Rt Hon Lord Lilley

    Mr. Peter Lilley (Hitchin and Harpenden) Yesterday’s Budget was the first that I have heard in which not a single measure introduced by a Chancellor of the Exchequer was costed. He gave no idea where the extra spending that he announced will come from. Overnight, we have been able to examine the small print and determine where the costs will fall. There will be a large cost, and it will fall on ordinary families and on businesses—which, ultimately, will have to pass on that cost to consumers, or reduce the number of those they employ.
    The Chancellor pretended that we would have lots of goodies at no cost. He tried the oldest trick in the book: pretending that there is such a thing as a free lunch. What he really gave us was a menu without prices. I steer clear of establishments with such practices, because, although their presentation may be top class, one gets very small portions and pays very large bills. In paying the bill for the Chancellor’s menu, we shall discover that he has, once again, betrayed the Prime Minister’s promise to the British people not to impose any taxes other than the windfall tax.

    Before the general election, the Prime Minister promised Birmingham business men: We have no plans to increase tax at all. He told the BBC: What I have said is the programme of the Labour party, and that does not imply any tax increases at all. Now—as we saw in last week’s debate—Ministers are trying to airbrush those pledges out of the picture. They want us to think that the only pledge that matters is their narrow promise not to raise income tax rates. So when the Prime Minister made vows to his party conference, 1309 we should have taken no notice of him? When he gave unequivocal answers to the media, they counted for nothing? We should have read his lips, and seen “lots more taxes”? What arrogance from the Government. It tells us an awful lot about new Labour. Although new Labour thinks that words are cheap, British taxpayers will discover that believing Labour’s words will cost them dear.

    This Budget is new Labour’s second tax-raising Budget. It raises taxes by another £2 billion a year, on top of the massive tax rises introduced in last July’s Budget.

    If Ministers are so keen—as they were last week—to direct us to the text of their manifesto pledges, will they tell us where in their manifesto they promised to cut the married couple’s tax allowance? Perhaps in the section entitled “Supporting the Family”? Where did they promise to clobber businesses with almost £20 billion in extra taxes? In the section they headed “Promoting Enterprise”? Where did they spell it out that they would cut mortgage interest tax relief? Was it in the section on home ownership? Where did they spell out the increase in employers’ national insurance charges for employees earning above the average wage? Where did they spell out three petrol duty hikes in 16 months? Where in their manifesto did they say that they plan to tax child benefit for upper-income families?

    Ms Joan Ryan (Enfield, North) Does the right hon. Gentleman agree that BP’s announcement that it is reducing petrol prices in rural areas by a further 2p—totalling a 4p reduction in the past month—clearly shows that it approves of the Budget and is responding to the Chancellor’s challenge to work with us in helping rural areas?

    Mr. Lilley That is a bit rich. Although the Government have hiked petrol tax three times in the past 15 or 16 months, Ministers claim credit for oil companies absorbing some of those increases because of low oil prices. They claim credit for that? The Government insult rural motorists by offering £50 million over three years, to compensate for almost £1 billion in extra taxation. Come off it. Read out something else from the brief next time.
    Yesterday, the Chancellor may not have spelt out the cost of any of his policies, but his Red Book makes it clear. It shows that the share of national income taken in tax is set to increase. By the end of this Parliament, he will be taking nearly 3 per cent. more of national income in tax. That is the cost of Labour’s tax programme; that is the cost of its stealth taxes. Public finances are strong, but because they are strong and doing even better than we expected, it should be possible to get back to a balanced Budget with fewer tax increases, not by adding to them as the Chancellor is doing.

    The reason Labour is having to put up taxes is that it is breaking another pledge: its promise to cut the cost of the welfare state. Before the election, the then leader of the Labour party used to trail around editors’ offices, particularly of right-wing newspapers, saying that, just as it took a Republican President such as Richard Nixon to recognise communist China, and just as it took a white President such as Pik Botha to do a deal with the 1310 African National Congress—[HON. MEMBERS: “It was P. W. Botha.”] Well, whoever did it. The then Labour party leader said that it would take a Labour Prime Minister to cut the size of the social security bill.

    Many editors thought that the then Labour party leader meant what he said. Indeed, Labour made cutting the social security bill a specific pledge in its manifesto. As part of its top pledge, it said that it would decrease the share of national income spent on the bills of economic and social failure. Labour said that it would cut the size of the welfare state, but since the election, every change that the Government have initiated in the welfare state—not those that they inherited from me—has involved increasing the cost of welfare; increasing spending on the welfare state, not reducing it.

    The Red Book shows that yesterday’s Budget will add another £10 billion to the cost of welfare this Parliament. That destroys Labour’s promise and its claim that its programme could be financed without increasing taxes. Instead of reducing social security spending, Labour is increasing it. That is why people are having to pay more tax.

    The Government do not even expect the welfare changes that they have introduced remotely to pay for themselves. It is clear from their figures that they expect very few extra people to be enticed back to work by the changes that they have made. I invite the Chancellor to tell us how many people he expects to be taken off the unemployment register as a result of the changes that he announced yesterday. Either he does not know or the number is so small that he will not tell. It is certainly invisible in the accounts that he published yesterday.

    If unemployment is higher in two years’ time than it is now, will the Chancellor admit that all his programmes have failed? We said—we have said all along—that we would support the Government if they brought forward the right welfare reforms. If they tackle the poverty trap, reduce the number of people who are dependent on benefit and bear down on the costs of the welfare state, they will certainly deserve the support of the whole House. This Budget does nothing of the kind. It increases spending, extends the number of people who are dependent on benefits and lumbers more people further up the income scale with greater disincentives to work.

    The Red Book shows that the number of families facing a marginal deduction rate of more than 60 per cent. will be increased by 250,000 as a result of the changes that the Government have introduced. Therefore, more people will face greater disincentives, not fewer. As the Financial Times pointed out this morning in its analysis of the Government’s child care credit: the assistance tapers so that help will be given for childcare costs for one child in families with incomes up to £22,000 and for two or more children in households with incomes up to £30,000″. The Government are bringing households with such income into the benefits system. The truth is that extending help up the income scale to people with good jobs will not get people into work.

    People can get off welfare and into work only if there are jobs for them to go to. Our reforms succeeded in creating jobs hand over fist. Before the election, unemployment had been falling month in, month out for more than four years. That momentum has continued. The good news today is that unemployment is down again, as the continued consequence of our reforms. 1311 The previous Government bequeathed a golden economic legacy of low inflation, steady growth, rising living standards and falling unemployment, which has come down to 5 per cent.—about half the level of France and Germany.

    The new Government are betraying that golden economic legacy, putting this country’s economic achievements at risk. After just 10 months in office, they have already hit pension funds with a £5-billion-a-year pensions tax, which means £5 billion a year less for British industry to invest. They have hit industry with a new quarterly payments regime that will cost companies £2 billion a year during this Parliament. In aggregate, industry will have to pay nearly £20 billion extra in taxes during this Parliament.

    The Government have reduced the rate of corporation tax, but they have increased the burden falling on British companies. Businesses have been hit with higher national insurance contributions for employees earning more than the average level. That will hit high-tech companies, which the Government claim to want to promote. Because the Government have taxed business and savings, interest rates have had to go higher, driving up the exchange rate and hitting our exports.

    Almost every economic decision that the Government have taken has helped to push our manufacturing sector towards the brink of recession. For five months in a row, output from manufacturing has fallen.

    Mr. Geraint Davies (Croydon, Central) rose—

    Mr. Lilley Doubtless the hon. Gentleman wants to tell us that that is what he was elected to achieve.

    Mr. Davies Does the right hon. Gentleman agree that, arithmetically, only about a quarter of the exchange rate is explained by relative interest rates? Does he further agree that the real reason for the high value of the pound is the uncertainty over the euro—the fact that the drachma decided to come in and that nobody knows what the rate will be? The fact that people are investing in sterling is a testimony to the prudent policy of my right hon. Friend the Chancellor. People know that investing in sterling is an investment in certainty and stable policies for the future.

    Mr. Lilley The hon. Gentleman made a brave try, but he is in difficulty because he does not know his Chancellor’s policy on the exchange rate. We also do not know the Chief Secretary’s policy. He was asked five times on “Newsnight” last night whether he thought that the exchange rate was at the right level. The Chancellor has said that he wants a stable pound. Does he want it stable at the present level, or does he want mobile stability?
    Whatever the Government say, their friends in the Trades Union Congress have become disillusioned with their policy. Their analysis says: Because of the combined impact of the exchange rate, higher interest rates and tight public spending controls, unemployment will start to rise by the end of this year. The Conservatives commissioned the Centre for Economics and Business Research, which has one of the best track records in recent years for forecasting the performance of the economy, to calculate the likely 1312 performance resulting from the combined effects of the two Budgets that the Chancellor has introduced compared with what would have happened under unchanged Conservative policies. It concludes that the main impact has been on the level of investment, which has been lowered by the taxes on business. As a result, the economy will grow more slowly and unemployment will be 100,000 a year higher under Labour than our policies would have achieved.

    Thanks to decisions taken by our party in government, Labour inherited a buoyant economy that was generating increased tax revenues, taking people off welfare and helping to reduce public expenditure. That means that there was no need for the extra taxes that Labour has thrust on businesses and ordinary people. What it has done will damage investment and enterprise and will jeopardise our golden economic legacy.

    As well as arranging for that analysis of the economic impact of the Chancellor’s policies, we commissioned a study of the impact on individual households of the changes introduced in this Budget and the previous one. It shows that the Chancellor got his figures wrong. In the Red Book, a table shows that almost all households are better off as a result of this Budget—although the Government had to publish a corrigendum, showing that all the figures that they published were too rosy. Even the corrected figures are wrong, because they take account only of direct taxes. The Labour Government think that people do not have a car, do not drink, do not smoke, do not have a pension and do not save: all those ways in which this and the previous Budget hit ordinary households were not taken into account.

    We asked the experts to look at a typical family with a couple of children and a mortgage, who contribute to a personal pension and own a car; we shall assume that they are not smokers, because they are a virtuous couple. The study showed that, next year, as a result of the changes introduced by the Chancellor, every household at all levels of income will be worse off. In the year after—when his increase in child benefit and the change to working families tax credit comes into force—only households with an income below £16,000 will be better off. All households of that type with an income above £16,000 will be worse off, as a result of the combined effect of direct and indirect taxes, increased by the Chancellor.

    One thing we have learnt about the Chancellor—from books, of course, and from leaks from No. 10—is that he suffers from a psychological flaw. That flaw seems to inhibit him in consulting people about his policies before he announces them. He does not even consult his own officials sufficiently. We found that in his first Budget—he clearly had not consulted in detail about the plan that they cooked up in opposition, to scrap advance corporation tax credits. The Government did not realise that that meant abolishing foreign income dividends and, in turn, abolishing ACT and, in turn, that they would have to replace it with quarterly payments. They then had to come back yesterday and revise the system, because it was putting too great a squeeze on business. That was muddle enough.

    The Government also had the muddle on individual savings accounts and abolishing personal equity plans and tax-exempt special savings accounts. The original proposals were a dog’s breakfast, which would retrospectively have hit the most prudent the hardest. We 1313 may not have won the vote in the debate the week before last, but we won the argument. We could see from the expressions on the faces of Ministers that the Government would have to come back with a changed policy. It may be better than what they were proposing last November, but as the Institute for Fiscal Studies pointed out today, the Government could clearly have achieved almost all of that change by adjusting TESSAs, to allow people to take out their money sooner than was previously the case.

    Mr. Gerald Howarth (Aldershot) Was not the original proposal indicative of Labour’s total hostility to wealth creation? The Government have done a U-turn because of the arguments promoted by my right hon. Friend the shadow Chancellor and because their focus groups told them that the proposals were not popular. This is not a policy change out of principle—it is a policy change because they know that the proposal is unpopular in the country.

    Mr. Lilley My hon. Friend is right, but the damage has been done. The Government have revealed what they want to do to people’s savings. That destroys trust, and it means that the likelihood of people saving as much in these ways in future is limited, because they fear that the Labour party might come back and change the system retrospectively, to damage them once again. That is why the Government forecast in the Red Book that the savings ratio is set to fall hard and fast in the years ahead. They themselves have undermined the savings culture in this country.
    The Chancellor’s failure to consult is revealed by more than the muddle arising from the changes to ISAs; he clearly has not thought out all the consequences of the move from family credit to working families tax credit. He recognises that, in 500,000 households, the woman could on average lose £40 a week to the benefit of the breadwinner into whose pay packet the money will be paid.

    Although people will be given a choice about how the money will be paid, the Chancellor does not say how that choice will be exercised. He says that the choice is for the household, but will it be for the man or the woman? It will be a new source of discord for low-income families. Will he tell the House what will happen if they cannot agree? In her speech to the Fawcett Society, the Financial Secretary was unable to say what would happen, but perhaps she can tell us now. This is another matter about which there has been no consultation because of the Chancellor’s psychological flaw.

    Yvette Cooper (Pontefract and Castleford) Will the right hon. Gentleman give way?

    Mr. Lilley Perhaps the hon. Lady was consulted—I believe that she was recently married, so she will be able to tell the House how she will reach agreement with her spouse.

    Yvette Cooper If the right hon. Gentleman dislikes the working families tax credit so much, will he say whether a future Conservative Government would abolish it?

    Mr. Lilley The question is whether the Labour Government will fulfil the promises in their manifesto 1314 last year, not what will be in our manifesto in four years. They promised that they would reduce the cost of the welfare state and not plough further billions of pounds into it.
    We also want to know whether the Minister for Welfare Reform still believes what he said when he commented on the Conservative Government’s proposal to pay family credit through the wage packet. In a reasoned and thoughtful contribution, he said: Whatever scheme is enacted, if the parents behave as we hope we ourselves would behave, it would be irrelevant. But we are concerned with that minority—it may or may not be substantial—of families in which money for the children is not paid over to the wife. We must draw on our experience to decide whether it is more likely that the money will go where Parliament wishes it to go—towards the welfare of children—if it is paid to the mothers rather than the fathers. I believe from my experience and that of many other organisations that more money will get to children in those families where something is wrong if we pay the money to mothers rather than fathers. The House has a right to know whether the Minister for Welfare Reform has altered his view on that. Conservative Members realise that the problems exist—we listen to reason and do our homework—but the Chancellor has not learnt from experience.

    Again, on the proposal to tax child benefit for those on high pay, the Chancellor is too confused and muddled to spell out the details. He rushes to say that the proposal will be implemented, but he does not know how that will be done. I tell him that he faces some serious dilemmas. If he decides to tax on the basis of the income of the whole household, he must do away with independent taxation and take into account the joint income of husband and wife. However, if he does not do that, and taxes only the recipient of the child benefit—usually the mother—that will be very unfair, as modestly paid women who receive the benefit will have to pay tax on it because they are working, whereas the wives of rich husbands will not pay any tax on it, and will be given it in full.

    The Chancellor hinted at a third option, whereby child benefit will be taxed only if one or other member of the household is liable to the 40 per cent. rate of tax. That infringes the principle of independent taxation and will prove unfair because, unlike at present, the couple will have to reveal to one another which tax band they are in.

    If the Chancellor insists on making those whose household contains one or more members who are liable to tax at 40 per cent. pay a tax on their child benefit, a couple with a combined income of £50,000 might not have to pay, while someone with an income of £30,000 would. How can that be fair?

    Mr. Robert Sheldon (Ashton-under-Lyne) The right hon. Gentleman referred to child benefit. I had something to do with its introduction to replace the child tax allowances. That change was undertaken on the basis of an agreement between our two parties that child benefit would be uprated in the same way as the allowances were. The previous Government broke that promise, and the new Government have tried to restore some of the advantages that we—and, indeed, the Opposition of the day—foresaw.

    Mr. Lilley That is a fair enough point. The right hon. Gentleman played a distinguished part, and he will remember that child benefit replaced a tax allowance. Is it 1315 not extraordinary to tax a tax allowance? That is a strange proposal. It is the sort of idea that the Chancellor cooks up in the Paymaster General’s Park lane flat or in one of his country retreats in Italy or France, without consulting officials.

    The Secretary of State for Education and Employment (Mr. David Blunkett) Perhaps the right hon. Gentleman will recall for us the attitude that his party took towards joint and several liability for men and women under the poll tax, and tell us what action he took as Secretary of State for Social Security. Perhaps he will tell us whether he is for or against the proposal in the Budget.

    Mr. Lilley We abolished the poll tax and replaced it with the council tax. The Government have introduced the biggest rise ever in council tax. Before the general election, the Prime Minister—

    Mr. Blunkett rose—

    Mr. Deputy Speaker (Mr. Michael J. Martin) Order. Both right hon. Gentlemen must sit down. The right hon. Member for Hitchin and Harpenden (Mr. Lilley) is not going to give way.

    Mr. Lilley I did not want to cause you to rule out of order a long debate on the poll tax, Mr. Deputy Speaker.
    Before the general election, the Prime Minister tried to convince the British people that Labour’s days of redistributive politics were long gone, but the more one looks at the Budget, the more its redistributive nature becomes clear. Perhaps the title of the Red Book, “New Ambitions for Britain”, provides a clue.

    Yesterday, the Prime Minister was sitting on the Front Bench. His ambition was to win the general election. Standing at the Dispatch Box was the Chancellor. His ambition is to win the leadership of the Labour party. He has his own agenda and needs to convince Labour Back Benchers that he is on their side. That is why the Budget conflicts with the Prime Minister’s promises: the Prime Minister made promises to appeal to the British electorate, and the Chancellor breaks them to appeal to the Labour selectorate.

    The Government believe in slick presentation and think that it is more important than keeping their promises. They think that they can tell us that black is white, spending is saving and taxes are good for us. They say that they want to encourage pension provision and they put a £500-million-a-year tax on pension funds. They say that they are the friends of business and they put nearly £20 billion of tax on business. They say that they are really country folk at heart and then slap the best part of £1 billion of extra taxes on motor fuel and gasoline, and believe that they can buy off rural anger by insulting people with £50 million for rural buses over three years. They say that this is a Budget for women and children, but they create a situation in which up to 500,000 women and children could lose £40 a week.

    This Budget betrays the Government’s pledges to middle Britain, it betrays their promise to reduce spending on the welfare state and it betrays the golden economic legacy that we bequeathed them. The Chancellor may 1316 have seen the waving Order Papers yesterday, but the people of this country will see the bills of his Budget landing on their doorstep in the months and years to come.