinely to reduce administrative burdens on business.

Only yesterday, CBI Northern Ireland informed me that the Northern Ireland Office was considering a new administrative burden on business, under the single equality legislation, to increase compulsory work force monitoring. Will the Minister go further than merely talking to local business people in Northern Ireland, and set up a taskforce to report to him within six months, representing the CBI, the Institute of Directors, chambers of commerce and the small business sector, under the subject heading, "Reducing the burden on business of all sizes"? Let us reduce the burden rather than increase it.

My Department is in regular discussions with the Economic Development Forum on a range of issues that affect business. I would like to pay tribute to the former Administration for setting up effective partnership structures in Northern Ireland, which have ensured that there is already close dialogue between the CBI and Government. I am sure that that will continue in the future.

Devolution

2.

What recent discussions he has held with the Northern Ireland party leaders about the future of the devolved institutions. [107068]

4.

If he will make a statement on the restoration of devolution in Northern Ireland. [107070]

6.

What recent discussions he has had on the prospects for re-establishing the Northern Ireland Assembly. [107072]

Before I answer, I know that the whole House will want to join me in paying tribute to the vital contribution made by soldiers from Northern Ireland and from the island of Ireland—notably in the Irish Guards and the Royal Irish Regiment—in Basra and southern Iraq. Our thoughts are with their families, and our sympathies and prayers are with the family of Lance Corporal Malone and those who have sacrificed their lives in Iraq.

We had intensive discussions with the parties last month in Hillsborough, and yesterday between President Bush, the Prime Minister and the Taoiseach. Those discussions have confirmed our belief that there is now a large measure of shared understanding among pro-agreement parties—[Interruption.]

Order. It is unfair to the Secretary of State that so many conversations are going on in the House. I know that hon. Members have other things on their minds, but those who wish to take part in Northern Ireland questions want to be heard, and they want to hear the Secretary of State.

Thank you, Mr. Speaker. Perhaps I should repeat my last sentence. We had intensive discussions with the parties last month in Hillsborough, and yesterday between President Bush, the Prime Minister and the Taoiseach. Those discussions have confirmed our belief that there is now a large measure of shared understanding among pro-agreement parties on the way forward in Northern Ireland.

I thank the Secretary of State for his reply. I agree that building trust between the parties is an essential ingredient in any way forward. Can he say what contribution the visit of President Bush has made to accelerate that process?

Yesterday's meeting at Hillsborough was extremely important, and reflects the United States Administration's commitment—previous Administrations were similarly committed—to ensuring that they encourage all the pro-agreement parties to come to an agreement. The President spent quite a lot of time talking to individual parties and their leaders in Northern Ireland, and takes a personal interest in these matters. The most important thing is that the President, the Prime Minister and the Taoiseach—the Heads of the Governments most involved in making peace in Northern Ireland were in Belfast during what is the most important week, I believe, since the Good Friday agreement was signed.

Does my right hon. Friend agree that devolution has been a success in Northern Ireland, as a recent poll has shown, and that the majority of people are for devolution? Does he also agree that we need to restore trust and confidence between the political parties in Northern Ireland? What is he doing to ensure that the political parties are part of the process to restore the required institutions and to achieve lasting devolution in Northern Ireland?

I very much agree with my hon. Friend about the importance of devolution in Northern Ireland. Part of the Good Friday agreement was that people in Northern Ireland would be governed by people from Northern Ireland who, because they lived and worked there, had a huge interest in the decisions that they made. I believe that devolution will be restored in time, but what my hon. Friend said about trust and confidence are vital. None of this will work unless trust and confidence are built up between the political parties themselves. The only way in which we can achieve success in the process before us is for the parties themselves to engage with each other and restore that trust. That is what this week is about, and I obviously hope that success is in front of us.

I warmly welcome the engagement of the United States Government in the problems of Northern Ireland, but does my right hon. Friend agree that without demilitarisation we can never have proper rule of law and a proper democracy in Northern Ireland? What progress has been made on the demilitarisation and the decommissioning that was promised by the IRA?

My hon. Friend is right that a vital part of the Good Friday agreement is that there will be what is termed "normalisation", so that Northern Ireland becomes just like Scotland, Wales or parts of England in terms of military presence, and that that is predicated on a stable, peaceful society. That is why decommissioning too is a vital part of the Good Friday agreement.

The Secretary of State knows that the Prime Minister and the Taoiseach are planning to go to Northern Ireland tomorrow. Reference has been made to a joint declaration that, I understand, indicates the sort of things that the Government might do in the event of acts of completion from the Irish republican movement. Does the Secretary of State agree that, in that case, it would be extremely ill-advised of the Government to publish a joint declaration unless they were absolutely sure that the republican movement would deliver genuine acts of completion both on demilitarisation and disbandment that would be convincing for the public of Northern Ireland?

The right hon. Gentleman is absolutely right that none of this will work unless there is a commitment from the IRA and paramilitaries in general to ensure that we live in a peaceful and democratic Northern Ireland. He knows too that there must be a cessation of paramilitary activity—real, total and permanent—and that the picture would not be complete unless the Government's declarations and statements from the IRA indicated that there was no longer paramilitary activity. In both cases, we would have to go forward, because acts of completion apply right across the board.

First, within that anticipated joint declaration, will the Government address the sectarian voting system that operates in the Assembly and serves to reinforce divisions rather than to resolve them? Secondly, can the Secretary of State confirm what the Under-Secretary, the hon. Member for Basildon (Angela Smith), promised yesterday: while the Assembly is suspended, from now on we will get the chance to table amendments to statutory instruments rather than having to vote on each one on a take-it-or-leave-it basis?

On the last point, I shall obviously have to look into that. The question of secondary legislation clearly depends on the success of the discussions and negotiations, and the sooner devolution is restored in Northern Ireland and the Northern Ireland Assembly takes its own decisions, the better. As for the first part of the hon. Gentleman's question, the way in which Members of the Assembly vote in the Assembly is a matter for a paragraph 8 review, which is due in the autumn.

May I echo, on behalf of the Opposition, the right hon. Gentleman's words of tribute to the gallantry and brilliant professionalism of the Irish Guards and the Royal Irish Regiment? We are all extremely proud of them. May I also echo his words of condolence to the families of the fallen?

Does the right hon. Gentleman accept that we warmly welcome yesterday's joint British-Irish-US statement on the peace process? On the understanding that the words really do mean that the Government will settle for nothing less than 100 per cent. completion of decommissioning and disbandment, we strongly endorse that declaration. Does he agree that, if decommissioning is to meet the criteria in the IRA's own undertaking of 6 May 2000 that IRA weapons should be put beyond use
"in such a way as to … ensure maximum public confidence",
a greater degree of transparency will be required in that process in future?

The hon. Gentleman is right to echo the point made by the right hon. Member for Upper Bann (Mr. Trimble) that no agreement is possible and no deal can be reached unless there are acts of completion right across the board, including the activities of the IRA. To that extent, the hon. Gentleman is absolutely right. May I also thank him for his tribute to the soldiers who have fought and died in Iraq?

If, as the whole House hopes, an important statement is made on Thursday by the two Governments and by other parties to the process, will the right hon. Gentleman take the earliest opportunity—and I mean the earliest opportunity—to come before the House to make a statement? Parliament, as well as the media, has a right to hear an authoritative account of what has gone on, to ask questions and to consider the matter. If that statement were delayed beyond 24 hours at the very latest, it would be a real abuse of Parliament, which we are all hoping to avoid, because we sincerely want to do everything possible to support the Government in these important negotiations.

I agree with the hon. Gentleman that it is hugely important that the House is kept informed of developments in Northern Ireland, and that as soon as possible a statement would be made to the House with regard to the declaration and to other matters that we are discussing in that respect.

Assets Recovery Agency

3.

What assessment he has made of the likely impact of the Assets Recovery Agency in Northern Ireland. [107069]

The Parliamentary Under-Secretary of State for Northern Ireland
(Mr. Desmond Browne)

The Assets Recovery Agency came into operation on 24 February, in both Belfast and London. The formidable powers of the agency to recover criminal assets will help to reduce crime and disrupt criminal enterprises. That will help to alleviate the impact of crime on communities in Northern Ireland as well as in the rest of the United Kingdom.

I am grateful to my hon. Friend for his reply, but will the agency be able finally to expose many of those in Northern Ireland who use the term "paramilitary" as a cover for what they really are—vicious criminal activists?

I thank my hon. Friend for her question. The selection of cases to be pursued by the agency is entirely a matter for its director, supported by the assistant director for Northern Ireland, who must act in accordance with their statutory duty to use their powers in a way that they consider will best reduce crime in Northern Ireland and throughout the United Kingdom. The reality is that, in Northern Ireland, a significant proportion of organised crime is related to paramilitary organisations. In fact, it is estimated that about half the organised crime networks are linked to paramilitarism. I would, of course, expect the agency's annual plan to take that into account.

Can the Minister tell the House what discussions he has had with the Assets Recovery Agency on bringing its important activities within the remit of the new chief inspector of criminal justice, with which he is very familiar?

I am grateful to the hon. Lady for her specific question. I have not as yet had the opportunity to have discussions with the assistant director for Northern Ireland, or the director, in relation to that matter, but I will be in touch with the hon. Lady when I do.

My hon. Friend will be aware of the concern expressed by the Northern Ireland Affairs Committee as regards the manning of the Assets Recovery Agency, so I am delighted to hear that we are making progress on its activities. Will he continue to monitor the situation to ensure that the organisation is effective and look at the success of southern Ireland's assets recovery agency?

My hon. Friend is right to point out that the success of the Criminal Assets Bureau in Dublin greatly assisted the development of the policy relating to the Assets Recovery Agency. I can reassure him, and the other members of the Select Committee, that they need have no concerns on resources. The agency is adequately funded, and the initial budget for the United Kingdom for this financial year is £13 million. Of course, that and other matters will be kept under review. There are about 90 staff, including the Belfast branch, and the number is likely to grow in respect of case load and success. The Assets Recovery Agency will play a full part in Northern Ireland in the work of the organised crime taskforce, which has had significant success and is chaired by my hon. Friend the Minister of State.

Does the Minister agree that, even if the peace process makes great strides forward this week, which we all hope, there will still be an enduring threat from organised crime? We want an end not only to terrorism, but to the racketeering that has been so hideously linked with it.

Of course, I agree with the hon. Gentleman's assertion. If his question is about whether we will ensure that the Assets Recovery Agency and the organised crime taskforce target those very circumstances, he has my assurance.

Public Services

5.

What plans he has to allow local authorities in Northern Ireland more powers to provide services demanded by local communities; and if he will make a statement. [107071]

Last year, the Northern Ireland Executive initiated a review of public administration. That review is undertaking a comprehensive examination of the roles and responsibilities of all parts of the public sector in Northern Ireland, including local government. Decisions arising from the review will be a matter for the Northern Ireland Executive.

Does my hon. Friend agree that, in the interests of the community and the people of Northern Ireland, good, efficient and democratic local government is essential to allow decision making, which impacts on the destiny of local people, to be nearer to the people? Will he ensure that any decision that is taken is in the best interests of those people so that we can have peace and loyalty in Northern Ireland?

I agree with my hon. Friend that good, efficient local administration is what we all want, whether it be in Northern Ireland or Great Britain. A lot of good work is already being done in local government in Northern Ireland and by the local strategy partnerships. Decisions on the review of public administration will inevitably be long term, and we hope that a restored Executive will be taking them in due course.

I declare a registered interest. When is the review of public administration likely to be completed and will transfer of greater responsibility be delayed until that happens? When did the Minister or the Secretary of State last meet representatives of the Northern Ireland Local Government Association to discuss those issues?

The Under-Secretary, my hon. Friend the Member for Basildon (Angela Smith), regularly meets local government representatives. As the hon. Gentleman will be aware, the original timetable for the report on the review of public administration was for December this year. Given suspension, it is unlikely to be achieved, but I hope that, with an early restoration of devolution, it will be possible to carry out the necessary public consultation that everybody wants so that decisions can be taken, probably in 2004.

Paramilitary Activity

7.

How many (a) punishment beatings and (b) forced exclusions there have been in Northern Ireland in the year to 31 March 2003; and if he will make a statement. [107073]

Between 1 April 2002 and 31 March this year—[Interruption.]

Order. The House is still far too noisy. Allow the Minister to be heard.

There have been 300 paramilitary-style attacks: 137 assaults and 163 shootings. There are no figures available that indicate the number of persons who may have been forced to leave Northern Ireland through paramilitary intimidation. We call on those with influence over paramilitary groups to call a complete end to those barbaric attacks and acts of intimidation.

Does the Minister agree that true peace in Northern Ireland will be established not just by the absence of bombs and bullets on the streets of Northern Ireland but by the complete ending of exclusions and punishment beatings by the paramilitaries, which so scar the communities affected?

Yes, I do. I utterly deplore and condemn those vicious attacks, in many cases upon teenagers who, as a result, are often maimed for life. There is no place for such activity in a modern democratic society.

Does the Minister agree that our thanks should be given to those in England, Scotland and Wales who have helped bona fide exiles? At the same time, is it beyond the capacity of the Government to perceive the difference between those who have an influence but do not use it and those who have encouraged people to come back to Northern Ireland and then ordered their murder? Surely we can no longer trust such people, even in negotiations.

I agree with a lot of what the hon. Gentleman says. There is clearly no place for such paramilitary activity, the brutality and cruelty of it, and it should cease completely. We look to those with influence to ensure that that happens.

Will my hon. Friend challenge the myth that is perpetuated by paramilitary groups that exiles have invariably been involved in antisocial activity such as drug-running, whereas, in fact, many have been those paramilitaries' opponents, a number have been informers who have saved people's lives and others have just run into trouble on a personal basis with paramilitary groups?

I absolutely agree and endorse what my hon. Friend has said and pay tribute to him for the many occasions on which he has campaigned for the return of exiles and for an end to such activity.

Republican Exiles

8.

What discussions he has had with Sinn Fein/IRA about the early return of exiles to Northern Ireland. [107074]

The Parliamentary Under-Secretary of State for Northern Ireland
(Mr. Desmond Browne)

The Government have consistently made their position clear. The exiling of individuals is a despicable practice that we wholly condemn. It must end and those exiles must feel free to return in safety.

Will the Minister say whether the issue of exiles from Northern Ireland was on the agenda of discussions between the President of the United States and the Prime Minister at Hillsborough over the past few days? If it was, can the Minister say what advice he is giving to those families who wish to return to Northern Ireland? What practical assistance can be offered to them about their security should they return? Can he confirm that the return of exiles to Northern Ireland must take place before any concessions are made to so-called on-the-run prisoners?

I am unable to answer the detail of the first part of the hon. Gentleman's question at this stage. What I can say is that through the forces of law and order in Northern Ireland, the Government offer security to those who wish to return. As for the third part of his question, of course, it is clear that all aspects of the current discussions are interlinked and they can be considered only in the context of acts of completion. The practice of exiling must end and those who have been exiled must feel able to return to Northern Ireland.

Echoing the comments by my hon. Friend the Member for East Devon (Mr. Swire), many people in Northern Ireland are appalled at the prospect of a deal for on-the-run terrorists, many of whom have committed serious atrocities. People see that as a serious injustice. Will the Minister assure us that priority will be given to the exiles, many of whom are innocent and have not been found guilty of any wrongdoing?

I entirely agree with what the hon. Gentleman says about those in the unfortunate position of having been exiled. I have been working with, among others, the Maranatha community in trying to establish support for such people and to develop a suitable policy.

As for the hon. Gentleman's main point, he knows that the British and Irish Governments recognised at the Weston Park talks that the issue of terrorists on the run needed to be dealt with, and that steps should be taken for the purpose. As the Prime Minister made clear in his speech in Belfast, the Government will only contemplate such steps, and difficult issues such as on-the-runs, in the context of acts of completion.

Prime Minister

The Prime Minister was asked—

Engagements

Q1. [107852]

If he will list his official engagements for Wednesday 9 April.

This morning I had meetings with ministerial colleagues and others. In addition to my duties in the House, I shall have further such meetings later today.

I am sure that the whole House would once again like to express its deep condolences to the families of the servicemen and others who have lost their lives during the last week of the conflict in Iraq. Again we salute their courage, and give our heartfelt gratitude for their sacrifice.

May I associate myself with the Prime Minister's words about those who have fallen in battle in Iraq?

May I ask the Prime Minister, however, whether he is aware of another battle—the battle to save Britain's pharmacies in the light of the Office of Fair Trading report? Will he assure me that his Government will not introduce any policies that would fundamentally threaten the future of Britain's pharmacy network, and the remarkable job that pharmacies do for people throughout Britain?

Of course it is vitally important that we maintain the pharmacy network. It is also important, however, that we pay due attention to reports that are given to us about the virtues of competition. I am sure that we will strike the right balance between those two objectives.

As the coalition forces move deeper into the Iraqi cities, they are uncovering, being guided towards and being shown torture chambers, rape rooms and other horrifying evidence of the brutalities committed by Saddam and his henchmen—a sickening picture of the killing inflicted on innocent people. Will my right hon. Friend ensure that this evil is eradicated from Iraq by ordering the hunting down of these people-butchers?

I think we would also want to express our deep regret at any loss of innocent civilian life during the conflict, It is, I am afraid, the unfortunate consequence of war, but my hon. Friend is absolutely right to draw attention to the plight of people in Iraq under Saddam—not just the torture chambers and the routine barbarity, but the literally thousands of people killed and brutalised every year by Saddam's regime. According to recent estimates from some of the non-governmental organisations, some 1 million children are suffering from malnutrition as a result of the way in which the country is run. I hope that when we assess the humanitarian picture, for all the difficulties that naturally exist there at the moment, people will understand that for the vast majority of people in Iraq the absolute humanitarian priority was to be rid of the regime of Saddam Hussein.

In the last three weeks, British and American troops have defeated Iraqi forces and taken Basra, and it now seems that the regime is fast losing its grip on Baghdad. Even as we speak, Iraqi people are celebrating in the streets. This has been one of the most brilliantly executed campaigns of recent history. May I join the Prime Minister in paying heartfelt tribute to the professionalism and bravery of British troops in Iraq, and in remembering those who have given their lives for this country?

I congratulate the Prime Minister on the role that he has played, standing together with our American allies, in liberating the Iraqi people and ousting this evil dictator. He will recall, however, that at the end of the last Gulf war Iraqi generals signed a document of surrender on behalf of the Iraqi regime. The current regime is in complete collapse, it appears, and we all want to prevent further unnecessary loss of life. Given that, from whom do the Prime Minister believe—or from whom do his advisers believe—the coalition can now accept an unconditional surrender?

First of all, in respect of our troops and what they have done in the past few weeks, I wish to record once again our pride in their enormous courage, professionalism and skill, and to pay tribute, in fact, to the coalition troops as a whole, because the American troops, in that remarkable advance on Baghdad, also showed their professionalism and skill. Indeed, I pay tribute—because it is not always possible to do this—to the Australian and other special forces, and to other support staff, who have played their part, too.

In relation to who we would take a surrender from, it is extremely difficult, as we speak, to know what is left of the governing higher ranks of Saddam's regime. I think that the best way of answering that would be that we must be clear that whoever we accept a final declaration from to the effect that, so far as Saddam's regime is concerned, the war is over, whoever it is has that proper authority. I cannot at the moment make a judgment as to who that may be, but one thing that we must—

I will resist all temptation at this point. So we will have to wait and see.

On Monday, certain reports indicated that the Defence Secretary appeared to make light of some of the looting in Basra. However, this morning, as looting spread to Baghdad, the aid agency said that it would not deliver aid to Basra until security was ensured. I also understand that there are now reports that members of the regime are using the disorder to cover themselves while they remove evidence from government buildings. Will the Prime Minister confirm that British troops are now policing the streets in Basra and arresting looters? Given that British commanders have recently said that their forces are thinly stretched, does he believe that policing in Iraq will require reinforcements either from the UK, or perhaps from some other countries?

The answer to the latter point is that it may do; again, we just cannot be sure at the moment. However, in respect of Basra, our armed forces are doing their very best in what is a difficult situation. I think that there is bound to be a certain amount of disorder, and probably a certain amount of lawlessness, in the aftermath of the collapse of Saddam's regime in places such as Basra. But the troops are doing their level best to restore order. There is an inhibition on them, however. This is what I think would be called in military jargon a semi-permissive environment: in other words, it is not yet fully secure for our troops.

Obviously, our military commanders want to make sure that, in employing whatever troops they employ, as it were almost on policing duties, they do not put their lives at risk. Subject to that, they do believe that the situation is more under control today than it was yesterday. They are also meeting local officials to try to make sure that, within the local community, order is restored. Just before I came to the House, I was briefed on the fact that some of the local leaders are now coming forward and offering their assistance in making sure that this policing happens. Indeed, some of those people who looted and took property yesterday are returning it.

Returning to the weapons of mass destruction, there have been potential finds of illegal missiles, chemicals and suspect warheads. Does the Prime Minister agree with me that there should be an independent verification by UN weapons inspectors, and what steps are being taken to ensure that this should happen?

We are in discussion with the United Nations about this. Plainly, it would be a good idea from every perspective to make sure that there is some sort of objective verification of any potential weapons of mass destruction that are seized. As we speak, there is obviously an investigation going on into certain of those weapons that were taken a few days ago, and tests are being carried out. However, it is important, I think, for the international community as a whole that, as we establish control—and, indeed, as people working on these programmes are free to come forward and speak to us—we make sure that a legitimacy is given to this, so that there can be some objective assessment of the truth of the situation. Certainly, so far as we are concerned—perhaps this allows me to say this once again—we have no doubt at all that these weapons of mass destruction exist. I say to people who sometimes say, "Why haven't you been finding them as you've gone through the country?" that the truth is that there has been a six-month campaign of concealment. It is not surprising that we have not found them. We need the evidence of the experts and scientists, but we are convinced that we will get it.

Over the past few weeks, the war of words between Syria and the United States has escalated. Does the Prime Minister share US concerns about Syria, and what does he believe that Syria must do now to ease those concerns?

There are two issues, the most immediate of which is the suggestion that Syria was supplying arms or equipment to the Iraqi regime for the war. Syria has assured us that that is not the case, and I made it clear in a recent conversation with President Bashar that it would be unacceptable. Secondly, there is a longer-term issue, which is the need to make sure—especially if we are moving forward with a process of peace in the middle east—that all support by countries such as Syria for terrorist organisations and those who want to destroy any prospect of peace in the middle east ceases, and ceases entirely.

The whole House would agree that the reconstruction of Iraq must be run by the Iraqis. However, there must be an interim authority, which is to be run by General Garner. Will the Prime Minister confirm whether that interim authority will have the specific endorsement of the United Nations?

Two processes are involved. One is the office that will be run by General Garner and others, including British people, in the immediate post-conflict situation. Then, as soon as possible, the interim authority should be an Iraqi interim authority and we should develop that as soon as we can. That is why we are suggesting a series of ways to ensure that we find out who are the proper representatives from the different groupings in different parts of the country and bring them all together. In that process, the coalition forces will have a role and the United Nations should have a role. I see no reason why, if we approach the problem sensibly and given that Kofi Annan has now appointed a special adviser, we cannot do that in a collaborative way. If we do so, the interim authority is likely to have the legitimacy that it needs. It is important that it has that legitimacy and is seen to have it in the outside world. If, as we said yesterday, the United Nations has a vital role in that process, it will make the task all the more easy to do.

I note the Prime Minister's remarks. He will be aware of President Chirac's unhelpful remarks yesterday saying almost exactly the opposite, which means, in a sense, that we may not be able to achieve such a resolution. However, the International Development Secretary has said that, without a UN resolution, coalition troops will represent "an occupying army" with no legal right to reconstruct Iraq. Does the Prime Minister share her view?

In respect of President Chirac's remarks, it is important to look also at the remarks of the German Chancellor and of the spokesman of Kofi Annan, the UN Secretary-General, who gave a broad welcome to what was said yesterday. There will obviously be many negotiations and discussions about the problem. In the end, it depends on whether people want to reach an agreement or not. If they want to reach an agreement, it is perfectly easy to do so. Yesterday, President Bush could not have been clearer in saying that the UN should have a vital role, not just in humanitarian aid, but in relation to the reconstruction of the country. I believe that we should wait and see how it develops. We are in constant discussion with the countries concerned. Indeed, I am due to speak to President Chirac later today, and, with good will, we will reach a way through.

One of the reasons for going into Iraq was to establish the rule of law. Can my right hon. Friend give an undertaking that none of the prisoners taken by Her Majesty's forces will be transferred out of their custody until their position has been properly established by independent tribunals, and that they will not be sent to Guantanamo Bay without there being a proper reason for it?

I can certainly assure my hon. Friend that any of our prisoners of war will be treated fully in accordance with international law, which lays down strict rules in respect of that matter and we shall abide by them.

In paying tribute to the courage and professionalism of our armed forces, does the Prime Minister agree that we owe it to them—[Interruption.]

Does the Prime Minister agree that we owe it to them as much to the innocent Iraqi civilians to win the peace, having successfully prosecuted the war? Does he agree that it will be vital that relationships with Russia and our European allies are properly re-established so that we can get into Iraq the funding that will be central to the reconstruction?

It is obviously vital that we do all we can to make sure that Iraq gets the future that we have set out for it. I hope that Russia and other countries will co-operate with us in that regard. In the end, the critical thing will be to make sure that we deal with the immediate humanitarian situation and that the Iraqi interim authority is run by Iraqis who are genuinely representative of the whole country. We set out a process yesterday that allows us to get there and I hope that Russia and other countries co-operate with us in it.

When the Prime Minister met the American President, was the President able to indicate whether the American Administration would accept the Israeli Government's interpretation of the middle east road map—that it is all subject to possible amendment at a future stage?

The road map is not just a set of steps in a process, but a set of very clear undertakings that must be entered into by both sides. The road map has been drawn up by the United States, the EU, Russia and the UN. I do not doubt that there will be all sorts of representations made about it. However, the fact is that the road map is there as a way through. Therefore, in its essential particulars, we must abide by it and make sure that it is implemented. That is why the right hon. Gentleman will have heard the United States President say, once again, that we are committed not just to publishing the road map, but to implementing it. Of course people will make representations—they are bound to—but implementing the road map means exactly what it says.

Does my right hon. Friend agree that the reconstruction of Iraq, particularly following the decades of neglect by Saddam Hussein, needs the involvement not just of the UN and all its agencies, but the World Bank, the IMF and the G8 countries? Should not our main concern be that once the media spotlight is off Iraq, we maintain our commitment to the restoration of prosperity and democracy?

I agree entirely. However, I should point out that the conflict is not yet over, and there are still difficult things to do. As we speak, there is still intense resistance—not broad spread among the Iraqi people, but among those parts of Saddam's regime that want to cling to power. It is not over yet, but I agree with my right hon. Friend that it is essential that we make sure that we commit to the reconstruction of Iraq. It is fair to point out that Iraq—unlike Afghanistan, where we had to deal with a country with few immediate resources—is potentially a wealthy country. The tragedy of Iraq is that its wealth has not been used for the Iraqi people. When we read that Saddam Hussein's wealth appears to be $3 billion, while his people live in poverty—60 per cent. are dependent on food aid—we can see just how much there is to be done. However, with the natural wealth that there is in Iraq, that is work that can be done.

Q2. [107853]

Notwithstanding the tremendous success of our troops, sadly there have been large numbers of civilian casualties. Hospitals in Baghdad are crying out for urgent assistance. Can the Prime Minister assure the House that coalition forces will do all they possibly can to get that assistance there as soon as possible?

Of course we will do that and, as we speak, teams are working alongside American troops in order to do so. I should point out two particular problems. One is that, as parts of Saddam's regime have moved out of areas, they have cut the power, harming our ability to provide humanitarian assistance and power, particularly to hospitals and other necessary areas. The second is that it cannot be pointed out too often that we make every effort to avoid civilian casualties, but there is a problem because of Saddam basing the headquarters of some of his special republican guard and local security services in the most densely populated residential areas. That makes it all the more difficult for us to act in a way that preserves as much civilian life as we possibly can. That said, probably more care has been taken with targeting in this military conflict than any in recent times.

Q3. [107854]

Is the Prime Minister aware of the reported deaths of almost 1,000 civilians in one day last week? Those deaths were not televised; they took place in Africa, in the Democratic Republic of Congo, in a conflict that has claimed almost 4 million lives, making it the deadliest war since world war two. Will the Prime Minister use his influence to use the upcoming G8 meeting to increase the numbers of UN observers and peacekeepers? Will he ensure that just because those deaths were not televised, the victims will not be forgotten?

My hon. Friend makes an entirely justified point. I assure her that we are working closely with the UN and other troop-contributing countries to ensure the deployment of what was supposed to be almost 9,000 UN peacekeepers. They were mandated by the UN last December and we are trying to insert them into the situation there. Once again, we exhort all parties to abide by UN Security Council resolution 1468, which condemns violations of human rights and international humanitarian law and calls on all parties to cease their hostilities immediately. I assure my hon. Friend that, even with public attention naturally focused on Iraq, we continue to be as active as we possibly can on this issue.

Is the Prime Minister pleased or saddened by reports that the tests for the UK joining the euro have not been met?

I am afraid that the hon. Gentleman will have to wait until the assessment is made.

Q4. [107855]

My right hon. Friend will be aware that Thanet council, working closely with the Government, has worked wonders in regenerating the district, creating business parks and even a new university campus. However, we still have great difficulty in getting developers to prefer to work on brownfield sites and the renovation of existing houses over developing greenfield sites. Will my right hon. Friend ensure that we focus attention on making sure that arrangements are in place that will encourage people to develop our old Victorian towns?

I entirely agree with my hon. Friend on the issue that he raises. It is extremely important that we make every effort to develop brownfield sites and to make sure also that we take back into use homes that have been empty for a long time. Without in any way previewing what my right hon. Friend the Chancellor of the Exchequer is going to say later, I hope that my hon. Friend stays around for the Budget statement.

In considering precisely what role the UN will have in postwar Iraq, will the Prime Minister reflect on the record of the UK and the US in building durable democracies in Germany and Japan? Does he not think that that record compares rather favourably with the UN's record in Somalia?

The reality is that there are examples of the UN working well, and of its working less well. What is clear is that the UN does not want the sole responsibility in the matter, and in any event that is simply not practical. What is important, however, is that the UN is involved and, as we said yesterday, that it has a vital role. We will be the occupying forces. If we set up the Iraqi interim authority in the right way, working with the UN, we will get a representative body that can then take charge of its own country. The key thing is to make sure—perhaps through joint commissions, as happened in Afghanistan and elsewhere—that we get a broadly representative Government. As I said a moment or two ago, I believe that this is a situation where, if people want to find a proper solution, they can. The fact that Kofi Annan has appointed a special adviser is important, as it allows us to work with him. With good will, we will get this job done in the best way for the Iraqi people. This matter should not be a diplomatic wrangle: it should be about what is best for the Iraqi people for the future.

Q5. [107856]

In the USA, prominent proponents of war with Iraq are now demanding regime change in Iran and Syria. Does my right hon. Friend recognise the consternation that is caused by the conjunction of that with comments about those countries made by Rumsfeld, Rice and even Powell, and the aggressive strategic theories of the Bush Administration? Will the Prime Minister impress on our US allies that a precedent has not been set for further pre-emptive wars without international consensus, in the middle east or elsewhere?

What is actually being said by the US Administration and ourselves is that any actions being taken by Syria and Iran at the moment should not interfere with the proper progress of the military conflict, nor with building Iraq properly for the future when the conflict is over. That is why we have said to both Syria and Iran that it is important that they do not provide military help to people who are engaged in action against coalition forces. I think that that is a perfectly reasonable position, and I respectfully say to my hon. Friend that I would not read any more into it than that.

Given the growing importance of humanitarian aid in the war against Iraq, and given the fact that we send nearly £1 billion to the EU overseas aid package—money that is largely spent by Brussels for political purposes, as evidenced by the fact that the top 10 recipients are all countries bordering the EU—will the Prime Minister now override his Secretary of State for International Development and divert that money to Iraq, which is where it is far more desperately needed?

The debate over humanitarian aid in the EU is of long standing. In fact, my right hon. Friend is one of many Secretaries of State in different parts of the European Union who have been asking for changes in that regard.

I have to say two other things to the hon. Gentleman. First, the aid that we give to those surrounding European countries is still important, because they are countries that are undergoing a process of reconstruction. Secondly, I have no doubt at all that the European Union—we will be able to discuss this further next week—will want to give full humanitarian assistance to Iraq. The EU naturally has a role to play in that, and can play it very well.

Q6. [107857]

Given the vital importance of the small business sector to the well-being of our economy, and given that many small businesses tell me that their staff are their greatest asset, will the Prime Minister explain the benefits to the small business sector of the new rights for working people?

That is an important issue. We have changed the rules to enable more small employers to claim back 100 per cent. of maternity, paternity and adoption payments, so we are improving the situation for them. We are also significantly increasing maternity pay and the length of time that people can take in unpaid leave, and taking measures on flexible working. That will give more and more people the opportunity to balance work and family life. It is also good for employers because, as my hon. Friend rightly says, staff are their main asset.

The Prime Minister will be aware that a great deal of discussion is going on about a new police college in Northern Ireland. Does he share my concern that strand 1 of the agreement has been breached by the offer of the Republic of Ireland Government to fund some £30 million if it is built in Ebrington in Londonderry, which would support only one political party? On Budget day, would we be right in assuming that perhaps the 30 pieces of silver is now $30 million?

If the hon. Gentleman will forgive me, I will not give him an answer off the top of my head: I will have to correspond with him about that.

Q7. [107858]

Does the Prime Minister share the pleasure that pupils, teachers, governors and parents must feel on the publication of the international study yesterday showing that English primary school pupils are among the best readers in the world; and will he go on working with his right hon. Friend the Chancellor to ensure that the strong and stable economy, which underpins the investment that helps to achieve that success, continues?

We certainly will continue that work. For England to be third behind Sweden and the Netherlands out of 35 countries, ahead of France, Germany, the United States and many other countries, is a tremendous tribute to what has happened in our primary schools over the past few years. It has happened because of reform through the national literacy and numeracy strategy and investment that represents the largest-ever increase in education funding that this country has ever seen. That is why it is very important to continue that investment, not cut it by 20 per cent.

Q8. [107859]

Is the Prime Minister aware of the desperate state of farming in this country, which is borne out by the latest news that Brandons turkey factory went into receivership yesterday? Will he ensure that common agricultural policy reform does not work entirely to the disadvantage of British farmers and to please French and German farmers?

Of course we will. We also recognise that the farming industry has been undergoing a huge period of structural change, which it has been undertaking for several years. The best way to proceed is through the Curry commission, which we established some time ago. I am sorry for the hon. Lady's constituents whose jobs will be lost as a result of the changes that have been announced, but I assure her that we will continue to try to get the best deal we can out of the Agriculture Council.

Orders Of The Day

Ways And Means

Budget Statement

Before I call the Chancellor of the Exchequer, it may be for the convenience of hon. Members if I remind them that, at the end of the Chancellor's speech, copies of the Budget resolutions will be available to hon. Members in the Vote Office.

12.30 pm

It is half a century since a Budget has been presented with Britain engaged in large-scale military conflict. On 10 April 1951, the then Chancellor told the House of Commons that, heavy as the burdens may seem at times, they were small set against the cause, which is great, and the courage of our armed forces, which is even greater. And even as we look forward to the end of the conflict in Iraq, my first Budget decision is to ensure proper provision for our military, for our domestic security and for international development and reconstruction.

I can confirm that I have set aside £3 billion in a special reserve available to the Ministry of Defence, so that our troops continue to be properly equipped and given the resources that they deserve and have a right to expect.

I believe that the whole House will wish to join me in expressing our gratitude and support to our armed forces for the zeal, bravery and resilience with which they carry out their duties and for their outstanding achievements.

And I believe that we owe a debt of gratitude to the strong leadership in a difficult time of our Prime Minister.

At home, our responsibility is to safeguard our communities from terrorist threats and here our resolve again is absolute. It is therefore right also to set aside in this Budget an extra £330 million for additional domestic counter-terrorism measures. The Home Secretary will therefore take forward measures to improve detection work at our ports and enhance our response to a range of terrorist threats. The House of Commons will again be united in taking every step to preserve and protect the security of the people of this United Kingdom.

Looking forward, there are three long-term challenges to which the international community must rise and which will require additional financial support: reconstruction in Iraq; a lasting middle east peace settlement; and, a new and urgent effort, going beyond debt relief, to combat the injustice and instability caused by world poverty.

To contribute to the United Nations appeal and to carry out humanitarian work in Iraq, for which we owe special thanks to the Red Cross and international aid organisations, the Government will contribute £240 million, including, for the United Nations, $100 million. And to back up the UN and the work of reconstruction and development, I will today set aside an additional $100 million.

Just as it is right for Britain and America to lead action in Iraq, it is now right for Britain and America to lead action against the hopelessness of poverty in the poorest countries. This Saturday in Washington, at the G7 and then International Monetary Fund and World Bank meetings, Britain will—with all-party support for which I am grateful—table our plan for a $50 billion a year international finance facility to fund primary education for the 115 million children without it, and to fund health care and life-saving drugs to tackle AIDS, malaria and tuberculosis at prices that poor countries can afford.

I believe that the whole House will also support our proposal to overhaul the European Union aid budget and redirect EU aid so that instead of 60 per cent bypassing the poorest countries, more European aid will be targeted at reducing world poverty by half by 2015. It is now time for the world's richest countries in word and in deed to fulfil their obligations to the world's poorest.

I will report today that Britain—even in difficult world conditions—is able to meet our military and security costs abroad and at home, to meet the costs of building peace, and to do so while maintaining in full our record investment in schools, hospitals, transport and policing and providing new help in this Budget today also for British business, industry and commerce.

And, Mr. Deputy Speaker, as the major economies look forward to the opportunity, if the right decisions are taken, for a global upturn, Britain starts from the foundation of low inflation: the lowest inflation for 30 years; the lowest interest rates for 40 years; the highest levels of employment in our history; and I can report today that Britain has now experienced the longest period of sustained economic growth and the longest period of growth in living standards in half a century.

I can tell the House that—unlike America, Japan and Germany—the British economy has grown uninterrupted, free of recession, in every single quarter over the past six years.

Having reformed the economy since 1997, the Budget marks the next stage; it is to achieve, in our time, a more flexible, more enterprising, full employment Britain: a Britain of economic strength and social justice.

Because our economy will have to be better equipped for the global upturn, this Budget's detailed economic reforms will seek, for each region and nation, greater flexibility in capital markets, in product markets and thus prices for goods and services; greater flexibility in our housing and planning, in mortgages and in labour markets.

Britain is closer than we have been for three decades to full employment and so today, with social security, housing benefit and employment reforms, I will announce, to encourage greater flexibility and fairness, this Budget will advance our goal of full employment in every region and nation of the United Kingdom.

Because it is a Britain of economic strength and social justice we seek, we now plan—paid for by the national insurance tax rise—by 2008, 80,000 more nurses than 1997 and 25,000 more doctors, and this Budget will further reform and secure public services and the NHS we believe in: free at the point of need.

And as the first Government for three decades with clear goals to reduce poverty among children and the elderly, the House will want to know that in this Budget I will introduce a new guarantee with immediate effect for every new-born child in this country and a new guarantee with immediate effect for every pensioner in this country.

Let me first give the detail of the economic outlook. I can report that inflation has averaged 2.3 per cent in the last year, is expected to be at 2¾ per cent. in the fourth quarter of this year and will be 2½ per cent. next year, for every one of the following years.

Before Bank of England independence, the pre-1997 inflation target was 2½ per cent. or less but market expectations of UK inflation five, 10 and 20 years ahead were around 4½ per cent., almost double the target.

Today in 2003 because of the success of the monetary regime we introduced in 1997—and I pay tribute to the retiring Governor of the Bank of England, Sir Edward George, and the Monetary Policy Committee—we have a symmetric inflation target of 2½ per cent. and on a five, 10 and 20 year perspective the markets expect inflation to be exactly that—2½per cent.

And it is because since 1997 the monetary policy and the Bank of England have established credibility that, in a particularly uncertain period for the global economy, monetary policy has been able, supported by fiscal policy, to steer a course between deflation and inflation: cautious about domestic risks, including affordable pay settlements and the housing market; and vigilant to global risks in equities, in trade and in investment.

And it is for these reasons that while under the old regime, 30-year British interest rates were higher than those of Germany and America—in 1997, nearly 8 per cent. compared with 7 per cent. in the USA and 6½ per cent. in Germany—our hard-won stability now means that these long-term British interest rates—at just 4.7 per cent.—are today below those of Germany, below those of the euro area and below those of America.

So British monetary and fiscal policy has been able to respond to the world downturn and keep the British economy stable and growing. And it is that steady economic leadership, vigilant to risk, resolute in our commitment to stability, that is essential for a post-conflict world economy that while still fragile has the potential for renewed growth.

I am required to set the inflation target in each Budget.

In 1997, I spoke of the case over time for moving to a new domestic measure of inflation.

The advantages of the current indicator of inflation—RPIX—is that it is known, well understood and has served us well.

The advantages, however, of the internationally recognised index of consumer prices—HICP—is that it is in line with best international practice and is used by every other G7 nation but Japan, and by our neighbours in Europe.

So there is a case in principle for adopting for Britain this index of consumer prices and the Treasury will continue to examine the detailed implications of such a change.

Today, I am reaffirming our symmetrical inflation target based on the current RPIX measure. Our target for the financial year will be 2½ per cent.

I can now report that, since the last Budget, there are 253,000 more jobs in the UK. In the last quarter of 2002 alone, 150,000 new jobs were created. There are now 1.5 million more people in work than in 1997. Unemployment in Germany, France and Italy is around 9 per cent., in the euro area as a whole it is 9 per cent. In Britain, it is 5 per cent. British unemployment today is lower than in the euro area, Japan and America together for the first time for nearly 50 years.

Over the same period that a total of 3 million jobs were lost in America, employment has risen in Britain by ½ million, and the number of unemployed claiming benefit has fallen below 1 million for the first time since 1974.

So of all the major global economies Britain is now alone in combining inflation with the lowest unemployment for a generation.

In recent months, the oil price has fluctuated between $23 and $33 per barrel.

Among the continuing risks is, as everyone knows, the volatility of global equity markets, which have come down, though there have been sharp movements in recent days. Even in the world downturn of the early 1990s, world trade continued to grow at nearly 5 per cent. a year. But world trade grew by just 0.1 per cent. in 2001, and while it recovered to 4 per cent. growth in the first half of 2002, it slowed again to just 1.7 per cent. in the second half of the year. And so I understand the concerns and the difficulties of manufacturers and exporters, and all those trading across the world.

That is why—in the interests of Britain, Europe and the poorest countries—the world trade talks, now stalled on agriculture, pharmaceuticals and services, should be moved forward with urgency.

We now know that in 2001 and 2002 economic growth in Germany has averaged 0.4 per cent; in Japan 0.4 per cent; the euro area 1.1 per cent.; America, taking the two years together, just 1.4 per cent. And here in Britain, with growth in 2001 of 2.1 per cent. and then, in 2002, 1.8 per cent., we have averaged 2 per cent.—higher therefore than America; much higher than Japan; much higher than the euro area.

Looking forward, the largest repercussions for the British economy arise from the further fall in growth prospects for the euro area to around 1 per cent. in 2003.

German growth, expected at the time of the pre-Budget report to be 1.3 per cent. in 2003, is now expected to be just 0.4 per cent. Here in Britain, I now expect that growth this year will be 2 to 2½per cent.—double the euro area and Japan, and about the same level as America.

So, just as the record shows that, in 2001 and 2002, Britain, with north America, outperformed the rest of the G7 industrialised countries and were the fastest growing economies, so, again, with all the risks, we are expected, with north America, to be the fastest growing G7 economies in 2003.

In the previous two world downturns, in both the early 1980s and in the early 1990s, the British economy was in recession and output contracted for five whole quarters in a row—but this time in a world downturn, it has grown in every single quarter. Employment, which fell by 1.3 million in the early 80s and 1.6 million in the early 90s downturn, this time has not fallen but risen by ½ million. Inflation, which rose to 20 per cent. in the 80s downturn and 10 per cent. in the early 90s, has this time averaged just 2.3 per cent. Interest rates, which peaked at 16 per cent. in the 80s downturn and at 15 per cent. in the 90s downturn, are today 3.75 per cent. And mortgage rates, which rose to 15 per cent. in both the early 80s and early 90s, are under 5 per cent today.

So, unlike the early downturns of the 1980s and 1990s, when others were in charge and when Britain was first into the downturn and suffered most and longest, I can report to the House that this time, on growth, employment, inflation, interest rates—and also for debt and deficits, where I remind the House in 1993 borrowing peaked at 8 per cent. in today's money, £83 billion of borrowing in just one year—this time Britain, even amidst global uncertainty, is not only doing better than in the past but also doing better when we make the comparison with these other countries.

Fixed investment, which has fallen, just as business investment has fallen round the world—and is in the euro area still falling—is expected to grow in Britain this year by 4¼ to 4¾4 per cent.—with business investment moving up from the second half—and then 4¾ to 5¼ per cent. next year.

Manufacturing output, which has fallen in every major industrialised country in the last year, with difficulties for the whole sector, is expected to grow in Britain by ¼ per cent. to ¾ per cent. this year, and then 2¼ to ¾ per cent. next year.

With the housing market and consumer spending now moderating, we expect domestic demand to grow by 3 to 3½ per cent. this year and in 2004.

Risks remain and are real, but with inflation and interest rates low, with fiscal policy in Britain supporting monetary policy, and with the world—particularly America—poised to make what we believe will be a steady recovery over the course of this year and next, we expect British growth overall to rise in both 2004 and 2005 by 3 to 3½ per cent. as the economy returns to trend.

Private consumption as a whole is expected to grow by ¾ to 3 per cent. this year and by 2½ to 2¾ per cent. next year; building on six years from 1997 in which the typical British household has each year seen an average 3½ per cent. real terms rise in their income.

Throughout the post-war period, Britain has faced a productivity gap with our competitors and in particular now a substantial gap with the USA.

The latest productivity figures from the independent Office for National Statistics, and now updated from the census of 2001, are published in full in today's Budget report.

The most recent data show that the productivity gap per head with Germany has narrowed to just 4 per cent.; with France that gap is 16 per cent. but has fallen significantly, and the productivity gap with Japan has been eliminated with Britain now 7 per cent. higher.

But despite the progress made, Britain and the rest of Europe still have a productivity gap—between 20 and 30 per cent.—with the US and so, with rates of corporation tax, small business tax and capital gains tax already among the lowest of the major economies, our Budget reforms will learn from American innovation, competition and enterprise and that is why we will introduce new flexibilities in our economy; reforms that will be important for our future prospects in Europe.

Two thirds of the productivity gap with America is due to the poorer quantity and quality of innovation. So it is a priority to raise research and development from today's 1.9 per cent. of GDP toward America's 2.8 per cent.

Having launched the successful R and D tax credits last year, we are, following representations from the CBI and others, announcing improvements today in the credits' scope and value and that we will consult with business to improve the definition of qualifying research to ensure that it keeps pace with technological developments. Because two thirds of the R and D credit is paid to manufacturing, this is of special help to manufacturers in our regions.

To back up our extra £1.25 billion investment in science itself—not least the £40 million over two years we are investing as a world leader in stem cell research—I have asked the Inland Revenue to report on further help for already tax exempt research and technology organisations so that Britain, with these changes, can lead the world in new discoveries, and then new industries and jobs.

One third of overall productivity gains comes from new entrants to markets: start-up and then growing businesses whose dynamism transforms commerce, challenges existing businesses to do better, and when we have flexibility increases our competitiveness.

For small firms that are looking for capital of between £250,000 and £1 million, there is evidence of an equity gap that prevents them from realising their full growth potential. Small business investment companies backed by Government incentives now make almost 60 per cent. of all venture capital investments in American small business—and they helped finance the early growth of now large companies such as Intel, Apple and FedEx.

To match this success I am publishing proposals for the creation of British small business investment companies—and these will be private sector vehicles to inject new capital into small and medium-sized firms.

Because of the importance I attach to creating the best environment for investment, even when under pressure to meet the costs of war and reconstruction, I will today back up the cut to 19p in small business tax by funding three tax reliefs and incentives that will help companies in industrial and in rural areas make the most of the opportunities of the upturn.

By raising the qualifying threshold for small and medium-sized businesses to the maximum possible under EU law—that is £20 million—a total of 3.7 million businesses will be eligible for 40 per cent. investment allowances. A total of more than 3 million businesses will now also qualify for 100 per cent. allowances for investment in IT, which I am extending for a further year to April 2004.

Sectors that include 400,000 firms will now be eligible to borrow from the reformed small firms loan guarantee scheme, including catering, retail and vehicle repairs.

Each of our constituencies has thousands of small businesses, self-employed and sole traders—indeed, there is an average of 5,000 per constituency.

From tomorrow, firms with turnovers of £56,000 or less will not have to register for VAT—and that is the most generous VAT threshold in Europe. From tomorrow we will also abolish automatic fines for late payment of VAT for 200,000 more small businesses. In 2000, we released 150,000 companies with turnovers under £1 million from burdensome audit requirements and, subject to a consultative review this summer, we propose to release many thousands more.

Ten years ago it took 28 regulations and certificates to form a business in Britain. Even today in mainland Europe it takes around four weeks and an average £600. Today, in a Britain more flexible, it takes just one week and only £20. And to cut costs further and enhance that flexibility, from tomorrow, 650,000 firms will no longer have to account for every VAT transaction and can now opt for automatic flat-rate VAT payments, cutting out unnecessary paperwork.

Next month the Home Secretary will designate, for reform or abolition, 40 additional regulations and procedures, making a total of over 500 regulations and procedures—500 introduced by previous Governments—that are now identified for reform or abolition.

Where we find local enforcement of regulations uneven and unpredictable, we will consider using our reserve power to introduce statutory codes of enforcement practice and we have invited the CBI, Institute of Directors and others to second their experts to join us to remove unnecessary regulations starting with construction, transport and environmental services.

To meet concerns raised by business, I can announce that the Information Commissioner will produce revised and simplified guidance on the Data Protection Act 1998; the national statistician will review exempting more firms from statistical requirements; and new procedures will make it easier and simpler from this year for small firms to compete for Government contracts.

Because flexibility at a UK level should be matched by flexibility in Europe, we are proposing that Europe's competition authorities proactively investigate barriers to competition, starting with financial services; and we have now agreed to submit to the EU jobs review our employment strategy that could help Europe's 15 million unemployed. Britain does lead in job creation, in tax credits that make work pay, and this week—learning from Europe—we have introduced new maternity rights and the first ever paternity pay; and in striking the balance between dynamism and social standards, our position is that no change to European regulations, like the working time directive, should risk British job creation.

To break down the trade barriers between Europe and the USA, and to build a stronger transatlantic economic partnership, we will propose to the Commission and to the US Government liberalisation in services and the faster removal of tariffs between our countries.

I have examined rates of corporation tax, small business corporation tax and capital gains tax, and I propose to freeze them. On air passenger duty, I propose to freeze rates. On insurance premium tax, I propose to freeze rates. On the climate change levy, I propose to freeze rates.

I propose, from Monday, the annual inflation rise of 1p on a pint of beer, 4p on a bottle of wine. I will freeze duties on cider and sparkling wine. Because past Governments set higher taxes on the alcohol content of spirits than on beer and wine, I will for the sixth Budget in a row, freeze all spirits duties—that is the longest freeze in duty for 50 years and it will benefit whisky producers in all parts of the United Kingdom.

I turn now to bingo. I will abolish the bingo tax on 4 August, just as I have abolished direct taxes on the pools and on betting on horse racing. The tax on bingo players' stakes and the tax on bingo prizes will be replaced in the same way as the tax on betting and the pools. So I can tell the House it will be a gross tax on company profits for bingo at one and five—15 per cent.

I have also to make a decision on fuel duties. Owing to the recent high and volatile level of oil prices as a result of military conflict in Iraq, I have decided to defer the 1.28p a litre annual revalorisation of fuel duties until six months from now—1 October—and I will legislate to this effect. And if the current international uncertainties and volatility remain, I will not proceed with the change at all.

I will also freeze vehicle excise duty rates for lorries and for motor cycles and raise excise duty rates from 1 May on cars and vans only by the normal inflation rise of £5. But to encourage the development of the least polluting cars I will offer a new rate, £110 lower than the standard rate for a licence.

Bioethanol fuel reduces air pollution and greenhouse gas emissions substantially. To encourage its development I can announce that when the industry is ready on 1 January 2005, we will reduce bioethanol duty by 20p per litre.

Enhanced capital allowances designed to encourage energy-saving technologies are set out in detail by the Inland Revenue today.

In January this year we abolished royalty payments from the North sea. I can now announce that from 1 January next year, and for all contracts completed from today, we will abolish petroleum revenue tax on new tariffing business in the North sea.

My decision on cigarettes is, for public health reasons, to go ahead with a rise—the annual inflation rise of 8p per packet of 20.

Last year I raised the exemption for inheritance tax to £250,000. I propose now to raise the exemption to £255,000. Ninety-five per cent. of estates will pay no tax.

All income tax rates and tax allowances will remain as set out in last year's Budget and the pre-Budget report.

The Inland Revenue's discussion document on residence and domicile is published today.

I want to say something about the housing market. I can now report that since 1997 an additional 1.1 million British families have become homeowners for the first time—home ownership, benefiting from the lowest mortgage rates for 40 years, is rising in all parts of the UK to 70 per cent of all households. It is the highest level in our history, and it is higher now than in America and Europe.

But while most mortgages elsewhere are fixed rate, most UK mortgages—64 per cent. of new mortgages—are at short-term variable rates with most of the rest fixed for just one to five years. And with housing demand at historically high levels, housing supply has remained low. And this has contributed not just to, over 30 years, a greater growth in house prices, three times that of Europe, but to the volatility and inflexibility of the housing market—an issue on which we will publish a background study as part of the Treasury's five tests assessment on the euro.

Most stop-go problems that Britain has suffered in the last 50 years have been led or influenced by the more highly cyclical and often more volatile nature of our housing market.

Housing finance needs to become more certain and planning more flexible. I have asked David Miles, professor of finance at Imperial College, to examine the case for, and how, Britain can develop a market for long-term fixed-rate mortgages—something that is important to the UK in or out of the euro, and certainly more important in a single currency area.

The Deputy Prime Minister and I are asking Kate Barker, formerly of the CBI, to examine and report on how we can reduce barriers to increased housing supply. Backing up his decision to double public investment in new homes and in the renovation of housing estates, the Deputy Prime Minister is announcing today that he will intervene where planning authorities fail to prepare proper plans or deliver an adequate supply of new housing; if necessary call in proposed major housing developments; and consider the case for binding local plans to increase certainty and ensure the stability of the housing market.

I will freeze stamp duty on homes and business property purchases.

As a result of tax avoidance, only half of all commercial property transactions—worth £10 billion a year—are paying the stamp duty owed.

As I announced in the last Budget, the Finance Bill will introduce new tax avoidance powers to close these loopholes.

In addition, because tax avoidance and distortions could take the form of leasing, the Finance Bill will make provision to restructure the stamp duty currently paid on the rental value of all new leases, at a proposed rate of 1 per cent.—four times lower than the usual stamp duty rate on which we consulted.

To provide time for further consultation with business and commerce on how to promote a more level playing field between leases and transfers, I propose to trigger this reform only on 1 December. I will do so only if, after consultation with the industry, there is no effective alternative for tackling avoidance. If I have to trigger the change, I will increase the exemption from stamp duty for commercial property from £60,000 to £150,000, and exempt leases up to £150,000. Therefore, in any event, there will be no duty on 60 per cent. of commercial rental contracts.

We are also reforming the tax treatment of home purchases funded by alternative mortgage products, including Islamic mortgages, where, in the past, home buyers have been charged stamp duty twice.

Anti-avoidance measures on VAT fraud, share-based remuneration, loan relationships and derivative contracts are set out in detail by the Inland Revenue today.

I now turn to policies that will benefit specifically the economies of our regions and the nations of the United Kingdom.

Past civil service relocation reviews have included the Fleming review, and, more recently, the Hardman review, which led to more than 10,000 civil service jobs transferred out of London. The Deputy Prime Minister and I propose now that we examine not only the civil service but non-departmental bodies and other public services with the aim of achieving best value for money.

Successful relocation out of London by private sector companies suggests that public sector jobs transferred to regions and nations could exceed 20,000, to the benefit of the whole country.

Today, therefore, we are asking Departments to submit updated work force development plans and asking Sir Michael Lyons of Birmingham university to advise with a view to decisions on relocation by the next spending review.

The more each of the UK's regions, and Scotland, Wales and Northern Ireland, enter into global competition, the more we must encourage and help them harness their distinctive strengths, overcome economic weaknesses and, with a modern, locally led regional policy, rise to the challenge of making their skills, innovation and enterprise world-class.

To meet the needs of manufacturers investing in our regions, who now receive two thirds of both the R and D tax credit and permanent capital allowances, regional venture capital funds are now investing £270 million in high-growth businesses.

While business research and development in the south-east is £450 per head, it is just £50 per head in the north-east, and small business creation rates in the poorest areas are unacceptably low at one sixth of the most prosperous.

The Secretary of State for Trade and Industry is therefore asking Sir Tom McKillop of AstraZeneca to advise on the extension of regional science and industry councils. We will devolve more responsibility for small business services and training to the regions. In partnership with the banks, we are offering a new online service to give small business advice on training. In addition, today, we are adding to the incentives for small business creation in the 2,000 places in the UK with the most deprivation, which we have designated enterprise areas: to speed up development, fast-track planning approval; to cut the cost of property purchases, stamp duty is abolished; to cut the cost of initial investment, access to the Phoenix fund with the prospect of enhanced capital allowances; to cut the cost of risk capital, community investment tax relief; and to encourage entrepreneurship, enterprise advisers for local schools.

In the past, the more new business local authorities have encouraged, the more rateable income has flowed to the Treasury with no benefit to them. We will therefore legislate to ensure that from April 2005 local authorities and central Government share the receipts that result from new business creation to the benefit of local citizens.

The modern route—indeed, I believe, the only route—to full employment for all regions and nations is to combine flexibility with fairness.

Six years of reform have moved Britain to a new system in which, instead of just signing on for benefit at a local social security office, the first requirement is signing up at a Jobcentre for active job search and help with training, and 2 million people have benefited from the new deal.

Some parts of our country, however, still have twice the unemployment of others and, too often, national rules in employment policy do not encourage local initiative and innovation. It is therefore time to give local Jobcentres discretionary powers, so that, in ways that are targeted, distinctive and flexible, they can fill local vacancies, help the long-term unemployed respond to local employment and skill needs, in industries from tourism and the rural economy to IT and manufacturing, and develop their local plan for their area for full employment. In place of Whitehall-controlled ring-fencing, the Secretary of State for Work and Pensions is announcing local discretion to award grants for training, travel to interviews, and direct cash support to bridge the transition to work. There will be new powers to provide intensive job preparation courses and early entry into the new deal. In addition, drawing on a new ethnic minorities fund, Jobcentre staff will be able to tackle the particular barriers facing those who too often miss out on jobs. In return for local discretion, a new performance regime will accord higher rewards to top managers with provision to change the management of the worst performing.

Too often, unemployed men and women say that when they lose housing benefit, working is not worth while. Therefore, the Secretary of State for Work and Pensions is also announcing today that, from next April, men and women taking up jobs will no longer be required to submit a new claim for housing benefit but simply inform local housing benefit offices, and until benefits are recalculated they will continue to be paid the out-of-work rate.

In addition to requiring the long-term unemployed in 40 areas of the UK to take jobs on offer, we now propose: for those unemployed for 13 weeks, widening the area of job search to within one and a half hours of home and a new six-week period of weekly rather than fortnightly signing on; for all unemployed, an increase in the number of job applications and other requirements in return for benefit; and for the partners of benefit claimants, work-focused interviews and help to support the search for a job.

Some of the hardest to help into work are young offenders, 70 per cent. of whom reoffend.

The Home Secretary and the Minister for Work are therefore now considering how we can apply nationwide, under the leadership of Sir John Parker of Transco, the successful Reading training for work programme. We will offer young offenders training and work while in prison and, with good behaviour, a job when they are released: a programme with a 78 per cent. success rate so far. We will be tough on the causes of crime and tough on crime.

One million disabled men and women desperately want jobs. As a first step for men and women on incapacity benefit who wish to work, there will be an extra £19 a week as we raise the guaranteed minimum income to £194.

Welfare to work is only the first stage, however. Just as in past years we have helped people move from unemployment to employment, the next challenge—the new agenda—is to help people move from low-skilled work to higher-skilled work.

Because nobody wishes Britain to compete on the basis of low pay but on high skills, the right to education to 16 must be complemented by the right to lifelong learning: a classic case of social justice building economic strength.

While it is in the national economic interest that every adult has the basic NVQ2 qualifications, 8 million adults in Britain today do not have them.

The radical way forward that we propose is that, in return for employers giving staff time off for basic training, Government will contribute towards training and wage costs, and employees themselves can then move up the skills ladder.

The Education Secretary is therefore doubling the already successful employer training pilots, naming a further six areas of Britain today at a total overall cost of £170 million.

We will also review, for 16 to 17-year-olds, training, pay and employment needs, including the case for 16 and 17-year-olds having a minimum wage, and today the modern apprenticeship taskforce meets for the first time as apprenticeships, once withering away, are to rise to 320,000 by 2006.

Moving beyond the old voluntarism of the past in this national effort for skills, everyone—government, employers, employees and trade unions has a responsibility and a part to play, and we will extend the trade union learning fund by £3 million extra in 2005.

Expanding the skills that we need requires not only new investment and training but a modern approach to the economic and social benefits of legal immigration, so important to the past success of the US economy and now to ours.

UK work permits have risen from 47,000 to 140,000, and so the Home Secretary will now expand the highly skilled migrant programme and introduce measures for younger applicants and partners; he will encourage foreign nationals graduating in maths, science and engineering in the UK to seek a career in the UK; and he will expand the work permit scheme for industries like construction which face skills shortages.

While meeting the challenge of combating illegal immigration, we are supporting legal immigration which contributes to economic strength and social justice.

There are 200,000 more lone parents in work than in 1997. Lone parent employment has risen to 54 per cent as we advance to our 2010 goal of 70 per cent of lone parents in work. Following the report submitted yesterday by BT chief executive Ben Verwaayen and published yesterday, employers—starting in London with BT and including, initially, Glasgow, Liverpool, Manchester, Leeds and Newcastle— will provide for lone parents work preparation courses, and offer flexible terms backed up by help with childcare.

And for lone parents who voluntarily attend regular work-focused interviews and undertake job search, we will offer an extra £20 a week to cover job search costs, rising to—and topping up wages for a year—£40 extra a week when they move into work.

While the minimum wage today is £147 for a 35-hour week, tax credits raise the minimum family income for a lone parent with two children to £276 even after tax—almost twice as much as the minimum wage. And tax credits are the modern route to eradicating poverty by making work pay.

For lone parents who want work, but want to work part-time, we will now do more with a new housing benefit disregard. For lone parents on a typical rent of £50 a week, part time work will pay £213 a week—more than £10 an hour—making them far better off working part time than not working at all. Last month, we showed our confidence in the future by announcing a rise in the minimum wage for this year and next. And with the new tax credit system in place, a couple, both earning, with two children, now have their tax bill cancelled out until their income, including child benefit, is just under £20,000 a year. The same couple with three children will have their tax bill effectively cut to zero until their total income including child benefit is £22,500. That same couple, with help for typical child care costs, will have their tax cancelled out until they earn just under £30,000.

Our reforms in the tax system guarantee that work pays. And whichever part of the country you live in, and even if you change to a job which pays less, for low earners, for every £10 lost in pay, up to £7 is made up through the new system.

With this national framework for fairness set in place, I can tell the House that the British economy is now better placed to recognise local and regional conditions in pay, such as the extra costs for retention and recruitment that arise in London and the south-east, especially for the low-paid. In future, therefore, we plan regional price indexes showing differences in regional inflation rates; remits for pay review bodies and for public sector workers, including the civil service, will include a stronger local and regional dimension; and with the new housing benefit pathfinder scheme offering a flat rate in the private rented sector based on location and household circumstances, it makes sense not only to roll out this pilot nation wide but to develop a similar flat rate housing benefit system in the social sector. In these ways, we will make housing benefit work more effectively, more sensitively and more fairly in each area of the country, removing the barriers to work.

So the flexibility that I propose—in employment, in pay, in the liberalisation of capital, labour and product markets, flexibilities important for competitiveness in the global economy and our engagement in Europe—is not bought at the cost of fairness for families but is underwritten by policies for full employment, tackling poverty through tax credits, and more investment in public services.

And these are measures that combine the flexibility, too often undervalued in Europe, that is essential for enterprise with the fairness, too often undervalued in the USA, that is essential for social cohesion: it makes Britain a leader for those who see enterprise and fairness advancing together.

It is because from 1997 we took decisions to freeze spending; to cut debt; to use the spectrum auction to repay even more debt; and it is because we have cut unemployment and debt interest payments that we have been able to raise public expenditure on health, education and our anti-poverty programmes. We have been able to meet the additional commitments on employment, industry and support for families that I am announcing today. And yet at every stage of the economic cycle and including in the cautious case we have been able to meet all our fiscal rules.

Let me provide the detailed figures.

Figures for our current Budget for last year, 2002–03, and for the five years to 2007–08 are minus 12 billion, minus 8 billion, minus 1 billion, plus 2 billion, plus 6 billion and plus 9 billion.

So we meet our golden rule over the cycle. We will not only achieve a balance—[Interruption.] That is the golden rule over the cycle. We will not only achieve a balance but achieve an estimated surplus at £32 billion, showing that it is right and prudent to borrow at this, the right time in the economic cycle. And adjusted for the cycle we meet the golden rule this year and we meet it every year to 2006.

Our second rule—the sustainable investment rule—is that debt should be kept below 40 per cent of national income. Debt this year is actually rising to 42 per cent in France, 46 per cent in the USA—[Interruption.] The wrong country, Mr. Deputy Speaker. It is rising to 49 per cent in Germany, 55 per cent in the euro area, 76 per cent in Japan, but I can tell the House that in Britain debt this year and in future years will be at 32.2, 32.7, 33.2, 33.5 and 33.8 per cent, comfortably meeting our sustainable investment rule, doing so over the cycle and in every year.

We are within the Maastricht criteria on deficits and debt and, as planned, I will present the Government's statement on the assessment on the euro by the first week of June.

The House will have before it all 18 of our background studies as well as our assessment of the five economic tests.

It is because of the tough decisions that have led to the low debt that I have just described that I can, in the financial year which has just ended, make the full £3 billion allocation to the costs of military action in Iraq, contribute to humanitarian aid and improved national security at home, and with borrowing at £24 billions, 2.3 per cent of GDP, still have a debt ratio this year as low as 30.9 per cent, the lowest debt GDP ratio of all our major competitors. And we have not been, and will not be, diverted from increasing investment in our health and public services at a faster rate than in any post-war period.

Indeed, compared with a deficit of 8 per cent. of GDP 10 years ago, and an average of 6 per cent over the early nineties, the figures for net borrowing for this year and future years are just 2.5, 2.1, 1.9, 1.7 and 1.6 per cent.

Net borrowing for this year and future years is therefore £27 billion, £24 billion, £23 billion, £22 billion and £22 billion.

Cyclically adjusted net borrowing, which is forecast this year at 2.5 per cent in America, higher at 2.6 per cent in France, 2.3 per cent in Germany, and 7 per cent in Japan, is in Britain just 1.7 per cent last year and this year, and in future years 1.5, 1.5, 1.7, 1.7 and 1.6 per cent of GDP.

With these figures showing that we meet both fiscal rules comfortably, I can therefore confirm to the House all the decisions of our spending review: by 2006 over £1 billion more a year for housing; £5 billion more a year for transport; £15 billion a year more for education; £40 billion more a year by 2008 for health; in total, by 2006, £61 billion more a year for public services. And at the same time, I can build in extra caution for future years by prudently setting aside new resources in the reserve margin for annually managed expenditure, showing that Britain can combine economic stability and rising employment with faster rising investment in hospitals and schools than in all other major countries—Britain showing that economic strength and social justice can advance together.

As we now plan the coming spending review, I want to make announcements about the next steps forward that we propose to take. Both economic strength and social justice are advanced when parents can balance work and family life and are able to make real and effective choices. So we have asked the spending review to examine the future of child care and family-friendly policies, and I propose a dialogue with family and parent groups and voluntary associations. For the first time from this month, 5 million families with incomes below £58,000 a year will receive the new child tax credit, with most receiving £26.45 for the first child, rising to £54 a week for the poorest. This is the best and fairest support for our nation's children in our nation's history and, together with record investment in our schools, the best investment in our nation's future.

We are on track to meet our 2004 target for a 25 per cent. reduction in child poverty. And for the next Budget and the next spending review, I have asked for a report on both the public service and welfare reforms we need to reach our goal of a 50 per cent. cut in child poverty by 2010, on the road to abolishing child poverty in a generation. In preparing the coming spending review, we also propose that work be taken forward with Britain's charitable, voluntary and community organisations, so that they can play a fuller part in renewing the social fabric of our local communities. The review will also encompass challenges too long neglected: helping children at risk, led by the Chief Secretary; and also tackling domestic violence, on which the Home Secretary will issue a consultation document shortly.

The pre-Budget report announced our support in principle for the creation of a gap year volunteer corps, supporting financially low income school leavers who give a year of their time to community service. I can announce that, so strong is the interest from the voluntary sector, the Home Secretary is announcing that the first pilot for the new volunteer corps will start next month. To back up free entry to the main national museums and galleries which has raised admissions by 70 per cent., with 5 million more visitors, I now propose to review the incentives, reliefs and exemptions available to help national and regional museums and galleries to make acquisitions of works of art and culture, which should not be lost to the nation but, instead, should be accessible to the people of Britain.

The Secretary of State for Work and Pensions will report on the consultation on the pensions review and our proposed tax reforms shortly. The next spending review will also seek to maximise regional and local discretion in service delivery, matching national standards with local performance standards, reduced ring fencing, greater transparency, more timely performance data—overall greater freedoms and flexibilities for local authorities and other education, health, and social service providers.

The modernisation of the welfare state is not just about improving income and services, but about ensuring that all have a stake in the wealth of the nation. A child trust fund, established for each child at birth, endowed during their childhood years and available at age 18—to which Britain as a nation contributes—expresses our shared belief that in our country every child should have the best possible start in life. So I can tell the House that for every child born from today, we will establish in their name a child trust fund. Seven hundred thousand children are born every year, and we will fund from this year and every year in future, for each new-born child, an initial endowment of at least £250—£500 for the poorest one third of children—a reform which is progressive and universal, benefiting every child and with more to those who need help most. And we will report shortly on the proposal that during primary and secondary school years, each child receive additional payments into their child trust fund. Parents and grandparents will also be able to contribute to the fund.

The child trust fund symbolises the difference between those who believe in modernising the welfare state and those who wish it to wither away. At age 18, on the basis of historic rates of return, the child trust fund will accumulate assets that will enable all young people to have more of the choices that were once available only to some. This shows what we mean by putting power, wealth and opportunity in the hands of the many and not the few. So that every child in the same class at school will, in future, have a trust fund, I will align the payments to school years and backdate these initial endowments to September last year, so that every child born since September 2002 will have their own child trust fund.

Our country faces a great challenge—to overcome inequalities of income and wealth and to build a Britain that is not just a property owning democracy but a wealth-owning, asset-owning democracy open to all. And today's announcement is the foundation on which the Government will build in future Budgets and spending reviews. None of this would be possible if we listened to representations to cut public spending by 20 per cent.

There is no section of our society who have contributed more to our national health service and who now depend on it more than Britain's elderly. We have always believed in a national health service free at the point of need. It is a commitment to which this Government, while in power, will hold steadfast. But there is an unfairness which undermines that commitment and which has unfortunately existed since 1948 when the NHS was first created. Thousands of pensioners in hospitals are effectively charged a payment, with, from six weeks, cash deducted from their weekly pension to pay for meals and accommodation. It is a hotel charge imposed on one of the most vulnerable groups in society. For everyone else in our country, other than those on pensions and benefits, hospital care is entirely free of charge. It is therefore wrong that the elderly, who have saved all their working lives for their retirement through their national insurance contributions, should now suffer the reduction of their pension entitlement to pay for hospital care. So for pensioners, even if they stay in hospital for up to a whole year, I am today announcing that we will abolish this charge. The charge will be abolished with immediate effect for pensioners going into hospital from today. To those opposite who have advocated vouchers, fees, or new health charges for medical services or basic accommodation, this is the Government's answer: we have not only rejected those charges but are abolishing hospital accommodation charges, not just for pensioners, but for all who have charges imposed on them through the social security system.

I have one further announcement to make. Starting next month, we will be writing to every pensioner in Britain, telling them that from October all single pensioners with income below £139 a week and all pensioner couples with total income below £203 a week—that is, the millions of pensioners in our country who have modest savings and modest works pensions—stand to benefit from our new pension credit. In total, in the typical constituency of hon. Members, 7,000 pensioners. Many couples will benefit by £20 a week, and many single pensioners by up to £15 a week. The average additional payment will be £7 a week extra for single pensioners on the credit, and £9 extra a week for couples on the credit.

At the age of 80, pensioners receive an addition of just 25p a week to cover the costs that getting older involves. At just 25p extra per week, it has rightly been criticised as inadequate, and I have had many representations from MPs on all sides of the House. To double or quadruple such a small allowance would not be a sufficient recognition of the needs of the very elderly over 80, or of the contribution that they have made to the life of our country and its success. The winter fuel payment of £200 has not, I regret, been supported by all parties in this House. But I hope that there will now be all-party support for my proposal that for every household where a pensioner reaches the age of 80, or is over 80, we will add to the winter allowance of £200 an extra payment of £100—a total of £300 that will be paid each and every year to almost 2 million elderly men and women over 80.

A Budget meeting our responsibilities abroad and at home; steadfast for stability, enterprise and full employment; tackling inequality; building an NHS free at the point of need. A Britain of economic strength and social justice. I commend this Budget to the House.

Provisional, Collection Of Taxes

Motion made, and Question,

That, pursuant to section 5 of the Provisional Collection of Taxes Act 1968, provisional statutory effect shall be given to the following motions:—

  • (a) Rates of tobacco products duty (motion No. 2);
  • (b) Rate of duty on beer (motion No. 3);
  • (c) Rate of duty on wine and made-wine (motion No. 4);
  • (d) Hydrocarbon oil duties (rebates) (motion No. 6);
  • (e) Vehicle excise duty (tractive units) (motion No. 12);
  • (f) Value added tax (requirement of evidence or security) (motion No. 13);
  • (g) Joint and several liability for unpaid VAT of another trader (motion No. 14);
  • (h) Value added tax (face-value vouchers) (motion No. 15);
  • (i) Employment income (provision of services through intermediary) (motion No. 28);
  • (j) Personal pension schemes (limits on contributions) (motion No. 45).—[Mr. Gordon Brown.]
  • put forthwith, pursuant to Standing Order No. 51 (Ways and means motions), and agreed to.

    Budget Resolutions

    Amendment Of The Law

    Motion made, and Question proposed,

    (1) That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance.

    (2) This Resolution does not extend to the making of any amendment with respect to value added tax so as to provide—

  • (a) for zero-rating or exempting a supply, acquisition or importation;
  • (b) for refunding an amount of tax;
  • (c) for any relief, other than a relief that—
  • (i) so far as it is applicable to goods, applies to goods of every description, and
  • (ii) so far as it is applicable to services, applies to services of every description.—[Mr. Gorden Brown.]
  • 1.32 pm

    On behalf of the House, I start by congratulating the Chancellor of the Exchequer and his wife, Sarah, on their happy announcement this weekend. I can assure him that children are a great blessing despite some of the trials.

    I welcome some of the measures in the right hon. Gentleman's Budget, particularly those to counter terrorism and to combat world poverty and poor education in deprived areas. We shall certainly give them welcome and support in as far as we possibly can.

    During the past six years we have come to learn that the Chancellor's Budget speeches are characterised as much by what they conceal as by what they disclose. The right hon. Gentleman has made it clear that he prefers to let the damaging detail—the fine print—leak out over the days and weeks that follow, his Budgets. Today, despite all the Chancellor's bombast and bravado, we learned a great deal.

    We learned that the Chancellor has got his forecasts wrong again, we learned from the Red Book that his borrowing is up again, and we learned that taxes are up and will stay up. From this week, a typical family will be another £568 a year worse off. We also learned that the Chancellor has no intention of being candid with the House or with the British people.

    Let us consider some of the figures that have been announced already in the Chancellor's Red Book. On page 235, we see that the savings ratio this year is forecast to be even lower than it was last year. On page 241, we see that manufacturing output fell last year by 4 per cent., and that the Chancellor's forecast for this year has been slashed as well. On page 238, we see that business investment, forecast last April by the right hon. Gentleman to grow this year by up to 6 per cent., is now forecast to fall. We did not get any of those details from the right hon. Gentleman's speech today. This is a Chancellor who promised us prudence, but has now given us higher borrowing and higher taxes at the same time.

    The Chancellor's message to the British people is clear: higher taxes, which is pain today, and higher borrowing, which is more pain tomorrow. The Chancellor has increased taxes on pay, jobs, homes, home owners, mortgages, marriages, petrol and pensions. The Government are taking an extra £5,500 per household per year. That is an extra £44 per week for every man, woman and child. The Chancellor's great excuse was that this money would make our public services world class. Instead, we have a million people on hospital waiting lists, a crime is committed every five seconds, and thousands of children are leaving school without one GCSE to their name. It is the same old story: more tax, more spend and more waste. That is the sum of the Chancellor's approach.

    That is from the Government who promised:
    "We have no plans to increase tax at all."
    They added:
    "Our proposals do not involve raising taxes."
    They even said:
    "We want people to pay lower taxes."
    Now, 53 tax rises later, when people receive their pay packets this week they will find that their take-home pay has fallen for the first time in 20 years. Now they know what the Chancellor really stands for—promises, promises, promises. Every year he makes them and every year he breaks them.

    Just as he has broken his promises to individuals, so he has broken his promises to business. In 1998, the Chancellor promised major changes to help business. In 1999, he promised tax cuts for business. In 2000, he promised incentives for business. In 2001, he promised more good news for business. Today, he even promised new help for business.

    Today, we also see what the Chancellor's promises are worth. There will be an £8 billion tax on jobs. That is the cost of national insurance, which he has raised. That is hitting business, and it will hit it hard. The British chambers of commerce say that it will hit it so hard that one in five firms will cut jobs directly as a result of the Chancellor's new tax. The Chancellor has been so hard on business that, since 1997, he has taken an extra £47 billion from it in tax. No wonder that the right hon. Gentleman did not tell the House today about the real cost of his policies.

    The Chancellor did not say, for example—although the figures are now clear—that insolvencies are at their worst level for a decade, or that analysts say that 70,000 firms will go bust over the next three years. He did not say that manufacturing has lost 300 jobs every day since Labour has been in power, or that manufacturing output and investment are now lower than when he delivered his first Budget in 1997.

    Just as the Chancellor has broken his promises to business, so he has broken his promises to hard-working families. Since 1997, council tax has increased by 60 per cent., adding more than £400 to a typical bill. Just look at the Red Book—council tax is up by £8 billion since Labour came to power. Stamp duty increases have added £5,000 to the cost of purchasing an average home in the south-east. The abolition of mortgage tax relief has cost home owners £200 a year. The abolition of the married couples' allowance has cost families £300 a year. Higher petrol taxes have cost the average motorist about £300 extra every year. In short, the Government's tax take has risen by more than 50 per cent. since the right hon. Gentleman became the Chancellor.

    Of all those who have been hit by the Chancellor, there is one group that will be hurt more than most. The savers of today are the pensioners of tomorrow. [Interruption.] Labour Members may laugh, but they are laughing at those who are saving for their futures, whom they are damaging. They laugh while the Chancellor is busy blighting those people's old age by damaging their retirement. It is worth reminding all of them who want to laugh that in 1997 he said that he would "encourage personal savings". In 2001, he said that he would
    "reward savers, pensioners and hard-working families".—[Official Report, 7 March 2001; Vol. 364, c. 307.]
    Again today, he gave us all the same guff that he usually gives about helping them—promises, promises, promises, but under him savings have halved.

    When Labour took office in 1997, the savings ratio was 10 per cent. Today, it has fallen to 4¾ per cent. It is all there in the Red Book. The Chancellor is destroying savings, and his so-called pension reforms include a pension tax, worth £5 billion a year, which has hit every single future pensioner. He has also created a pensions crisis. Someone retiring today will retire on half the income that they would have retired on in 1997. He should apologise to all those people whose lives he has damaged.

    The Chancellor has not only let down those who wish to retire in the future. He is the man who promised the end to the means test for pensioners, but, under him, the proportion of pensioner households subject to a means test has risen by 50 per cent. Every single one will remember his words. Today, after two years and three consultations, reannouncements and re-reannouncements, the Chancellor decided to announce his child trust fund again. We have more overcomplicated proposals that will do little to help future long-term saving, but they will extend means-testing to even more people. There is only one thing to say about this little scheme of the Chancellor's—[Interruption.]
    —if the Home Secretary will keep quiet for a second: all the money that the Chancellor is offering to those children will have to go towards paying their tuition fees or their top-up fees.

    I come now to the financial impact of the war with Iraq. We support the Government in their waging of this war, and we naturally support its full and proper funding, so, as I said earlier, and I repeat, we welcome the extra money that the Chancellor has announced today. But he should be warned; he cannot get away with using the war to get him off the hook for his long-term mismanagement of the economy. Nor can he get away with blaming Europe for all his problems. He just cannot blame all his flawed forecasts on world events.

    Last April, the Chancellor delivered his forecasts to the House for the corning year, and he got them wrong. He got his forecasts for growth wrong. He got his forecasts for tax revenues wrong. He got his forecasts for borrowing wrong. So, in November, he admitted that his central growth forecast for 2002—2¼ per cent.—was wrong. He conceded that tax revenues had failed to meet his projections, and he announced that borrowing would have to rise by £20 billion in just two years. Then, he went on to blame all that on the fact that world trade and world gross domestic product growth had not been as fast as he had forecast.

    The Chancellor's excuse, in other words, was not that he had failed Britain, but that the world had failed him. That is a serious charge to make, so I went back to last year's Red Book to check how those figures stack up. We find that when he delivered his pre-Budget report in November, the only forecasts that he got right were those for world trade and world growth. He blames the world, not himself, for getting it wrong, and we heard it again today, although he sits there grimacing. He blamed the world one more time: it is the world's fault that growth is running in such a way.

    The Chancellor wants us to believe that the world economy has experienced the most rapid slowdown for 30 years. In the early 1990s, we had three years of world growth averaging just 1 per cent. Last year, according to the European Commission report, in which he places so much credit, world growth was 2.9 per cent. This year, the same group forecasts growth of 3.2 per cent. So, the Chancellor is inventing a series of problems that do not exist.

    Today, the Chancellor has to admit one more time that he got his growth forecasts wrong again. They are down by 0.5 per cent., so they are wrong and his assumptions on tax revenues are wrong as well. The result is that his borrowing projections are also wrong. He sprinted through his borrowing figures, so let me recap. Last April, he predicted that he would have to borrow £13 billion this financial year. Today, he admitted that he would have to borrow £27 billion. That takes us only to the end of the financial year.

    Just two Budgets ago, the Chancellor told the House that he would need to borrow £35 billion between 2002 and 2006. Today, he admitted that the true figure for borrowing over the period is not £35 billion, but £98 billion. In just two years, his medium-term borrowing requirement has risen by £63 billion. That is not just invented money; it amounts to £2,600 extra for every single household in Britain. He cannot borrow indefinitely, however. Surely even he, with his fiddled figures, understands that. More and more borrowing will mean higher and higher taxes.

    Independent forecasters have long been warning the Chancellor that he was being far too optimistic. They questioned his revised predictions. Some called them "overly optimistic" and "rose tinted". We know what the independent experts think now: 78 per cent. think that by 2006 the Chancellor will have to raise taxes by between £5 billion and £8 billion, and those are the experts who sit on his own Treasury panel, although we do not hear any of that from the Chancellor.

    The point is that the Chancellor's broken promises and missed forecasts might have been palatable if we were seeing real reform of our public services, but the facts speak for themselves. Take health: 1 million people are on NHS waiting lists, hospital admissions are down, not up, and last year 300,000 people were forced to pay for their own operations—a figure that has trebled since 1997.

    On education, 50,000 children play truant every day, one in four leaves primary school unable to read, write or count properly, and every year more than 30,000 children leave school without a single qualification. This Government have tested to destruction the theory that more and more money alone can transform our public services. They have talked about reform, but delivered none. Six years of spin and spending cannot hide the fact that our public services are just not good enough. They need not simply more money, which is the Chancellor's prescription, but a new approach altogether. Our public services need an approach based on giving power back to people so that they are in control of their own lives, whether they are nurses, doctors, teachers, patients or parents.

    The Chancellor has delivered his seventh Budget: six years, seven speeches and all promises, promises, promises. He promised prudent Budgets, fair Budgets, Budgets for enterprise and Budgets for the public services, but he has not delivered any of it. He has got it wrong, because he puts systems and initiatives, targets and schemes, in which he has great faith, before real people and real results. He has got it wrong because he thinks that he knows better than the British people how they should be living their lives. He has also got it wrong because he is driven not by the facts, which are staring him in the face, but by an ideology that has gripped him and will not let go. His sole mission in this Parliament is to prove that the old ways still work—never mind the evidence, never mind the consequences, just more failing policies and more downgraded forecasts from a discredited Chancellor.

    Last week, before it was too late, the Chancellor could have scrapped his tax on jobs and pay. He could have stopped punishing people who work hard and save hard. Today, he could have delivered security and independence for the young, for the old, for hard-working families and individuals, for those who create jobs and those who need them, for those who pay for public services and those who rely on them. He could have delivered a fair deal for all those people, but he did not and he never will. It is the British people who will pay the price: more taxes, more spending and public services that simply are not good enough. The message of the Budget is clear for the British people—it is pain today from the Chancellor and, as borrowing spirals and he blocks any real reform, more pain tomorrow.

    1.51 pm

    I begin by extending my personal congratulations to the Chancellor and to his wife Sarah and wish them good luck. Their news is very good indeed.

    This has been an example of not only a buck-passing Budget but a cross your fingers and hope for the best Budget. That is the reality of what the Chancellor has been up to. When we look at all the problems that we all encounter as constituency MPs, the jobs that are being lost and the sectors of the economy that are in difficulty, not least manufacturing, there is a sense of denial in the Chancellor's amazing account of how every indicator puts us well ahead of the pack internationally. He should stop blaming the rest of the world and feel chastened this year, because the British people are paying the price for mistakes and they deserve more than excuses. The current problems are not simply due to the inevitable downturn that has taken place in the world economy, because the British economy has been doing significantly worse than those of many of our principal competitors. That is proved by some key facts.

    Business investment has fallen at record rates. In 2002 it fell faster than in any major economy, unless one counts Iceland as a major economy. All the other countries have faced the same economic downturn as we have, but all are investing more than the UK in their long-term recovery. One cannot pay for the future if one does not invest now. That has to be a central criticism of the Chancellor's approach.

    Manufacturing employment has fallen by more than 500,000 since 1997. Manufacturing has been in the longest recession since the second world war and output has fallen in seven of the past eight quarters. The Chancellor is now presiding over the biggest deficit and lowest growth rate since the Conservative Government lost office.

    The Chancellor has announced some measures that may help, not least the reductions in red tape and bureaucracy for the business sector. We have all had serious and sustained representations to that effect. We welcome those proposals and will obviously study them in detail as the Finance Bill progresses. We certainly want to see greater simplification in tax. This is the Chancellor's seventh Budget and, as in each of the other six, more and more complication and detail is being built into the system as he unveils the various schemes and initiatives. That will have to be examined carefully, too.

    As a country, we should be doing more to prepare our way for entry into the euro. We certainly look forward with considerable interest to the statement at the beginning of June to see whether white smoke emanates from No. 10 or No. 11, depending on what is going to happen—

    Indeed.

    The Chancellor is right to press ahead with his spending plans, which, as he knows, we support. We were critical of the Government in the earlier years for not investing more sooner. There is much to be done and no time to waste. It is sound to borrow more when there is a downturn, so long as the economy remains in balance over an entire economic cycle. On that, we are with the Government in the broad parameters. We certainly reject the Conservative alternative, whatever it proves to be. It is difficult to have a debate with the Conservatives at the moment because we do not know the basis for their plans.

    The Government's pension credit comes in this autumn. It may be well intentioned but it is something of a bureaucratic nightmare. It is estimated that 1 million older people who are eligible will end up not claiming. That is not good enough. It would be better to scrap that and rely instead on a £5 increase in the basic pension, plus big increases in the age additions: £10 for the over-75s and £15 more for the over-80s. All the indicators demonstrate that the poorest pensioners are inevitably the oldest pensioners. That is where we should be front-loading our support with a view to the future.

    What about council tax rises? It is now estimated, on the basis of figures that have come out today, that this year the overall increase in council tax that families pay will be £2 billion. That is a gigantic increase to spread across the economy at a time like this.

    Can the right hon. Gentleman confirm that the cost of getting rid of council tax would, on average, be a 3 per cent. rise in income tax—at least that is what it says in an internal Liberal Democrat document that has come into my hands? Will he refute the section of that document that says:

    "However, we don't want to be drawn extensively into this"?

    My answer is that what we have proposed at the time of this Budget is—[Interruption.] I will answer the point directly. It was a fair question and I will give a fair and full answer. We are proposing for this Budget that our priority would be for the top rate of tax to go from 40p to 50p for every pound earned above £100,000 per year. That would generate—these are the official figures—£4.5 billion, which one could put into the economy as a whole. What could one do with that money? One could do a number of socially progressive things. First and foremost, one could introduce a flat-rate reduction of £100 for each and every council tax payer in the country. That is a fairer, more egalitarian approach. With the additional resources, one could also, as we have already achieved in Scotland, abolish tuition fees and not go down the route of introducing top-up fees.

    The best of those costed policies contributes that bit more. After all, that group of earners constitutes only 1 per cent. of the tax-paying public. One could have a fairer system of local government funding and greater student opportunity than we have at the moment. Those will find a positive echo with people between now and 1 May.

    The right hon. Gentleman mentions tuition fees in Scotland, but he knows as well as I that tuition fees are delayed in Scotland. Indeed, in my household this week, we had a notice for the tuition fees for two years' education for my youngest son, so let the right hon. Gentleman talk on the real planet.

    I do not agree with the hon. Gentleman's interpretation of the policy to which his own party has been a signatory in Scotland. If this is the argument that the Labour party in the House of Commons is advancing, I suggest that the hon. Gentleman have a word with someone called Jack McConnell, because that is certainly not what he is arguing in Scotland. [Interruption.]

    Order. I hope that the debate can be conducted in a more orderly manner than this.

    I shall try to behave, Mr. Deputy Speaker.

    This is a disappointing Budget on four counts. It is a buck-passing Budget, and it is a Budget that invites unfavourable comparisons with the past and will undermine many people's hopes for the future. People want a more transparent system of fair taxation. They want it to be devoted—properly and efficiently, through more local accountability—to vital public services, and they want less of the smoke and mirrors that has been such a defining feature of the last six years.

    That is the approach taken by the Liberal Democrats. We are willing to confront people with the fact that one cannot get something for nothing in life, and that the days of the apotheosis of Thatcherism are over. The idea that it is possible to reduce taxation steadily while magically delivering improved public services just does not add up. We have continued to present that argument, but the Government have yet to respond to it—and they certainly have not done so adequately in what we have heard today.

    Order. I must inform the House that Budget resolution No. 28, entitled "Employment income (provision of services through intermediary)", is incorrectly printed. The correct version will shortly be available in the Vote Office, and will appear in tomorrow's order of business.

    2.1 pm

    I congratulate the Chancellor on presenting his Budget against a delicate international and national background—a background of which Opposition speeches have made no mention. The real problem internationally is a weakening of demand in both the United States and Asia. We are mindful of the fact that the US has been the leading world economy since the early 1990s, but already the labour market statistics for February and March show a big fall in not just employment but consumer confidence and industrial output expectations. As for Asia, a severe lack of confidence has been caused by both the stand-off with North Korea and the severe acute respiratory syndrome affecting Hong Kong and other areas.

    As the Chancellor suggested, the background in Europe is sclerotic. Europe is lagging behind Japan for the second year running, Germany has the worst unemployment on record, and the economic reforms required by the Lisbon agenda have made little progress. In the eurozone, economic growth rates are now down to 1 per cent. There is cause for alarm, because the eurozone is the largest market for the United Kingdom: 60 per cent. of our manufacturing exports go to those countries, and just over 40 per cent. of our total trade is with Europe. The European Union forecasts a fall in eurozone growth from 1.7 to 1 per cent., which would reduce gross domestic product in the United Kingdom by a quarter of 1 per cent. and add £2 billion or £3 billion to next year's public sector net borrowing.

    There are also a number of domestic threats. Retail sales have been weakening, and are now at their weakest for 10 years. Industrial investment is nearing a 20-year low, and the finance industry is still recovering from the dotcom crash famously described by Alan Greenspan as "infectious greed".

    That, however, must be balanced against the macroeconomic essentials, which are sound: the UK has the lowest inflation for 50 years and the lowest interest rates. It is also comforting that we have the lowest unemployment among the G7 countries. It is forecast that next year the United Kingdom will be the top country, possibly overtaking America.

    Notwithstanding the criticisms levelled at the Government, this is the time for fiscal loosening. There is a sound economic case for extra borrowing when the risks are all on the downside. When interest rates are low, inflationary pressures are almost non-existent and the national debt is, as the Chancellor pointed out, very modest, we do not want the imposition of a fiscal straitjacket on a cyclically depressed economy. We need the Budget deficit announced by the Chancellor for investment, and for general support for the economy. Let us take advantage of automatic stabilisers, which ensure that borrowing takes the strain when the economy weakens and we need not raise taxes or cut public spending. The Chancellor has remained faithful to that idea.

    There are a number of things about which we can be optimistic. We have cheap money, and we have the lowest interest rates. Interest rates are negative in the United States, and barely positive in the eurozone and the UK. We have cheaper oil. One positive aspect of the conflict over the past few weeks—not much is positive in terms of damage and injuries—is the fact that the oil price has not zoomed up. I think that its highest level has been about $30 a barrel. The link between oil and GDP, and economic growth, is important.

    My hon. Friend has mentioned investment. Is there not a case for additional borrowing for investment in infrastructure, especially housing and transport infrastructure, to help get the economy moving? Is my hon. Friend disappointed that the Chancellor did not do more in that direction, and also omitted to make capital available in lieu of private finance initiative credits in order to speed capital expenditure?

    I agree that it is important for us to stick to our public spending targets, but, as I have said, the international background is fragile. In the last Budget we committed ourselves to an extra £61 billion of public expenditure. If we can spend all that, and spend it wisely, we will do a service. I think the civil service has yet to learn how to spend it: I believe that the undershoot this year is about £2 billion. I want the measures on public services to be implemented, but they must be realistic given the background.

    In the last 11 months of the financial year, total central Government receipts were 1.5 per cent. higher than in the corresponding months last year. That is less than the 2.2 per cent. increase implied in the pre-Budget report, and well below the 4.2 per cent. anticipated in the April 2002 Budget. In the context of the medium-term financial forecasts, we are not meeting the targets that we have set ourselves in a number of areas, which is worrying. Corporation tax forecasts have been cut on three consecutive occasions, but the Treasury is confident that its forecasts are correct. I hope that in this instance they are.

    Martin Weale of the National Institute of Economic and Social Research has said:
    "My worry is not about deficits in the short term. The problems arise in two or three years' time".
    Although I accept what the Chancellor said: namely that, over the Treasury's estimated economic cycle from 1999 to 2005, there will be a £46 billion surplus, serious questions about our borrowing and our commitments to public expenditure will have to be answered at the end of that economic cycle.

    The Chancellor mentioned productivity. We are still disappointed about that. In the next few months, my Committee will look at productivity. Every year since 1996, productivity has increased by 1.25 per cent., compared with the historical average of 2.25 per cent. The latest Bank of England inflation report states:
    "The growth of labour productivity per person has been below its long-run average".
    In its annual assessment, the International Monetary Fund states:
    "Raising productivity remains a key challenge".
    We are well behind the United States in output per worker—some 45 per cent. behind. Even if we factor out the longer hours worked in the US, there remains an output gap of 25 per cent., and we are still below France and Germany. That is the big issue. Those countries have sclerotic growth, yet their productivity remains higher. We have yet to crack that issue in this country.

    The hon. Gentleman mentioned tuition fees and, by implication, top-up fees. Given that, as we know, education makes a big difference to productivity, and given that the Welsh Liberal Democrats—should they get back in government in Wales—will promise to try to abolish tuition fees and not to introduce top-up fees, what advice would the hon. Gentleman give to his Labour colleagues in the Welsh Assembly? Would he advise them to seek a partnership with the Liberal Democrats in order to find that solution?

    If I spoke to my Labour colleagues in Wales, they would tell me to take with a pinch of salt anything that the Liberal Democrats in Wales say about that. However, we are at one on productivity. My intervention on the leader of the Liberal Democrats was for the sake of honesty and clarity, which are important in terms of economic issues.

    It is argued that education improves productivity, but is it not a fact that productivity in India and China is even better than ours in some respects, despite our level of education?

    Yes, but I accept the basic point that education and skills are extremely important. One reason given for the disappointing productivity results is that an extra 1.5 million people have been employed in this country since 1997. Generally speaking, such people have less skills and no work ethic, so it is a matter of training them. Raising productivity is a long-term objective, not a short-term one.

    Has the hon. Gentleman noticed the terrible trend of productivity in the public services? We have put 25 per cent. more real resources into the health service, and got nothing more out. Is not the core of the problem the fact that too much is going into public services without getting the benefits?

    I cannot accept what the right hon. Gentleman says on face value, without looking into the figures; however, the biggest growth has occurred in the public services. In terms of investment in the past year in the general international environment, where the economy is in decline, jobs in the public services have been very important. I agree with the right hon. Gentleman that there are reasons for concern in the public services, wage costs being an example. Last year, wage costs in the public services were 5 per cent., whereas in the private sector they were 3.5 per cent. So there are issues that we need to address, and I think that we can have an intelligent debate on them across the divide.

    It has become clear in recent minutes that the stance of the leader of the Liberal Democrats is that, on receiving a bill, he will in each case simply say that he disagrees with the interpretation of it. On the subject of the euro, and given the Government's clear, if mistaken, commitment in principle to joining the single currency, is the position of the hon. Gentleman that this country should do so at exchange rate mechanism mid-rates?

    The hon. Gentleman anticipates my speech—I shall come to that point in due time. In any event, he is too disparaging of the leader of the Liberal Democrats. The right hon. Member for Ross, Skye and Inverness, West (Mr. Kennedy) and I have been friends for many years, and I respect his integrity. His politics are wonky, but he is a good guy.

    The Chancellor has come up with productivity-related initiatives every year since 1997. He has focused on competition, capital gains, tax credits for research and development, raising corporation tax and dividend payments, and on skills training. In addition, new enterprise legislation will be enacted in June. However, we still have a long way to go on productivity, and I give the Chancellor and the Treasury notice that my Committee will be looking at this issue.

    The National Institute of Economic and Social Research has suggested that we try something new by joining the euro. It suggests that removing the exchange rate and interest rate volatility through the eurozone could, in the long run, raise UK capital stock by 10 per cent., adding 4 per cent. to the gross domestic product. In addition, trade competition would help productivity.

    That leads me to the wider aspect of the euro. Throughout the Chancellor's speech, references were made to labour market flexibility, convergence and other related issues. The decision that the Government must take before the first week in June will be extremely important. During the past three months, my Committee has taken evidence on the UK and the euro; in fact, we have had two evidence sessions every week since the beginning of January. I think that ours is the only body in the country that is making such a fundamental examination of the UK and the euro. To date, the debate in the country has been superficial, irrelevant to people's lives and largely arcane. Ask any member of the public —or even of the Government—to name the five tests, and one would struggle to get the answer; in fact, the question would probably be met with a blank look.

    The Chancellor says that the economic case must be "clear and unambiguous", but can that be the case? During our Committee hearing, I asked the Chancellor whether he had ever met an economist who thought that any such case was clear and unambiguous, but he declined to answer. In my view, a clear and unambiguous case cannot be made. People will not be convinced by the Chancellor or his advisers' saying that the economic tests have been met, so we are going in. All that can be made in respect of the economic tests is an economic judgment, but the real judgment is political.

    I applaud the Chancellor for the thoroughness with which he has approached this economic analysis. The history of sterling through the 20th century, as far back as 1924, when we re-joined the gold standard, shows that there was no such economic analysis. The history books show that when Winston Churchill was sitting at the table in No. 10 Downing street with Montagu Norman, the then Governor of the Bank of England, he was offered a cursory appreciation of what was happening. He then turned to Montague Norman and said, "Well, will we go in, Montagu?" Montagu replied "Yes". We were back in the gold standard, and disaster followed as a result. So we must have a thorough economic analysis.

    I agree very much with the hon. Gentleman's approach, but does he accept that, even in an economic sense, common sense tells us that, with 10 new members about to join the EU, all of which are committed to joining the euro, both British and foreign investors are likely to consider the idea of investing in low-cost areas inside the eurozone more attractive than risking investing in the UK, given that there is no clear idea of whether we will be in or out?

    Inward investment and the window of opportunity are very important issues, and our Committee has heard witnesses from the UK and elsewhere in Europe comment on them. Our debates and inquiries to date show that Europe is a complex issue, not a simple one, and that the economic case cannot be clear and unambiguous. The Government could put their best judgment, in economic terms, on the line; then, the decision will be a political one. Hopefully, our report will indicate the complexity of the argument and point out to people that there are dangers if we go in and dangers if we stay out; there are arguments on both sides. We want to establish the core issues, and inward investment is one of them for people such as the hon. Member for Gordon (Malcolm Bruce), who is on the pro-side. However, there are other core issues, such as interest rates and the one-size-fits-all approach, for those on the anti-side.

    Does my hon. Friend agree that if the previous Conservative Government had set five economic tests before joining the exchange rate mechanism, they might have made a better job of it?

    That comment stands for itself and I have no need to add to it. We can pay a heavy price for the absence of proper economic analysis.

    The tests and the core issues are important. If I were to read out all the tests, it would bore us all, but they point to the importance of certain issues—for example, on convergence, whether the business cycles and economic structures are compatible so that we can live comfortably with euro interest rates. Is our economy similar to the economies in economic and monetary union? Does it have the same underlying behaviour, and does it move in harmony with them?

    One of the issues that the Chancellor tackled was the housing market. We are told that the UK housing market is vastly different from that in the rest of Europe, particularly in respect of the variable-interest mortgages in this country. The Chancellor will assess whether fixed-interest mortgage rates would help to bring about greater stability in this country and also whether that would be beneficial if we decided to join the euro at a later date.

    The second test is flexibility: how rapidly prices and wages adjust to changes in demand, particularly in view of our one-size-fits-all interest rates. I accept that there could be dangers in that, and that our current macro-economic model—with the Bank of England and the Monetary Policy Committee—is good. Opponents of the euro will be asking the serious question of whether we should trade in the superior model of the Monetary Policy Committee for the inferior model of the European Central Bank. That is a big issue.

    The third test is whether euro membership will improve conditions for long-term investment. That is hotly debated. As an observer, I believe that business does not like risks and joining might mean fewer risks.

    The fourth aspect is the competitive position of the UK financial services industry. I believe that, irrespective of where it is based, it will prosper because it is twice the size of anything else in Europe—Frankfurt is the next largest. Some people ask why the test involves the state of our financial services industry, rather than manufacturing or other industries. It is not the most important test, but I am sure that it will be passed.

    Lastly, there is a catch-all question that summarises the others: will our membership promote higher growth, stability and jobs? Will UK investment dry up if we are not in the euro? With the candidate countries joining the eurozone over the next couple of years, what about the window of opportunity to influence the governance of the European Central Bank? What about changing the stability and growth pact? On our visits to Frankfurt, Paris and elsewhere, some people have suggested that it is almost all about stability, and only a little about growth. What we need in the eurozone and elsewhere is growth. The Chancellor's fiscal loosening is important, but it does not apply to the same extent in the rest of Europe due to the stability and growth pact. If we do not join, will we sacrifice our leadership role in Europe?

    I am sorry to intervene twice, but does the hon. Gentleman agree that we have a great opportunity to be proactive partners in business with potential new members? Obviously, I know Estonia particularly well. If we take the strategic approach along the lines that he describes, by being in at the start, we could help our own economy by investing in those developing economies.

    I would like to relate the hon. Gentleman's point to my account of the Treasury Committee's inquiry. We visited the Republic of Ireland, Poland and Hungary, the latter two being among the candidate countries. They see Britain as one of the large countries with a leadership role, they like how we do things and they want to increase business links with us. It is an important issue to go into the main pot for discussion. There is no doubt that the smaller countries look to Britain as a leader.

    One issue that the Chancellor did not much touch on is pensions. The hon. Member for Roxburgh and Berwickshire (Sir A. Kirkwood) and myself are considering the issue, which is a long-term problem that should be examined on a cross-party basis. When interest rates are low and equity markets are tumbling, an enormous gap develops—currently estimated at £85 billion—between the value of UK pension fund assets and liabilities. In some cases, the deficits are almost as large as the company itself. For example, Rolls-Royce has a deficit of £1.12 billion, whereas its market capitalisation is £1.24 billion. That presents a real danger to the firm and to its employees.

    If we want to, we can get involved in the blame game: we can blame the actuaries for an optimistic forecast and for keeping us in equities for too long; we can blame FRS 17, the new accounting practice standard; and we can blame the Government for removing tax reliefs on dividends and for imposing legislation. However, we must sort the problem out on a consensual, cross-party basis. Only this week, I met the chief executive of a major United Kingdom company, who said that the private sector must get more involved in the problem. We see little coming from the private sector, but we really need some initiatives from that direction. As I said, the hon. Member for Roxburgh and Berwickshire and I will work on the problem during the recess.

    One example from the private sector is Sainsbury's, which has a final salary scheme and has increased the contributions of its employees from 4.25 per cent. to 7 per cent.—that amounts to a pay cut. The employees have a choice: they can pay the extra, or stay at the 4.25 per cent. rate and end up with a career average salary pension. Employees and employers have a choice. One of the biggest problems with pensions is that young people up to the age of 35 or 40 simply do not think about them, believing that there is no tomorrow. We have to educate younger people to start saving money at an earlier age.

    I shall say this sotto voce: perhaps the problems will become so considerable that we will have to think about introducing a form of compulsion. I know that the Government do not want to know about that, but it must be on the medium and long-term agenda for the pensions industry. I certainly do not want companies to follow the Boots' route. I have nothing against Boots, but it had a 100 per cent. flight from equities into bonds. When the stock market is fragile, we do not want a further flight from equities, which would make things even more problematic.

    I put the call out today, on a cross-party basis, that we must all—not just the Government, who have not taken it as seriously as they should have—do something about the problem. We all have responsibilities in that respect.

    Is it not vital for the Government to examine more carefully the interaction between state benefits and personal and private pensions? My hon. Friend commends Sainsbury's, but it effectively charged its workers more for a less generous pension. That may not necessarily be wrong, but it is difficult for low-income workers who, if they make contributions only to be penalised by their state benefits, will be little better off. The interaction between the two is vital.

    I do not commend Sainsbury's; I simply highlight it as an example because the company is trying to deal with the problem. The public-private divide has not been adequately debated and we need more clarity on the issue. The Government are attempting to deal with the problem partly through pension credit. My hon. Friend may disagree, but Sainsbury's is making an effort. We have a long way to go on the issue.

    I shall finish by referring to something that the Chancellor mentioned at the beginning of his speech: international development, which he cited as one of the three long-term challenges. I commend the Government for tabling, this Saturday in Washington, a $50 billion international financial facility initiative to deal with the 115 million young people around the developing world who do not have primary education, and also the health needs of people in Africa and elsewhere who are suffering from AIDS, tuberculosis and malaria. Against that background, the real disgrace is the continued protection of farmers by almost the entire developed world. The EU, Japan, and the United States are in the dock.

    On 31 March, the Doha trade agreement on agricultural subsidies collapsed. That followed the collapse of the agreement on pharmaceuticals, which followed the collapse of the trade terms of developing countries. From a multilateral point of view, that is extremely worrying. It is important that we get the WTO on track at the September ministerial meeting in Cancun.

    We must also request early agriculture reforms in the EU. It is vital for the EU to initiate a process of eliminating its export subsidies. The world economy is facing the first synchronised downturn since the 1970s, and we will not achieve the worthy aims of debt relief if that is not resolved. Rich countries are subsidising their agriculture to the tune of £365 billion a year, putting farmers in developing countries out of business and creating a dependence on imports to survive. In the next month, along with one of the development charities, I shall be visiting Zambia to look at development issues. Two million people are going hungry in that country and some 300,000 Africans live on less than 65p a day. We all make a great fuss, rightly, about Comic Relief, which raised £40 million for Africa through its last initiative, yet every day Africa pays more than £26 million in debt repayments. There is something grotesquely wrong in that relationship and I suggest to the Government that debt must be cancelled without preconditions such as trade liberalisation measures. Debt cancellation would release funds to tackle mass poverty and meet the millennium development goals. We must look at what the rich countries are doing because, daily, we are punishing the poorer countries.

    For years I have suggested that the Government work towards the 0.7 per cent. target for international development. I commend the Chancellor and the Secretary of State for International Development for their work in this area. but meeting the target would be hugely symbolic around the world. An additional £50 billion a year could be given to the international community if we met that target, because others would follow. This country contributes and we have all-party support for doing so, but it is against a background of impoverishment of the developing nations.

    Does the hon. Gentleman agree that it is essential that the US ends its block on TRIPS—trade-related aspects of intellectual property rights—reform, so that countries such as Zambia and others in sub-Saharan Africa can get low-cost drugs to address the awful plague of HIV/AIDS?

    I agree entirely, and I mentioned that the Doha round collapsed on the issue of pharmaceuticals. That needs to be revived. We will not make progress against such a background.

    We are kidding ourselves if we feel that what we will put on the table on Saturday will complete our task. It will not, and I know that the Chancellor and others are aware of that. The big issue is the EU subsidies. We must ensure that multilateral organisations are put back on track after the disasters of the past few months. That is extremely important for us all. It is important for us economically, but also for our brothers and sisters in developing countries.

    2.34 pm

    I have declared my interests in the register.

    This Budget takes the breath away in terms of the things that the Chancellor did not admit to and the things that he would not say. This was a Budget by a Chancellor of tax and waste who has perfected the techniques of taxing, taxing and taxing again. He taxes when you are not watching and when you are. He taxes money that many people did not know they had and taxes the money that they desperately need.

    If only the money were being well spent; if only hospitals were suddenly full of beds and waiting lists were suddenly reduced; if only all schools offered places of high quality that parents would wish their children to go to; if only we had a transport system of which we could be proud. If so, some of us might say that although we would not have raised as much tax ourselves, at least we have something worthwhile.

    We know that our transport system is a disgrace by international standards and by the standards of the past in this country. We know that the health service is groaning, with too many managers, middle-ranking executives, spin doctors and others. It does not have enough real doctors and is short of beds by a large margin. We know that our education service is extremely patchy and is still letting down many children in the most deprived areas of the country, as the Government remain wedded to intervening on local government and sending out directives and circulars by the dozen, the hundred and the thousand over its years in office so far.

    The Government still have not learnt that one cannot teach children by circular from Whitehall. They still have not learnt that the system needs the power of better management, better direction and more parental choice, district by district and borough by borough.

    The Budget is also a demonstration that we have a Chancellor of fiddled figures and failed forecasts. He tried to disguise the enormous surge in borrowing that he will impose on the long-suffering taxpayers of this country over the next few years. Had he been more honest and spelt out the figures—as he had to do in the Red Book today—he would have told us that there is to be a £166 billion surge in borrowing between 2001–02 and 2007–08, a relatively short period. My guess is that just as his forecasts last year went lamentably astray, these forecasts are again going to err. The error will be on the side of the Chancellor disguising the true extent of the black hole in his Budget figures, and underestimating the true extent of the borrowing that he will have to incur.

    On the subject of borrowing, does the right hon. Gentleman recall that the total borrowed under the previous Conservative Government surged, to use his word, by £304 billion?

    I remember a policy called the exchange rate mechanism; it was warmly recommended by the Labour and Liberal Democrat parties and was the only consensus economic policy that the Conservatives ever followed. I remember that that caused high borrowing. The hon. Gentleman obviously thinks that high borrowing was a bad thing at that time. I hope that he will join me in condemning the Chancellor's wish to try to emulate that surge in borrowing over the next few years. Just as surely as that borrowing did damage in the early 1990s, so will this borrowing damage our economy today.

    Borrowing is not a cheap or easy option; it is not a cop out. The borrowing all has to be repaid with interest. It means that one pays not just once, but twice, because the law of compound arithmetic is very cruel on those who do the borrowing and need to do the repaying. It is not the Chancellor who will repay all that money, but my constituents and his. Very often it is the poorest of this country who get sandbagged by the Chancellor's taxes.

    By implication, the right hon. Gentleman criticises the Government for not putting more money into public services. Is he for or against an increase in finance for Welsh public services, including free social care, bearing in mind that he gave money back to the Treasury from the Welsh budget when he was Secretary of State for Wales?

    I remember increasing the things that mattered in Wales and keeping open hospitals that others might well have closed. My case is not that I want more spending, but that I want the money properly spent. I do not want it spent on the army of spin doctors, quangos, middle managers, pen-pushers and directive-seekers. I want it spent on nurses, doctors and beds, with some left over so that we have less borrowing and less taxation. What this Government have also got to learn is that the higher the tax, the worse the economy performs. The bigger the increases in taxes, the more businesses are damaged. As the businesses are damaged, the revenues go down and the spending goes up. The Chancellor is in danger of being locked in a vicious cycle. As happened last year, he could discover that his revenues fall short and that his expenditures surge. That is the price and penalty of a bad economic policy.

    The right hon. Gentleman mentioned earlier that there would be some money left over. The hon. Member for Arundel and South Downs (Mr. Flight) has suggested that that might be as much as 20 per cent. Does the right hon. Gentleman agree with that figure? If not, what figure would he supply?

    I seem to remember my hon. Friend the Member for Arundel and South Downs (Mr. Flight) saying that elements of the overhead could be cut by 20 per cent. I thought that that was a very modest estimate of what could be done. I should like to cut 100 per cent. of the overhead of regional government in England. On cue, my right hon. Friend the Member for Haltemprice and Howden (David Davis) has arrived in the Chamber. He knows about these matters, and I wish him every success in his campaign.

    We want regional government to be taken from the map of England. I do not want England balkanised, and I do not want the bill for balkanisation sent to me. I want to be represented locally by councillors in a unitary council—as I am now—and I want to be represented nationally through the high court of Parliament. I believe that there should be direct communication between the leaders of major councils and Ministers, and between senior council officers and officials in Whitehall. There is no need for the hundreds and thousands of people in regional offices tucked away in towns and cities. Many people have never even heard of them, but they cost us far too much money.

    I am afraid that the hon. Member for Edmonton (Mr. Love) walked right into a massive trap, because 20 per cent. off the overhead is not enough. That proposal shows the modesty of my hon. Friend the Member for Arundel and South Downs and my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard), the shadow Chancellor, who supervises such matters. I would urge them to be even bolder, and to identify those overheads where we can sweep the whole lot away. However, the hon. Gentleman is leading me down tempting paths not central to my case today.

    The Chancellor is also the Chancellor of boom and bust. It was interesting to note that he did not even have the gall today to mention boom and bust. This is a Chancellor with a record, who now stands arraigned in the high court of Parliament for having created too many busts after all those booms. He is a man who knows all too much about the bust.

    We have only to look at what has happened to the stock market under this Chancellor. It soared in the first three years. Why? It was because the Chancellor stuck to Conservative economic plans—lower taxes and lighter regulation. What has happened to the stock market since the Chancellor's policies were truly unrolled? Of course, it plunged.

    Labour Members are giggling away, and they would probably ask whether I had noticed that other stock markets around the world had fallen as well. I have noticed that, but the London market fell further and faster and harder than many of its competitor stock markets. The difference in the rate and extent of the fall is the price of the Chancellor.

    I appreciate the right hon. Gentleman giving way a second time. It is kind of him, but I think that I should correct his view of stock markets. The UK stock market is down 44 per cent. from its high point, but the French market is down 58 per cent., the German 65 per cent. and the Japanese 61 per cent. The right hon. Gentleman is not right.

    The problem with the hon. Gentleman's figures is that he is not taking the right time periods or markets. If he compares London with New York, he will see that my case is entirely made—that the American economy is run with lower levels of taxation and regulation. If he takes the time period that I mentioned, beginning from the point when the Chancellor's policies started to take effect in this country, he will see that the rate of fall is faster in Britain than in the other major markets.

    I want to make a little progress before taking more meaningless interventions, which are great fun to shoot down.

    The Chancellor of the Exchequer seems to believe that there can be taxes that do not do damage. Let us look at his great experiment with the telecoms tax—the £22 thousand million that was taken out of the pockets of the telecoms industry in this country. He told us that he was proud of it, and I shall give him this—he certainly found a way to maximise the take. He had a very senior mathematician advising him, and he got the sums absolutely right. He found the perfect way to mug the telecoms industry for a huge sum of money.

    However, we must look at the damage that tax did, especially when the Germans followed it up with a very similar system based on the same idea. The fallout in telecoms and high tech that was beginning in Wall street and the US was multiplied many fold in Europe because the Chancellor had led the way by taking far too much money out of the lead sector that was powering the growth, generating the productivity gains and transforming the economy. The Chancellor did the most damaging thing possible at the most damaging time. The result was carnage—cancelled investment programmes and bankruptcies, with people fighting for their lives even in great companies such as BT.

    I am grateful to the right hon. Gentleman for giving way. I shall not be drawn into commenting on the telecommunications licences. They were bought by private companies, and were not taxation. However, the right hon. Gentleman rather pooh-poohed the point made by my hon. Friend the Member for Warwick and Leamington (Mr. Plaskitt). As I recall, the American stock market fell about 41 per cent. It is a bit less than the UK fall, but only a little bit.

    Again, the hon. Gentleman is not looking at the time period that I am talking about, when the Chancellor exacted a price. I can give the sums. The Chancellor decided to take £5 billion out of pension funds at a time when the market was trading on a multiple of 20. Simple arithmetic shows that stocks would fall by £100 billion as a result of the £5 billion taken in tax. That money was taken from companies, pensions and savers. It was put somewhere else, and quite a lot was wasted.

    From a sedentary position, my right hon. Friend the Member for Haltemprice and Howden says that there was also the cost of regulation. In addition, the costs of the specific taxes and of the general business taxes came to around £50 billion. Even Labour must understand that taking £50 billion away from productive and enterprising companies means that there will be fewer jobs, less investment and a big fall in the stock values of the companies losing the money. One cannot take all that money away and expect it to have no impact.

    That brings me to the pensions disaster. The Chancellor thought his second most clever tax was the pensions tax. For a year or two, it did its stealthy business and the money came in. Many Labour Members really believed the Chancellor and the Prime Minister when they said, "It won't have any impact. The stock market will go on up, there will be magic money, and you needn't worry."

    However, the stock market did adjust as the money went out of pension funds. Moreover, the problem compounded: the capital collapse in share values led to the collapse in the values of pension funds, and the pension funds had less income to reinvest. As a result, the black holes in the pension funds got bigger and bigger.

    I was delighted that the hon. Member for Dumbarton (Mr. McFall), the Chairman of the Treasury Select Committee, was a big enough man to admit that there is a very serious problem in pension funds in this country. The £5 billion pensions tax is at the bottom of it.

    It is not the only cause. The international collapse in stock markets, which happened in parallel with the process that I have described, has done damage as well, but there is a very big "made in Britain" component in the pensions crash. One of the most obvious solutions is to try and find a way to reduce spending without damaging public services, so that some of the money can be given back to the pension funds. Unless that happens, it will be almost impossible for the funds to narrow the gap between assets and liabilities, and for the stock market to make the full recovery that we desperately need it to make if our great pensions success is to be preserved for another generation.

    I should have thought that the Chancellor of the Exchequer would be deeply ashamed of the single fact that my right hon. Friend the Member for Chingford and Woodford Green (Mr. Duncan Smith), the Leader of the Opposition, brought forward on this issue. That is, that many people will now retire on half the pension that they expected, and on half the pension that they would have earned from their pension fund if they had retired in the final year of a Conservative Government.

    That too is the price of this Chancellor of the Exchequer. He has been on watch for almost six years, and in the latter part of that period the pensions funds have collapsed. That has the real and immediate consequence that many people retiring now are not getting as much pension as previously. The even worse consequence for members of many of the schemes that continue is that they are being told that they will either have to pay a higher contribution or get smaller benefits. However, in probably as many as half the total number of cases, people are being told that their pension fund is being shut down, and that they no longer have the opportunity afforded to the previous generation to make a contribution, to receive an employer's contribution, and to look forward to a decent pension in the future.

    After the two disasters of the telecoms tax and the telecoms boom and bust, and the pensions tax and the pensions boom and bust, it is heroic of the Chancellor to settle this time on a tax on jobs. Labour Members must understand that the imposition of a very large tax on jobs in the form of the increases in employer and employee contributions, hitting this month, will have a serious impact on the number of surviving jobs. One would have thought that the 300 jobs a day that have gone in manufacturing for every day of this Government so far would have warned the Chancellor, but no. The jobs that are most vulnerable to the Chancellor's jobs tax are those in companies that are not earning good margins, are struggling, are loss-making, or do not pay particularly good wages. Those companies cannot afford such an imposition. The biggest danger of the tax on jobs is that it will destroy many more jobs in manufacturing. I hope that jobs will be created elsewhere to offset some of that impact, as has happened in recent months. However, most of the jobs that are being generated at the moment are in the public sector. The Government are destroying the productive jobs in companies that used to pay their way and pay taxes, and creating jobs in the public sector that unfortunately do not reach the right areas or deliver the improved services that we all desperately want.

    The hon. Member for Dumbarton rightly said that we have a big productivity problem. The Chancellor has spent six years lecturing the private sector on how it should raise productivity. He has spent six years imposing targets, interventions, directives, warm words and cold words on the public service, but he has not yet got anywhere near to creating higher productivity in the public service. We have a productivity-destroying machine called taxation and public spending. We take money away from the productive sectors that could invest and create new jobs if they kept it, and tip it down the drain on the wrong kind of public service spending, even succeeding in lowering productivity there in the process. On both sides of the account, we are doing damage to our productivity record at a time when the Chancellor rightly points out that we are still well behind some of our leading competitors, particularly the United States of America, and when we should be reinforcing success by leaving the money to a greater extent in the private sector, which could invest in the new technologies and new jobs that we need.

    My right hon. Friend referred to the inadequacy and deterioration of public services. Does he agree that for the Government to fail to meet targets for the public services that were set by independent experts would be disappointing, but for them to fail to meet their own targets—notably, but not exclusively, on literacy, numeracy and truancy—requires incompetence on a truly spectacular scale?

    My hon. Friend is absolutely right. Meeting targets for numeracy clearly challenges the Chancellor himself, because practically all the numbers that he put into last year's Budget documents were works of fiction. He will need a refresher course in numeracy, and I hope that the Education Secretary is working on that as a priority. Having had a quick look at the Chancellor's Red Book today, I suspect that he still has not learnt to be as numerate as he should be, and I have a nasty feeling that his productivity figures and growth figures will prove too optimistic, and that therefore his borrowing figures and tax revenue figures will prove too optimistic. This Chancellor of 53 tax increases will prove that the more one taxes, the less one raises.

    My right hon. Friend may not have had a chance to see all the associated documents that go with the Red Book, which include a so-called discussion document entitled "Public services: meeting the productivity challenge". It seems that the Chancellor has just woken up to the fact that he has spent the money, but did not get the reform, and that no wonder productivity is collapsing.

    My hon. Friend moves me on to the penultimate section of my speech. What should be done about the dilemma in which the Chancellor finds himself? The vital issue is that of public service reform. My right hon. Friend the Leader of the Opposition is right: we do not begrudge money if it is well spent in the public services, but we think that it is absurd to take so much money and tip it into the wrong areas without first reforming the services to ensure that it is likely to be well spent.

    Hon. Members will be pleased to know that I cannot go into detail on all the services today. However, the general theme that I would recommend to the Chancellor is one that is more beloved of the Prime Minister than of his own Treasury—that is, that he should trust local management and the choices made by users of services rather more, and that he should start to dismantle the huge bureaucracy that he has created nationally, regionally and in the principal councils to try to monitor, regulate, overrule and interfere in public service management on the ground. Extra money needs to be spent in hospitals on nurses and doctors and in schools on teachers and the equipment that they need to teach; far less needs to be spent on all the intermediate levels between Ministers and those operating units; and we need to trust patients and parents far more by giving them real choice.

    If I could sum it up in a single phrase that should certainly appeal to Blairites in the Labour party, if not to other members, we need to back choices for people who cannot afford choices. I do not want to live in a world where those who are very rich can buy themselves all the best possible health care, when they need it and of the kind that they want, and can pay for a really superb school at a very high price out of their taxed income, but where everyone else has nothing like that degree of choice in getting the health care that they need, when they need it, or schooling of the quality that they want.

    I want people in my constituency who are on more modest incomes than those who send their sons to Eton or go to the best private hospital to have a real chance of access to a high-quality school of their choice, where all or most of the money is supplied by the state—all of it if they want a free place, or most of it if they are prepared to pay a top-up fee. I want real choice, and I want it to give those who live in the middle of London or the middle of Birmingham the same life chances as those who live in the better suburbs and shires where there are really good schools and hospitals—they do exist in some places.

    We all need that greater choice and we all need far more capacity in the health and transport systems. Transport is a good example of where we could achieve a great deal in expanding rail capacity and road capacity if we really used the private sector. People are used to paying for their transport, and it can be financed entirely privately. We do not want expensive public-private partnerships and private finance initiatives, which deliver too much risk to the taxpayer and too little money to the service itself. The Government should have the courage of some of their convictions and let the private sector do far more to relieve the taxpayer of the enormous burden of tipping huge sums of money down the drain on to Network Rail and finding that the railway system is worse a year after the partial renationalisation than it was before.

    My final point is that the Government's overall economic strategy is going disastrously wrong. The course that they must adopt is one that reins in wasteful spending so that they have to borrow less, and starts to deal with the very damaging tax rises that they have imposed, which are now reaching the point whereby they will stop the growth in revenue that the country so desperately needs. It will be difficult, because the well-managed and strongly performing economy of the late 1990s has been badly gummed up by too much tax, too much regulation and some very foolish public spending priorities, but not impossible. Billions of pounds are being wasted on areas such as Network Rail, the quango world and regional government. A civil service of 500,000-plus is far too big. The Government should get a grip and start to reduce those expenditures so that they have some leeway.

    If the Government decide not to bother about that and to believe the bizarre and over-optimistic forecasts and figures in the Chancellor's Budget documents, we will get into a difficult pickle. Productivity will not grow in the way that is wanted; public services will not respond to the patient or the parent, because they will not be allowed to; there will not be the improvements that we want; and there will be no real choice. Public services will get a lot dearer, but will not deliver. The private sector will be starved of more and more cash and will not be able to make the investment that is required, which will limit the growth of the productive economy. That, in turn, will cut the tax base in future. "Fifty-three tax rises" will be written on the tomb of this Chancellor unless he stays in office for long enough to impose the extra ones that his Budget will require when the money runs out in the not-too-distant future. This is a Chancellor of tax and waste; a Chancellor of boom and bust; a Chancellor of fiddled figures. This is a Budget that we should vote against.

    2.59 pm

    It all sounds very woeful in Wokingham; the situation feels very different in my constituency.

    In the run-up to the Budget I have spent a fair amount of time taking the pulse of the Warwick, Leamington and south Warwickshire area. In the past three months, I have visited more than 20 companies in my constituency. I have spoken at length with the chambers of commerce, the Federation of Small Businesses, the Engineering Employers Federation and some of the intermediate bodies that the right hon. Member for Wokingham (Mr. Redwood) mentioned and disparaged so much—for example, Advantage West Midlands, our regional development agency, and the local learning and skills council. Between them, I have been sounding out a good cross-section of business opinion.

    I have spoken to sole traders, small and medium-sized enterprises, medium-sized firms and local firms that are part of global companies. I have also spoken to a mix of manufacturing and service companies. Within manufacturing, I have spoken to different types of businesses—lower as well as higher technology. In my constituency, the car industry is a strong presence—both design and build and also component supply. By taking all that on board, I have had a good opportunity to take the pulse of the economy in the west midlands. It has given me a platform from which to assess whether the Chancellor's handling of the economy in general and the particular measures he described today are responding to the needs of the business sector as I hear them in my constituency.

    In my discussions with those companies, three main issues have emerged as important to them. First, they stress the importance of maintaining underlying economic stability. They made an extensive number of points on the tax and red-tape issues that are of great importance to Conservative Members—they are also important to companies in my constituency and I shall deal with them in a moment. All the companies said, however, that tax and red-tape grumbles and issues pale into insignificance when set alongside the damage that would be done if the economy turned into recession. They recall previous recessions and the damage that they did to their companies. Recessions drove companies out of existence in my constituency and caused unemployment to soar—today, it is running at 1.5 per cent. which is a different story from what it was 10, 15 or 20 years ago.

    All my companies say that the most important thing that the Government can do is to maintain economic stability. They say that they will have arguments with us about other things that are happening, but above all, they tell us to maintain economic stability. So they are impressed with the Government's record on that central point—the fact that we have had positive gross domestic product growth for every quarter since the Labour Government have been responsible for managing the economy.

    Last year, our growth was bettered only by the United States and Canada. Our growth forecasts are now running well ahead of those in Euroland. As an economy, we are well placed to cope with the global slowdown. We have low interest rates, low inflation and stable public finance. Given that background and in those circumstances, it is prudent and sensible now to borrow to support economic activity; not to borrow at irrational or dangerous levels—we are not going anywhere near the 8 per cent. of GDP recorded under the Conservative Government—and the borrowing levels envisaged in the Chancellor's statement do not even reach 3 per cent. of GDP.

    Businesses recognise that that is a sensible way to manage public finances. It is the right posture to adopt towards public finances during this global dip. They are telling me and the Government, "Maintain that economic stability." It is crucial for maintaining the United Kingdom's favourable performance against so many other countries—many of the crucial investment decisions made for companies in my constituency, which affect my constituents, are made abroad, not in this country, by the foreign owners of those companies. The United Kingdom as a place for investment is judged against rival locations and capital is now highly mobile. Therefore maintaining the competitiveness and strength of our economy is important.

    I wonder whether those companies have said anything to the hon. Gentleman about why the United Kingdom's share of inward investment into Europe has fallen so substantially as compared with the rest of Europe.

    Of course, we have had extensive discussions on that subject, but as I think the hon. Gentleman knows from our examinations of it on the Treasury Committee, those figures are largely influenced by the flows of merger and acquisition activity, which can be very volatile. He is right to say that there has been a dip in the proportion of foreign development investment that has come to the United Kingdom in the past two years. The figures change erratically from year to year. It would not be wise to draw inferences from two years' figures; we should look at the wider picture.

    It is worth reminding the House of the recent report published by the Society of Motor Manufacturers and Traders Limited, "Strengthening the Supply Chain", which reminds us of the importance of the auto supply chain to the economy: 7,000 businesses, 140,000 jobs and half the businesses are small and medium-sized enterprises. The report points out that that sector is going through tough trading conditions at the moment because of the global downturn. It also emphasises the strength of the car industry in the United Kingdom. Each year during the 1980s, 1 million cars were built here on average, 1.5 million were built here in 2001, and the industry confidently expects that 2 million will be constructed here by 2005. It is worth quoting the report, which says:
    "The comparatively strong performance of the UK economy and its relative stability provide an advantage for UK based operations and continues to offer an attractive proposition for potential inward investors."
    That statement is also backed up by the latest KPMG study, "Competitive Alternatives", which ranks the United Kingdom as the second lowest cost base after Canada and 13 per cent. better than the United States of America. That study is based on labour costs, business taxes and transport, energy, land, construction and leasing costs. It is the most comprehensive assessment of all the costs that business faces. KPMG is pointing out that the United Kingdom is the second best country among all those that it has surveyed. That is extremely important for the auto component industry.

    The report also mentions some significant challenges that the industry faces. It looks to Government for a response on three challenges in particular: the need to do more to support apprenticeships; a single entry port for Government business support programmes; and more progress in achieving a low-carbon economy. I shall deal with all those in a moment, but the report also places great emphasis on, and calls the Government to do something about, ending the uncertainty over the euro. When I discussed that subject with businesses in my constituency, I found that their opinions were mixed. Some are not particularly interested in being in or out, some are desperately keen for us to get in, and some are opposed to entry. Irrespective of their position, however, they are all saying, "For goodness' sake, let's know where we are going on this." The SMMT report has this to say on the subject:
    "uncertainty about UK entry into the single currency also increases the risks associated with new investment. The government must move speedily towards a decision on membership of the single currency".
    So I was pleased to hear the Chancellor say that he will be pronouncing on the five tests before the beginning of June. For many companies in my constituency, that statement may be more important than anything else he said in his Budget speech. I look forward to hearing that announcement.

    The second important area that companies in my constituency have been raising with me is the need to drive up productivity and close the skills gap. The Chancellor mentioned that in his statement today. There are disappointing factors in the UK's productivity performance, but it is encouraging to hear that the gaps are narrowing between us and some of our competitors, although there is still a significant gap between us and the United States.

    I have asked many of my local companies for their views on productivity. Interestingly, many of them feel that their own company is doing all right and that there is no problem. They think that the fundamentals for eventual productivity improvement are in place. As my hon. Friend the Member for Dumbarton (Mr. McFall) said earlier, there is no doubt that our success in bringing more people into economic activity and in reaching historically high levels of such activity means that the improvement in productivity will be delayed. When the labour force is enlarged, increased productivity tends to follow. That was the experience in the United States and it is likely to be the same in this country.

    There are also significant productivity gaps between the UK regions. The Treasury Committee, on which I serve, is investigating that and I hope that we can contribute to a fuller understanding of why those regional variations exist and why they have been so persistent. However, those variations confirm the need for an adaptive policy response in the regions, so I welcome what the Chancellor said about devolving some decisions on the local economy further down the scale and giving regional development agencies more freedoms. Those agencies are themselves devolving some matters to sub-regions, which is an important development.

    I welcome the Chancellor's statement that there will be greater access to capital, new investment vehicles for small companies and further improvements to the research and development tax credit. Devolving employment policies to local job centres is also extremely good news.

    Some of my local companies mentioned the skills problem. Many local firms have considerable difficulty with recruitment. The labour market is tight throughout Warwickshire; unemployment is 1.5 per cent. in my constituency so, unsurprisingly, recruitment is a problem. That is especially true for manufacturing companies where, to some extent, there is an image problem. School leavers and people in further and higher education tend not to be drawn to engineering careers.

    Schools and further and higher education institutions should strengthen their links with engineering and manufacturing companies. Both sides should come together to make young people aware of the exciting and innovative things that are happening in our many successful manufacturing and engineering enterprises. Young people are not aware of them, so it is not surprising that they are not drawn to a career in that sector. The introduction of entrepreneurship in the curriculum is welcome and I hope that it will include advocacy of our remarkable engineering successes and the stimulating career opportunities that exist.

    Companies want an expansion of modern apprenticeships. I am pleased that the Chancellor envisages that 320,000 of them will be up and running by 2006. Strong links with universities are important for manufacturing companies. They work well in my area, where many local companies have good links with both Warwick and Coventry universities. There is strong collaboration in terms of courses run by the universities and in the products manufactured by the companies.

    Tax and red tape issues are certainly raised by companies in my constituency, but the particular points they make are of interest. Of course, no one would expect companies to be enthusiastic about the increase in national insurance that they faced and which is now in place, but they recognise that the overall corporate tax burden is reasonable. It is instructive to note the latest figures from the Organisation for Economic Co-operation and Development on that point. Total business taxes as a percentage of UK gross domestic product are 7.2 per cent.—the third best in the European Union. The comparable figure for Germany is 9.1 per cent. and in France it is 14.5 per cent. Total business taxes as a percentage of total taxation are 19.2 per cent. in the UK, making us the second best in the EU. Furthermore, the figure is lower than that for the United States of America.

    Does the hon. Gentleman agree that it is more important to look at the total tax burden? After all, directly or indirectly, firms end up paying for that and it is reflected in labour costs.

    But the firms I talked to look at the overall picture, as the hon. Gentleman encourages me to do. I talked to them about the impact of national insurance and the overall level of business tax in the economy and the comparisons with our competitor countries—the comparisons are favourable. They point out that although there are some tax increases for business there are also some offsetting benefits owing to our success in managing the economy. They enjoy the benefits of lower interest rates and of the reforms that we introduced to VAT and accounting. Indeed, today, my right hon. Friend the Chancellor has added more benefits and more cost reductions for small firms.

    Most companies were prepared to accept that the higher level of national insurance would be okay provided it was spent well—a point that we heard from the Opposition. Firms realise that the costs to employers of either private or social insurance-based systems are rising much more steeply elsewhere; for example, the cost burden imposed on French or German companies as they grapple with their public service problems is rising much faster than in this country. Firms that are part of a global operation are very aware of that.

    I am pleased that firms do not consider only the tax bill; they are also asking what they are getting for their taxes—rightly so. Firms which have problems with recruitment and the skills base welcome the fact that we are investing extra money in the education system as that will help them to address the skills shortfall. They welcome the extra investment in transport. The right hon. Member for Wokingham denounced our transport system, but there have been significant improvements in the local transport network in and around my constituency. There are major road schemes and distinct improvements have been made to the rail link with London. Those significant investments are all welcomed by businesses in my constituency. They realise that there can be no extra funding for the transport system unless they contribute through taxation.

    Companies also acknowledge the benefits to them of higher Government capital investment under the Labour Administration. Many of them have won contracts related to that investment. They are watching how the Government spend the money and assessing the degree to which it benefits industry, and they see that it does.

    Companies frequently raise the issue of red tape—frequently. [Interruption.] I am not surprised to hear approving murmurs from the Opposition Benches. When companies raise the issue of red tape, however, they are not talking about the 4,000 or 5,000 new regulations introduced each year to which Opposition Members often refer. In fact, only 3 per cent. of those regulations attract any business costs; most of them are local transport or electoral measures and have nothing to do with companies.

    What are the red tape issues that firms raise with me? At the top of the list are employment tribunals. Companies face increasing costs and time commitments and sharply increased lawyers' bills as they wrestle with increased numbers of tribunal cases. They want reform of the employment tribunal system and are anxious to know what will result from the Government's recent statements on the matter. They agree with the thrust of the reforms that the Government are trying to initiate: encouraging the resolution of disputes within firms before they even reach a tribunal; trying to spread the cost of liabilities so that they do not fall exclusively on companies; and discouraging frivolous claims. I believe that we should expect further Government announcements on the current investigations into the reform of tribunals, and the companies in my constituency are anxious to find out whether that reform will be the sort that they would like to see.

    Another red tape issue raised is the regulations coming from the Financial Services Authority. Many of the companies in my constituency take the view that the FSA is now producing over-elaborate regulations, and they want us to get the balance right. Again, we will be happy to take up that challenge in the Treasury Committee, and we look forward to putting some of those points to the FSA's new chief executive to find out whether the response is the one that business would like to hear.

    The difficulty of gaining access to Government business support schemes also appears under the heading of red tape. Undoubtedly, business would very much welcome it if we could evolve a single port of entry for the array of schemes that exist. Companies that have managed to gain access to the schemes have greatly appreciated them. They have done a number of very good things for a large number of companies in my constituency, but the time commitment in gaining access to them and understanding their criteria and complexity has deterred many businesses from coming forward and taking up the advantages that undoubtedly exist. So I urge the Government to consider creating a single access port for many of those schemes.

    Finally, insurance costs come under the red tape heading. There is no doubt at all that many companies face a very steep increase in insurance costs, especially for liability insurance. Again, they are pleased that the Office of Fair Trading and the Department for Work and Pensions are looking into the workings of the insurance industry, and they eagerly await the outcome of those investigations. Those costs are undoubtedly rising sharply, and companies are looking to us to respond and to try to help them.

    In summary, that survey of businesses in my constituency shows that they very much welcome the way that the economy has been managed and the Government's responsiveness. They have additional needs and problems, which they are putting to us, and I look forward to the Government's response to those issues in due course. As I say, top of their list is their appreciation of the fact that we remain one of the best performing economies in the G7. They appreciate the fact that we are managing public finances very soundly. They, along with my constituents, appreciate that we are on track to deliver both a strong economy and social justice; and they, as companies, have just as much interest in that as any of my constituents, so I commend the Budget statement.

    3.22 pm

    I begin by declaring an interest as a director and shareholder of a manufacturing business—a subject that has cropped up during the debate.

    The big story about the Budget and the Chancellor's record in office is that he has been an almost unprecedentedly lucky Chancellor whose luck is now clearly and demonstrably running out. The reason why I think that he was lucky is that he inherited a set of circumstances in 1997 that he himself described today as being a key element in the record for which he is responsible. After all, he stressed in his Budget statement today the importance of the fact that he has been able to build his record as Chancellor on—to use his words—the foundation of low inflation.

    I concede, of course, that the establishment of the independent MPC was a decision taken by Labour in 1997, but what the MPC has done is to consolidate the essential discipline of low inflation that was put in place despite huge opposition from Labour during the Conservative years. So the Chancellor was right to stress the importance of low inflation as the essential foundation on which economic success can be built.

    Later in the Budget statement, the Chancellor also stressed the importance of flexible markets. He lovingly went through the importance of flexible labour markets, flexible markets for goods, flexible markets for services and markets able to respond to customers. He made the point that our markets in this country are more flexible than most equivalent markets elsewhere in Europe, and he made the point further that we are still less flexible than the United States.

    I look forward to the day when a British Chancellor and his supporters, instead of saying, "Well, of course we are not as good as the United States, but we're better than Europe", will start to say, "We're well ahead of Europe and our objective is to make our markets as flexible, as competitive and as successful as the American domestic and international markets." All of that was clear in the Chancellor's rhetoric today. If we are to build a successful economy in this country, we have to recognise the importance of those essential disciplines—sound money and flexible markets.

    The problem with the Chancellor's record and the reason why I believe that his luck is now demonstrably running out is that, whereas the importance of those messages is increasingly understood elsewhere in Europe, where the drive is to lower taxes and to make markets more flexible, we in this country are marching resolutely in the other direction. The Government use the rhetoric of the importance of flexible markets, but they make decisions at every step to introduce new elements of red tape and new regulatory burdens, furring up the flexible markets to which they claim to attach importance.

    Furthermore, the central problem with the Budget is that the Government are not only re-imposing regulation on the economy when our European competitors are looking for ways to remove it, but increasing the tax burden when our European competitors are understanding the importance of the excessive tax burden that they suffer, which is holding back their economies. So the core problem with the Budget as the Chancellor presented it today is that the public finances that he is asking the House to endorse for the years ahead demonstrate the fact that, although he recognises all the stuff about flexible markets, disciplined public finances and so forth, he is undermining by his actions precisely the thing to which he says he attaches great importance.

    To highlight the central problem of the public finances, I want to draw the attention of the House to two aspects of the borrowing figures that the Chancellor announced today. First, I remind the House that, two years ago, when the Chancellor projected borrowing for the financial year just started, he said that it would be £10 billion. Since then, he has imposed an extra £8 billion in tax this year, so the equivalent figure should have been £2 billion. He was projecting that the figure for this year would be £10 billion, but he has since put an extra £8 billion into the revenue side of the account for this year. So. everything else unchanged, his projected borrowing for the current year would have been £2 billion. His actual figure is £27 billion—so two years and £25 billion out. That is material mistake.

    Sorry, £35 billion. That is also a material mistake. The Chancellor is £35 billion out.

    Yes, I was right first time.

    I want to draw the attention of the House to a second set of figures. The House will remember that the Chancellor read out a string of numbers that he clearly did not want us to understand the significance of. The string of numbers was for projected borrowing over the next five years. I am not absolutely certain of the numbers because he read them so fast that I could not write them down—I do not do shorthand—but I think that they were 27, 24, 23, 22 and 22. The important point that the House was supposed to take on board was that they showed a downward trend, albeit a marginal one. The House's reaction to the numbers might have been slightly different if the Chancellor had instead read out the Institute for Fiscal Studies' figures for the same period. Its projected figures are 25, 28, 31 and 35. If independent forecasters suggest—

    It is the consensus of independent forecasters. If the hon. Gentleman wants to set himself up as an expert witness to argue the case against the IFS before some committee, I shall be in the audience. I would want to witness such a blood sport. The Chancellor is engaging in wishful thinking.

    Does the right hon. Gentleman acknowledge that the IFS goes on to say that it expects

    "the government to overachieve the golden rule over the current cycle by around £31 billion"?

    I am trying to focus the minds of hon. Members on the question of whether borrowing will go down, as the Chancellor projects, or up, as the IFS projects. Given the Chancellor's track record on forecasting and the fact that one of his forecasts was £25 billion out over two years, it is likely that he will not deliver his objective of achieving a declining trend in total cash borrowing during the period of the forecast unless he takes further action. I shall explain why that is likely in a moment.

    Does the right hon. Gentleman agree that we need not rely on only the IFS? We could rely on the Treasury's published average of all independent forecasts, which forecasts £31 billion of borrowing in 2004–05.

    The hon. Gentleman is entirely right. I thought about using that figure when I was considering what to say because it is an independent figure. I wanted to draw the House's attention to figures from the IFS because it has published a run of forecasts over four years, which is comparable with that reported by the Chancellor today. The consensus and the IFS forecast suggest that the underlying position of the public finances is unstable and that borrowing continues to have an upward trend, despite the Chancellor's attempt to give the opposite impression this afternoon.

    Assuming that the figures produced by the IFS are correct—a big assumption given the difficulties of forecasting—does the right hon. Gentleman believe that we must take corrective action, and should that be to increase taxes or to reduce public expenditure? What level of public expenditure does he believe to be consequent on getting public finances back on to a reasonable path to the future?

    That brings me neatly to an attempt to identify why the public finances are unstable and, by implication, what should be done, as the hon. Gentleman asked. No one should be surprised that independent forecasters think that public finances are unstable, because the Chancellor published figures in the pre-Budget report that show that, in the first three years that he was Chancellor, public expenditure—measured in funny money of constant value pounds—decreased fractionally as a total level of spending. In those three years, expenditure fell by 1 per cent., went up by 0.2 per cent. and then went up by 0.7 per cent. The growth of public expenditure was securely slower than that of the rate of the economy as a whole. In the next two years for which the funny-money number is published, public expenditure started to grow by 4.5 per cent. a year. As we know, the projected figures for the current year and the out years suggest an 8 per cent. cash growth of public expenditure. If the brakes are let off public expenditure to such an extent against the background of slow world trade and disappointing growth compared with what was expected, it is hardly surprising that the public finances turn into a deep black hole. That is precisely what is happening.

    The figures that my right hon. Friend the Leader of the Opposition cited in his reply to the Chancellor about growth forecasts might have seemed to be rather dry statistics, but it is not dry statistics to point out that if public expenditure grows by 4.5 per cent. in a year when the economy grows by 1.8 per cent., sooner or later taxes will have to rise. That is simple arithmetic.

    Surely the point is that not only is borrowing rising, but, as this year's Red Book shows, taxation is going up by £27 billion.

    Borrowing is rising despite the huge increase in tax revenues. Some of that can be attributed to the national insurance increase—the £8 billion extra tax on jobs—that started at the beginning of this financial year. Incidentally, that increase was justified in last year's Budget as being necessary to fund health expenditure and we were invited to debate the benefits of spending extra tax revenue on health. Hon. Members should remember that only £2.4 billion of the £8 billion is for the national health service, while £5.6 billion is for elsewhere. The debate about health was not relevant to the debate about the £8 billion tax increase that was announced last year.

    The fact of the matter is that expenditure is rising faster than any likely outturn from economic growth, which is why the Chancellor is playing fast and loose with the projections of growth that he publishes annually. He told us today that the outlook for growth in 2003 is 2.25 per cent.—between 2 and 2.5 per cent. That is a whole percentage point less than he predicted at this time last year. For what it is worth, the consensus forecast is that even the reduced level will not be met. We are being asked to believe that the forecast that the Chancellor published a year ago for next year was too cautious, so he has improved it for 2004. Why? Because if he did not, he would be unable to publish the figures of projected declines in borrowing.

    The Chancellor is grappling with an economy that is not growing fast enough to meet the public expenditure ambitions to which he has committed himself before his colleagues, and he is trying to assure the electorate that they can be delivered without increases in taxation. That is why I describe the situation as unstable. In truth, we have gone back to planning the public finances on the basis of a wish list.

    I started by drawing attention to some of the disciplines that the Chancellor praises—disciplines without which he will never deliver successful economic management. One of the most basic disciplines is that one draws up the forecast before deciding the expenditure plan; it is not possible to draw up the expenditure plan and make the forecast fit. I do not often agree with much of what the leader of the Liberal Democrats says, but I agreed strongly with his opening comment. He said that on this Budget the Chancellor had shut his eyes and hoped for the best. That is exactly right. We are committing ourselves to a set of spending plans and the only way in which they can be made to work is by making the forecasts fit the plans rather than making the plans fit the forecasts.

    It is right to remind ourselves of the claim that new Labour made to be different from old Labour. We were asked to believe that the old ways of tax and spend were no longer the instinct of the Labour party—that somehow things in the future would be different. But the Government are reverting to type. We do not need to look into a crystal ball to see what the effects of that will be on the economy. Prudence is dead and has been replaced by Heath Robinson improvisation. The situation will continue to get worse, as it has over the past 12 months, unless there is an outbreak of realism in Great George street.

    3.40 pm

    It is interesting to follow the right hon. Member for Charnwood (Mr. Dorrell), because I too want to begin with borrowing, as several right hon. and hon. Members have done. Many hon. Members may know that I lived in Canada for a number of years and I follow events there quite closely. The debate in Canada on the federal Government's level of borrowing started 10 years ago and has largely worked its way through the system. I am delighted that we are discussing it, but I note that the approach of Opposition Members is to look for doom and gloom. I appreciate that that is the official Opposition's role, but given that average household income has increased by 3.5 per cent. in real terms every year for six years, it is surprising to hear them talk about the economy as though it is in rack and ruin.

    I got a bit of a shock when the hon. Gentleman began by suggesting that we should look to Canada. Its level of borrowing, both at provincial and national level, has been out of control for ages. Partly as a consequence of that, the gap between its GDP per capita and that of the United States has widened markedly over the past decade.

    We are here to debate matters relating to the United Kingdom. However, the hon. Gentleman is not correct. The forecast for economic growth in Canada is higher than in other G7 countries apart from the UK. All economists in Canada would agree that its federal debt has been markedly reduced and is well under control. He would not find a single reputable Canadian economist who would say that federal Government debt was out of control. Economists might have said that five years ago, but they would not say it now.

    The right hon. Member for Charnwood implied that the Chancellor fudged the figures on borrowing. Of course borrowing will increase. Table C5 on page 254 of the Red Book sets out the end-of-year public sector net debt as a percentage of GDP. It will be 32.2 per cent. in 2004; 32.7 per cent. in 2005; 33.2 per cent. in 2006; and 33.5 per cent. in 2007. That trend is rising very slowly. It is not a fast rise or fudge. It is right that the Government should engage in counter-cyclical spending.

    We must also consider the history of the official Opposition. On public borrowing, the national debt doubled in the five years of the Conservative Government between 1992 and 1997. When Labour took over in 1997, national debt as a proportion of GDP was, from memory, about 46 per cent. The figures that I quoted are in the low 30s and not climbing markedly. Labour Members need take no lessons from Conservative Members about the difficulties of borrowing and the public debt.

    If the hon. Gentleman looks up the figures for the 18 years of Conservative government, he will find that the British economy was just about the only one that succeeded in reducing its debt stock as a proportion of GDP. All other major industrialised countries saw sharp rises, which was a remarkable achievement. Only by picking the arbitrary period of the last five years can he make his point.

    I am afraid that I must again disagree with the hon. Gentleman. It was not an arbitrary period. What happened was that, for their first 13 years in office, the Conservative Government sold the family silver to cook the books. When they ran out of silver, they had to borrow massive sums to try to balance the books. That is the history, and it is why borrowing doubled.

    I am listening carefully to my hon. Friend's analysis of the trend in Government borrowing. Does he accept that one of the Major Government's responses when their public borrowing got out of control was to introduce the concept of the private finance initiative and the public-private partnership? Given the borrowing levels under the current Government, does he agree that further expansion of PFI and PPP is not only wrong and flawed but absolutely unnecessary?

    I would not agree with all the adjectives that my hon. Friend uses, but I do have grave concerns about the PFI, as he knows. Public borrowing, in which the Government continue to engage—and rightly so, as it is counter-cyclical—is quite reasonable. The Organisation for Economic Co-operation and Development estimates show that the United States of America, France and Germany have public debt of around 60 per cent. of GDP, and Italy and Japan have public debt of more than 100 per cent. of GDP, while we are talking about public debt of 33 per cent. in round terms—32.2 per cent., I think, in this financial year. It is not exactly a cascade of debt.

    In focusing on the level of Government borrowing, does the hon. Gentleman agree that everyone should be aware that something of the order of £100 billion is off balance sheet, covering all the PFI liabilities, Network Rail and other obligations?

    I am aware of that figure, as are all right hon. and hon. Members. Interestingly, that brings me neatly to my next point, which is based on something that the hon. Member for Arundel and South Downs (Mr. Flight) has rightly and widely been quoted on: the 20 per cent. cut, which Labour Members often say the official Opposition are considering. Last Thursday in a Statutory Instrument Committee, I raised the issue in response to a comment by the hon. Member for North Wiltshire (Mr. Gray):

    "His party talks about a 20 per cent. cut in spending across Government, but he has put forward three points, and adverts to a fourth, all of which would involve increased spending."
    The hon. Gentleman, who is a Conservative Front-Bench spokesman, intervened on me and, in his usual rapid way, which Members may well know, said:
    "He is also wrong about the Conservative party's proposals. We propose a cut in taxation. At no stage have we proposed a cut in public spending. The two are quite different."—[Official Report, Standing Committee, 3 April 2003; c. 9–10]
    To me, as a non-mathematician, it seems fairly obvious that if there were a cut in taxation but no cut in public spending, borrowing would increase even more under the official Opposition.

    If the hon. Gentleman cared to read the interview in The Daily Telegraph on 26 November, he would be entirely clear that the figure of 20 per cent. referred to the scope to cut waste in government. He may he aware of certain reports by his Government as to a scope of some 20 per cent. to cut excessive administrative costs in health care. I am therefore surprised that he should be misled by his party's propaganda. The issue is how much can be saved by more efficient government. Whether that should be spent on better and more front-line delivery or on cutting taxes is a separate judgment.