The Rt. Hon. Sir John Major KG CH

Prime Minister of Great Britain and Northern Ireland 1990-1997

Chief Secretary (1987-1989)

Mr Major’s Comments During Budget Resolutions Debate – 15 March 1989

The text of Mr Major’s comments during the Budget Resolutions and Economic Situation debate, made on 15th March 1989 in the House of Commons.

Mr. John Smith (Monklands, East) Yesterday the Chancellor of the Exchequer presented his Budget for 1989 without a word of apology for the damage done to our economy and to our society by the Budgets – now totalling six – for which he has been responsible. Last year we had a Budget for the rich. It was the most unfair redistribution of income and wealth that has occurred this century. However, it was also more than that: it was foolish as well as divisive and unfair. As is now startlingly clear, it was manifestly wrong in its assumptions about the economy and foolishly complacent about the policies it promoted.

The Chancellor was warned by the Opposition and by a few voices elsewhere about the dangers of a deteriorating balance of payments deficit on the current account. His response was to predict – in one of the most massive failures of prediction that has been offered to the House – that the deficit for 1988 would be £4 billion. We now know just how wrong he was. The outturn was a deficit of well over £14 billion, and the Chancellor confirmed that he expects the deficit to be just as bad this year. In an interesting insight on his own embarrassment, the Chancellor did not state the actual figure. Almost as if he could not bring himself to utter the words “£14.5 billion”, he took refuge in the circumlocution of saying that the current account deficit would remain at the same level as last year.

The Chancellor’s forecasts for the trade deficit are worse than ever before, but they may still be an under-estimate. The latest trade figures for January are running well ahead of the forecast that the Chancellor gave the House only yesterday. The deficit in manufactured goods for last year was in excess of £20 billion. I am forced to observe that the surplus – not the deficit – in the balance of trade in manufactured goods when the last Labour Government left office was over £3 billion.

We hear a little less today, but occasionally, in tones of fading echoes, we hear about the economic miracle wrought by the Government. It could, of course, be thought to be a miraculous achievement to turn a £3 billion surplus in manufactured goods into a deficit of £20 billion, all within a decade in which the Government gained the enormous windfall of £78 billion of North sea oil revenues, but, unfortunately, it would be a miracle in the wrong direction. The truth is that it is the Government’s pretensions, their glosses on the truth, the hype that modern advertising has perfected to an alarming degree and the absurd claims and exaggerations, which are so faithfully repeated by acolyte organs of communication, that are miraculous. The reality is depressingly not so good.

Let us take as examples three critical and indisputable facts about Britain’s economy. We have the highest balance of payments deficit in our history, the highest interest rates in the industrialised world and, with the exceptions only of Greece and Portugal, the highest rate of inflation in the European Community. We clearly have the highest rate of inflation among the G7 countries.

However, let us cast our minds back to just one year ago – almost a year to the day. Was there a hint of the danger ahead from our intrepid navigator, who was too busy moving the best furniture in the ship into the first-class cabins to notice the directions in which he was heading? There was not a word. Even after he had been warned in our debates on last year’s Budget, in his reply the Chancellor complacently affirmed that we had an economic miracle.

There was no talk then of a soft landing or a hard landing. I suppose that some perception of reality must have penetrated the Treasury over the year, as it now recognises that there must be a landing. However, if we are still involved in an economic miracle, it is difficult to understand why we do not keep on flying. Perhaps we are landing just to refuel or to change the pilot, or perhaps – even more likely – to give an extra seat in the cockpit for Sir Alan Walters.

When, in the period between the Budget of 1988 and now, it became clear that the Chancellor had gravely underestimated the boom in demand that the huge expansion of credit and his irresponsible tax handouts to the rich had caused, he started the relentless increase in interest rates that moved up from 7.5 per cent. to the current 13 per cent. – and there he is stuck. Interest rates have been lowered on or shortly after the Budget for years past – it is almost an annual ritual – but there has been no announcement of a cut in interest rates this year, nor is there likely to be.

The Chancellor dare not. Higher interest rates are the Lawson risk premium that must be paid to the foreign holders of the short-term money which finances the balance of payments deficit for which this Chancellor is responsible. They are the beneficiaries of the Chancellor’s repeated rounds of one-club golfing. However, as is painfully clear, the losers are industry and the British people as the cost of living soars. British industry is saddled with an uncompetitive exchange rate and higher costs for investment as it seeks to compete in the world market place. Industry is being urged to prepare for 1992 with one arm tied behind its back by its own Government.

Home owners have borne the brunt of the Chancellor’s chosen instrument of credit control. They have seen any tax benefits that they received in last year’s Budget vanish like snow from a dyke. To be fair, not all those who received tax cuts are worse off – the rich are still well ahead. They have so much that they can finance any increase in mortgage payments – those of them, of course, who need mortgages.

Let us consider those with more modest means. For the vast majority of home owners their mortgage payment is by far their largest domestic outgoing. A family with two children on £12,000 per year – £240 a week – received £12 per month in tax reductions last year. If they had a modest mortgage of only £25,000, their monthly repayment is up by £42. Last year the Chancellor with one hand gave them £12 and in the course of that year they were relieved of that and suffered an extra penalty of £30 per month. The Chancellor gives with one hand and then takes back with the other. It is a use of the invisible hand that even Adam Smith may not have envisaged.

I state those figures in a moderate way, because I know that my right hon. and hon. Friends will tell me of constituents who pay £60, £70 or £80 more in mortgage repayments per month – and they are right. I gave my example to show how at modest levels of income and of mortgage the last Budget was a boomerang.

The Chancellor described his Budget last year – I noticed him in the press doing the same this year – as a milestone, but for the majority of people in Britain the Lawson milestone has become a millstone around their necks. This year’s Budget offers no relief, because 1989 will be another year of mortgage misery for millions of home owners.

Of course, the high interest rate – the Chancellor’s sole instrument to curb demand – increases the cost of living and makes the inflation rate worse. It is little wonder that the Treasury would like to fiddle the figures and take mortgage costs out of the retail prices index. But mortgage bills consume personal income just like any other price rise. The Chancellor constantly makes utterly spurious comparisons with other industrialised countries that do not include mortgage costs in their calculation of retail prices. However, the pattern of home ownership in those countries is very different and other forms of housing costs – usually rents – are taken into consideration in their calculations.

It is invidious of the Government to disclaim the inflationary effects of increased mortgage payments; and offers precious little comfort for hard-pressed home owners this year. The truth is that, after a decade of Conservative rule, the Prime Minister’s anti-inflationary rhetoric is hollow. Her hype about zero inflation is exposed as humbug, and her Government provoke, not prevent, a spiral of rising prices.

The Chancellor’s forecast of the rate of inflation has proved only slightly less reliable than his forecast of the trade deficit. Last March he said that inflation would be 4 per cent. Last September he told us that there was only a “temporary blip”. But yesterday he confirmed that inflation is 8 per cent. and, even on his own estimation, it will stay high for the whole of 1989. According to the Chancellor, it will fall to 5.5 per cent., which I think even he might view as being relatively high.

To make matters worse, the Government themselves have created those inflationary own goals. [Interruption]. I hope that Ministers will pay attention, because this matter is one for which they are uniquely responsible. The Ministers seated opposite me on the Conservative Front Bench are responsible for heavy extra charges for water, electricity, public transport and National Health Service prescriptions. Those price rises sharply increase the cost of living. It is within the power of the Government not to have caused them and to reverse them. The Government are responsible for a very large part of the inflation from which we suffer.

It was no doubt for that reason, among others, that the Financial Times commented: Inflation is simply a headache for Finance Ministers who get things wrong. As the United Kingdom’s inflation rate surges upward. the Chancellor’s headache is getting worse. One might imagine that we suffer from a world contagion, but if one examines the inflation rates of competitor and analogous countries one realises that our inflation is significantly higher than theirs. We are not receiving inflation in some contagious way from those other countries, and the Chancellor has had the good fortune to be in office during a period of remarkably low commodity prices. Inflation in this country is a home-grown phenomenon – and we are looking at some of the gardeners on the Government Benches.

The Chancellor of the Exchequer is a disillusioned monetarist who displays no real understanding of the contemporary causes of inflation. [Laughter]. The Chancellor may laugh, but I can easily demonstrate the extent of his lamentable ignorance. Inflation can either be demand-led or pushed by rising prices. The Government, remarkably, have achieved it with both. The credit boom and last year’s tax cuts allowed demand to surge beyond the capacity of industry supply, creating bottlenecks and skill shortages. Meanwhile, rising charges for public utilities have added price-pushed inflation to fuel the problem even more.

In a celebrated phrase, the Chancellor said that inflation would be his “judge and jury”. Let us, in an exercise of charity, overlook the Chancellor’s attempts to fix the evidence by arguing that mortgages should be removed from the retail prices index. However much he wriggles, he will be unable to avoid the verdict. It is not for us to suggest an appropriate sentence for the criminal, because the Prime Minister is about to inflict a very severe punishment. Few of us would relish the prospect of daily tutorials in economics from Sir Alan Walters.

Mr. Tim Smith (Beaconsfield) Is there not an element of being wise after the event in all of this? Does the right hon. and learned Gentleman recall the policies that he advocated in the House on 5 November 1987 when, on an Opposition motion, he called for significant cuts in interest rates and increases in public spending? Is it not clear that, if those policies had been followed, interest rates and inflation would be back at the levels that we associate with the last Labour Government?

Mr. Smith I suppose that the Chancellor might be wiser after the event of his daily tutorials from Sir Alan Walters. I shall answer the hon. Gentleman’s question very directly. Neither I in any speech, nor the Opposition in any motion, commended the Chancellor’s credit boom and his irresponsible relaxation of credit. We voted against his irresponsible tax cuts for the rich. As we are talking about being wise after the event, I ask the hon. Member for Beaconsfield (Mr. Smith) – who no doubt talked about zero inflation – now that inflation is running at 8 per cent., who is wise after the event?

The Chief Secretary to the Treasury (Mr. John Major) It is within my memory and that of the right hon. and learned. Gentleman that on “Newsnight” last night he expressly denied that just after the stock exchange crash he called for further public expenditure and tax cuts. My hon. Friend the Member for Beaconsfield (Mr. Smith) mentioned a motion moved by the right hon. and learned Gentleman, and I have several press releases in his name suggesting precisely that. Perhaps he would care to withdraw.

Mr. Smith The right hon. Gentleman knows perfectly well that I said I was in favour of the small reduction in interest rates that was made at that time. That was made perfectly clear, and it does not do the right hon. Gentleman or the House any credit for him to try to change chat. We can look at the transcript of the television interview.

Mr. Major The right hon. and learned Gentleman is wriggling.

Mr. Smith Treasury Ministers are experts on wriggling.

I remind the hon. Member for Beaconsfield that in the debate to which he referred massive public expenditure was called for by one of the leading apologists for the Government on the Government Back Benches.

Of course we have asked for increases in public expenditure. If well-planned increases in public expenditure had been carried out as an alternative to the misguided tax cuts made in last year’s Budget, we would be able to spend today, but because the Government failed to spend we now have the ludicrous position of a Government with a surplus of £14 billion or £15 billion who are frightened to spend a penny piece of it.

Having fuelled inflation, the Chancellor now finds himself stuck with the consequences. Surely it is clear that Britain needs to invest. It needs to invest more in education and training to reduce the skill shortages by which many British companies are harmed. It needs to invest more to improve roads and railways to ease congestion, reduce pollution and promote safety. We need to spend more on the National Health Service to retain more qualified nurses and improve the quality of health care.

Every opinion poll shows that the British people want better roads, hospitals and schools. All the evidence shows that this would be good for the British economy. Above all, we need to invest in the talents of our people so that Britain produces quality goods that other countries want to buy. As we approach the 1990s, we need an economic miracle if we are to compete successfully against the Germans, Japanese and Americans in the world market place.

Labour Members make no apology for saying – we constantly insist on it – that our priority must be investment in training, education, research and regional development. The Chancellor and his fellow Ministers fail to understand that such public investment is non-inflationary and counter-inflationary. Investment that releases bottlenecks in skills is clearly counter-inflationary. Investment in the regions, where there are unused resources and unemployed people, would certainly be non-inflationary.

Public investment is not only vital to strengthen the economy but, for most of us, it is the key to improving the quality of our lives. Across the range of public services – health, education, water, the environment and transport – the effects of under-investment and penny-pinching over the years of this Conservative Government have reduced quality, safety and efficiency.

There are one or two items in the Budget that we welcome. Some 10 years after it was promised, the Chancellor has abolished the earnings rule for pensioners. He has given a tax preference to the use of lead-free petrol. He has reduced national insurance contributions at the lower end of the earnings scale. [Interruption]. It is of particular benefit to people on the lower earnings scale. Of course it helps people throughout the earnings scale, but perhaps some of them do not deserve as much benefit as those at the bottom end of it.

The Chancellor of the Exchequer (Mr. Nigel Lawson) The right hon. and learned Gentleman is being censorious.

Mr. Smith The Chancellor says that I am being censorious, but I am only being fair. I have old-fashioned notions about relating taxation to the ability to pay. I can tell the Chancellor that I do not mind being censured for holding those views; indeed, I am rather proud to accept such censure.

The Chancellor should have done much more for the lower paid. He increased income tax personal allowances by the bare minimum he was obliged to give, as opposed to the minimum he dared to give, and by an amount less than the present rate of inflation, and below the increase in average earnings. As a result, as he knows well, the proportion of income paid in income tax, even for the lowest paid, will increase.

For many others, the Chancellor has done nothing at all. The freezing of child benefit at £7.25 a week is a scandal. Child benefit replaced the children’s tax allowance, which would have been updated every year if the Conservatives had kept to an all-party agreement to do so.

While we are on the subject of taxation, I should say that one of the more sedulously spread myths of this Administration is that the tax burden has been reduced. It should be well enough known that the burden of tax as a percentage of national income is substantially higher now than it was before the present Government came to office. But I regret to say that that is still not widely enough appreciated, and I am always on the lookout for pieces of evidence in the presentation of the Government’s own statistics that reveal this important fact yet again. I found one of some interest on page 18 of the “Financial Statement and Budget Report” – the Red Book. In table 2.5 the Government approached this matter by assessing non-oil taxes and national insurance contributions as a percentage of non-oil-money GDP. They can do it any way they like, but it is the same question that is being asked: what percentage of income is going on taxation?

We discover that, on the basis of this analysis, the tax percentage of GDP in the six years of the present Chancellor’s period of office has moved from 37.75 to 37.5 – a reduction, over six years, of 0.25 per cent. The same table tells us helpfully that in 1978–79 the percentage, under the Labour Government, was 34.25. Clearly the Chancellor has some way to go to catch up with the percentage under the last Labour Government. Indeed, at this rate of progress – one quarter of 1 per cent. every six years – it would take the Chancellor 78 years to reach that level. Perhaps I should counsel the Chancellor against an excess of prudence and caution in this matter.

When we look at the effects of these tax changes and at the failure to increase benefits, we see how sad they are for many people in this country. Every time the Conservatives refuse to uprate child benefit they deny even modest help to the poorer families. We proposed that the Chancellor should increase child benefit to £8.35 – what it would have been if it had been increased in accordance with inflation. We said that he should also increase personal income tax allowances above the increase in earnings, particularly for the low paid, and make radical reforms in national insurance contributions to make them fairer. Had he done so, a family with two children, earning £190 a week, would have gained over £6 per week – and it is worth remembering that nearly half the wage earners in Britain earn less than that amount. That would have been a real help to the lower-paid.

Of course, the living standards of the most vulnerable people in our society will fall still further this year because the Chancellor has chosen to increase pensions and unemployment benefit by less than 6 per cent., even though, as he told us yesterday, inflation will reach 8 per cent. But it is hardly surprising that this Government overlook the less well-off. Last year the Budget was followed by the savage cuts in social security benefits caused by the new regime for income support and housing benefit. Regrettably, the effects of that continue to be with us.

Many pensioners receiving transitional payments, which were to protect them from some of the effects of these changes, will receive no net increase in payments this year. Their transitional addition will be reduced by the amount of any uprating. My hon. Friends and I see such people at our surgeries every week. I had an unfortunately large collection at my most recent surgeries. For them, the uprating will be not just insufficient – it will be non-existent. They will have to face the relentless rise in prices caused by 8 per cent. inflation, without any help at all from the Government.

But there is one proposal, which was mentioned only briefly by the Chancellor yesterday and with which we shall deal when we consider the Finance Bill, which we believe to be not only wrong but grotesque. I refer to the strange idea that the taxpayer should find a subsidy for private medical insurance for people over retirement age.

It may be that that was not the Chancellor’s idea. There was a rumour when it emerged during the health review that it was being resisted by the Chancellor and the Secretary of State for Health. But, as we know, resistance to the Prime Minister does not last long in this Administration. In what we might well imagine as an exercise in the adopted royal prerogative, the gentlemen concerned would have been told, “We have decided.” In an exercise of a distinctly non-royal we, they would conclude, “We had better do as we are told.” I am confirmed in the impression that the Prime Minister was the author of the scheme because, after all, she is one member of the Government whom we know could benefit personally from it.

I confess to having listened with some impatience over the years to lessons in the virtue of targeting benefits from the Prime Minister, the Chancellor and nearly every occupant of the Government Benches, but I confess that it is not immediately evident to my hon. Friends or to me that we should subsidise from our taxes the private medical insurance of people such as the Prime Minister who are already well provided for.

Mr. Ian Taylor (Esher) Since many thousands of trade unionists benefit from private health insurance, why is the right hon. and learned Gentleman trying to deny pensioners the same rights?

Mr. Smith As far as I know, neither trade unionists nor non-trade unionists have been the beneficiaries of tax privilege in pursuit of private medical care until this suggestion was made in the Budget.

My constituents, many of whom, I am sorry to say, are in the poor category, when they apply for income support or housing benefit are subjected to the most rigorous tests of income and capital. For even small and modest amounts of savings, they are completely excluded from any assistance from the taxpayer because, we are told, benefits must be strictly targeted.

Why does the same principle not apply in this case? What is the justification for an open-ended subsidy for private medical care. Bear in mind that we are talking about payments made not simply by pensioners but by those who make them on their behalf, many of whom will be paying tax at the higher rate. Why should the rest of us who pay our taxes and depend, and are happy to depend, on the NHS for our medical care subsidise by 40 per cent. the private medical bills of the hon. Gentleman, the Prime Minister or anyone else in Britain?

No test of income or capital is applied in this case. There is no invidious inquiry into means. We know that every time Conservatives want to advance their own interests they forget about targeting, particularly when it helps the better-off and the object is privilege. Indeed, the arrangements are extremely convenient. People do not even have to fill in a form to ask for tax relief. According to BUPA advertising in today’s newspapers, it will be deducted directly and the Treasury will then pay. That advertisement may be familiar to the Chancellor. It is a slightly unfair depiction of the right hon. Gentleman –

Mr. Neil Kinnock (Islwyn) Sumo Lawson.

Mr. Smith – as he wrestles with his difficulties. All I can say is that he is in this pickle because the Prime Minister insisted that this particularly daft scheme be put into his Budget.

We know that this is not a Budget of much substance. None the less, it is highly revealing. It reveals how fearful and defensive the Chancellor has become as he contemplates the results of his misguided policies. He has been forced to promise to maintain high interest rates for as far ahead as he can see. But with falling growth, rising inflation and a worsening deficit in our overseas trade, our economy is clearly not under wise or prudent supervision.

The Chancellor yesterday did not dwell on the perils which lie ahead, but he knows only too well the dangers of being dependent on the good will of the foreign holders of short-term money, whose financing of the balance of payments deficit he requires to secure by his policy of high interest rates, and on whose appreciation of their own interests the future of sterling depends.

This country has, under Conservative rule, not only seen the dissipation of North sea oil revenues which could have been used to rebuild our industry and achieve civilised standards of service and opportunity; we have also seen this country move from a position of oil strength to a position of dependence on short-term hot money. For that unfortunate outcome the Government will he held to account.

The Chief Secretary to the Treasury (Mr. John Major) This is my right hon. Friend’s sixth Budget. In these Budgets his measures have dramatically improved the supply performance of the economy and simplified the corporate and income tax system to an extent that few people anticipated. He has reduced the rates of tax and the number of taxes. He has abolished more taxes than any other Chancellor this century. He has reduced tax distortions and tax breaks and moved steadily towards a much simpler and more efficient tax structure. No Chancellor for generations has so reformed our fiscal structure, and that work has continued in this Budget.

The right hon. and learned Member for Monklands, East (Mr. Smith) said, correctly. that the tax burden has gone up. He is right about that, and I will tell him why. It has gone up because we are repaying Labour’s borrowing – [Interruption] – which, had we not done so – –

Mr. Kinnock Really!

Mr. Major The Leader of the Opposition would learn something if he listened; it would be a novelty for him.

As I was saying, had we not done that, it would today amount to a PSBR of £25 billion in today’s terms. That is not a burden that we are prepared to have and to pass on to the next generation, even though Labour Members were prepared to do so.

The right hon. and learned Member for Monklands, East may not believe it, but perhaps he does not understand these matters. Indeed, he has as much likelihood of understanding how the economy works as Donald Duck has of winning Mastermind – [Interruption.] I see the hon. Member for Glasgow, Garscadden (Mr. Dewar) leaving the Chamber. If that Donald returns, he at least will be extremely welcome.

The right hon. and learned Member for Monklands, East has noticed none of these developments. He has also ignored many of the effects of the changes that have been brought about – the increased growth, the dramatic increase in investment, the greater prosperity, the rise in the number of people in work and the falling numbers of people who are unemployed.

Mr. Harry Ewing (Falkirk, East) rose –

Mr. Major I will give way later in my speech.

Mr. Ewing rose –

Mr. Major The hon. Gentleman will have an opportunity to speak later. I am anxious to make some progress now.

Mr. Ewing rose –

Mr. Speaker Order. The hon. Member for Falkirk, East (Mr. Ewing) has been a Member for a long time. He knows the rules.

Mr. Major The hon. Gentleman has been here a long time. We welcome his presence and I promise to give way to him later.

The right hon. and learned Member for Monklands, East has been disparaging about the Budget. He thinks – I believe he has said so in explicit terms – that it is a missed opportunity. It is far from that. It is a prudent Budget, as my right hon. Friend said, and it is the right Budget to help bring down inflation, with the strong fiscal and monetary stance that the Government now have.

It is a Budget that is good for savers, is good for those in work – with a £3 gain for the vast majority of employees from the national insurance changes, is good for the elderly, is good for small companies and is good for the environment.

When in office, the Labour party produced Budgets – several a year, as I recall. People combed through them to see if anybody did not lose. One has to comb through this Chancellor’s Budget to find someone who does lose. That is the significant change, and most people understand that only too well.

The right hon. and learned Member for Monklands, East had some critical things to say about my right hon. Friend’s stewardship. Of course, it is the right hon. and learned Gentleman’s job to be critical, and he spares no effort in being critical. He makes even less effort in being accurate. He accuses my right hon. Friend of losing control of demand, yet I return to a point that we have debated before. After the stock exchange crash, there were genuine fears of a widespread recession. At that time, my right hon. Friend relaxed monetary policy, as everybody advised him to do, but the right hon. and learned Member for Monklands, East and his colleagues urged both cuts in interest rates and large increases in public expenditure. If we had done that – we did not increase public expenditure – the growth in demand about which the right hon. and learned Gentleman now talks would have been far worse.

The right hon. and learned Gentleman has forgotten that. Indeed, he has forgotten it to such an extent that last night on “Newsnight” when I specifically asked him, he categorically denied having called for public expenditure increases and said that he had called only for interest rate cuts. As my hon. Friend the Member for Beaconsfield (Mr. Smith) pointed out, the right hon. and learned Gentleman not only called for increases in public expenditure but moved a motion to that effect. [Interruption]. Last night the right hon. and learned Gentleman denied it. Last night he neglected to remember – I remind him in case he has forgotten – that he had twice issued news releases calling for increased public expenditure and increased demand: Smith Urges Action to Avert Recession and Smith Calls for Boost to Real Economy”. That was immediately after the stock exchange crash. If that action had been taken then, the growth in demand and inflation and the trade gap which the right hon. and learned Gentleman attributes to the crash would have been far worse.

The right hon. and learned Gentleman’s criticisms were met fairly and squarely yesterday in my right hon. Friend’s Budget. My right hon. Friend explained the origin of our trade gap. Exports are at an all-time high, but imports have risen much faster as a result of rapid growth in general and a massive investment boom in particular. It is interesting that fully three quarters of our imports of manufactures now consist of production and investment goods. Consumer goods are only a small proportion. The trade gap is not driven by a public sector deficit; it is investment led, and that investment is the source of future growth in production, exports and jobs. That is the difference between this trade gap and its predecessors, and the right hon. and learned Gentleman should understand that.

Having explained the cause, my right hon. Friend the Chancellor explained the remedy. The right action has been taken. The only effective way to slow excessive demand is to put up the cost of borrowing. That worked before and it is working now. It will choke off inflation and the trade gap will in due course diminish, and meanwhile we have no difficulty in financing it. There is no credible alternative.

The right hon. and learned Gentleman has also been critical of my right hon. Friend’s forecasts. He had some fun with them. That reminded me of something, and I wonder whether the right hon. and learned Gentleman remembers who said this in defence of Government forecasts of the trade gap: Obviously these are matters which are extremely difficult to forecast. I do not think that getting them right or wrong is the prerogative of any particular Government.” – [Official Report, 12 March 1979; Vol. 964, c. 18.] Does the right hon. and learned Gentleman remember who said that? I shall tell him. [An HON. MEMBER: “Disraeli.”] It was not Disraeli. It was the Secretary of State for Trade in 1979 – the right hon. and learned Gentleman himself.

Mr. John Smith Can the Chief Secretary tell me whether at any stage in my previous career I forecast a balance of trade deficit that was over four times wrong on a rate of inflation that was over twice wrong?

Mr. Major I can tell the right hon. and learned Gentleman what happened. As I recall, he was a very distinguished Secretary of State for Trade for five months. During that period, we moved from a surplus to a deficit, inflation rose by 3 per cent. and heaven alone knows what happened to export performance: it did extremely badly. Mercifully, the general election cut off the right hon. and learned Gentleman’s career at that stage.

Mr. Harry Ewing I know that the Chief Secretary’s hat is in the ring for the Chancellor’s job. Given the choice that the Prime Minister must make, I would say, “Better the devil you know than the devil you don’t.”

The Chief Secretary waxed eloquent about repaying the national debt. Will he make it clear whether it is now part of the Government’s economic policy to repay the national debt rather than investing in education, research, industry, the Health Service, the environment and everything else that improves the quality of life?

Mr. Major I refer the hon. Gentleman to my right hon. Friend’s Budget speech, in which he made it perfectly clear that our policy in the medium term was a balanced Budget but that it would take a period to achieve that balanced budget.

On public expenditure, the hon. Gentleman may care to recall that as a result of the public expenditure round last year there was a real increase of more than 3 per cent. in the priority programmes. That is a far more substantial increase than has taken place for many years and it was particularly well targeted. Capital expenditure rose – or, at least, it is to rise in the year beginning in April – by a record amount, particularly expenditure on the National Health Service. I should have thought that the hon. Gentleman would welcome that. [HON. MEMBERS: “Answer.”] The position is as I have described it and as my right hon. Friend the Chancellor explained yesterday.

The frankness revealed in my quotation from the right hon. and learned Member for Monklands, East is refreshing, although 10 years on it seems to have deserted him. As we saw a moment ago, when the right hon. and learned Gentleman talked about the growth of credit, his frankness is not all that has deserted him; his memory appears to have gone, or at least become selective.

I set out our solution to the trade gap a moment ago, but what was the right hon. and learned Gentleman’s solution? It was a dynamic solution. [HON. MEMBERS: “What about the Budget?”] I am coming to that: it is a very important Budget. The right hon. and learned Gentleman told the House – I shall quote him whether he is embarrassed by it or not – – We believe that the best way to do that” – to improve the trade gap – is to engage the attention of the sector working parties”. – [Official Report, 12 March 1979; Vol. 964, c. 9.] So that is it. All we need is a sector working party – no incentives, no productivity growth, no supply side reform, no firm fiscal or monetary stance, just a sector working party. Nor did the right hon. and learned Gentleman propose a specific remit for the working party. His ambitions were more limited. We had only to engage the working party’s attention and the trade gap would disappear. Clearly, the right hon. and learned Gentleman believed in the smack of firm indecision.

Mr. John Smith Whatever the policies for which I was responsible – I remind the House that we then had a manufacturing trade surplus – can the right hon. Gentleman tell me why, if monetary discipline, supply side reform and so on are so wonderful, a £3 billion surplus 10 years ago has been reduced to a deficit of £20 billion?

Mr. Major The right hon. and learned Gentleman will have noticed that as a result of our policies over the past few years there has been a more dramatic rise in the living standards of people in Britain than we have experienced for many years, and that is the final indicator of the success or failure of Government economic policies.

The right hon. and learned Gentleman proposed to the shadow Cabinet a shadow Budget package of tax cuts and spending which he costed at £3 billion. That was an odd piece of costing but I shall gloss over that for today. There is a curious feature about the costing of the £3 billion package. A day or so after unveiling that package of tax cuts and spending, the right hon. and learned Gentleman criticised my right hon. Friend’s Budget of last year as the cause of the growth of credit and the trade deficit. That Budget cut taxes in the current year by £4 billion.

If the right hon. and learned Gentleman believes that the £4 billion tax cut last year created the trade deficit, why did he propose in his shadow Budget a further £3 billion tax cut this year? The logic of the right hon. and learned Gentleman’s argument is that he should be clawing back last year’s reductions, not proposing more.

If he really believes what he has said in recent months, he should not have proposed that package, or, in doing so, he should have said that it would worsen the trade gap. But he did not say that. The truth is that the right hon. and learned Gentleman has been caught out. It is now perfectly clear that he knows that last year’s Budget did not create the trade gap, despite all that he and his colleagues have said repeatedly in recent months. Because he knows that, the right hon. and learned Gentleman considered it prudent to propose a tax and spending package almost as large as last year’s, and larger than my right hon. Friend’s proposals this year. It simply illustrates beyond doubt the sheer brass-necked hypocrisy of what the Opposition have been saying in recent months.

That brings me to the Leader of the Opposition and what he said yesterday.

Mr. John Smith What about your Budget?

Mr. Major I am referring to the right hon. Gentleman’s speech on the Budget. Is the right hon. and learned Gentleman suggesting that the Leader of the Opposition did not mention the Budget? He said yesterday, and I agree with him: Governments do not have their own money … Governments only have the taxpayers’ money.” – [Official Report, 14 March 1989; Vol. 149, c.315.] He then implied, although he did not say it explicitly, that the tax burden should be reduced by taking the basic rate down by 6p, to take it to the tax burden that he believed existed under Labour.

I thought that we had found a convert in the right hon. Gentleman, but that feeling lasted only for a moment. Within minutes of allocating the surplus to cuts in the basic rate, the right hon. Gentleman was allocating it to increases in public spending. He went further than ever before and allocated all the surplus £14 billion to increases in public spending. What the right hon. Gentleman had described as the taxpayers’ money did not stay with them for very long. It was soon snatched back to be spent by him. But he overlooked one thing. With Labour policies, that surplus would not exist in the first place to be snatched back.

The electorate understand that very well. Labour is the party of high taxation. We are the party of low taxation and that is why we sit on this side of the House and Labour Members sit opposite and will continue to do so for a large number of years to come.

Mr. John Home Robertson (East Lothian) Will the Minister give way?

Mr. Major In a moment.

The Leader of the Opposition said that the Government had been a bonanza for the rich and that the top 1 per cent. – which presumably includes the hon. Member for East Lothian (Mr. Home Robertson) who sought to intervene – has gained £16 billion since 1983 and £26 billion since 1979 in cumulative tax cuts. But he did not say that the same top 1 per cent. will be paying a higher proportion of total income tax in 1989–90 than they paid in 1978–79. That means that they will have paid £5.75 billion more in taxation. If they were not making that contribution, the difference would have to be made up by the other 99 per cent. of taxpayers. But that is the right hon. Gentleman’s policy. The Opposition believe in increased taxation for everyone, as they repeatedly make clear.

It is not only the top 1 per cent. who provide a higher proportion of the total tax take than they did in 1979. The top 5 per cent. were contributing 24 per cent. of the total tax take then and now they are contributing more than 29 per cent.

Amazingly, the right hon. Gentleman tried to pose as the friend of the low-paid. He said that the Government has removed their rights. I shall tell the Leader of the Opposition about the rights that we have given the low-paid. We have given them the right to keep more of what they earn, and they will welcome that. We have reduced the basic rate of tax from 33p to 25p in the pound – and that is before the latest reform, which provides an extra £3 a week for most people in work.

Mr. Home Robertson The right hon. Gentleman talks about his concern for taxpayers. May I draw his attention to what the right hon. Gentleman for Henley (Mr. Heseltine) described as the Tory tax? Is he aware that poll tax forms are being delivered to households throughout Scotland this very week? What does the right hon. Gentleman have to say about the fact that people like me, as he so charmingly put it, will end up paying less in local taxation because of that Tory tax whereas people on lower incomes throughout Scotland this year and in England next year will be paying substantially more tax?

Mr. Major I will tell the hon. Gentleman why so many people in Scotland will pay so much in community charge – because of the reckless way in which so many Scottish labour authorities spend.

My right hon. Friend’s Budget – –

Mr. John Smith I repeat the question put clearly by my hon. Friend the Member for East Lothian (Mr. Home Robertson), in case the right hon. Gentleman does not understand it. Why should people who are better off receive the same treatment as those who are much worse off? Can we have a straight answer to that question?

Mr. Major The majority of local government expenditure – [HON. MEMBERS: “Why?”] I am answering the question and the right hon. and learned Member for Monklands, East may learn something if he listens to my answer.

The majority of local government expenditure has been met in the past, and will be met in the future, by central Government grant, which comes out of the progressive tax system. The balance is met from the community charge, and payment of this element should be according to the services received.

My right hon. Friend’s Budget this year falls between the most far-reaching tax reforms for a generation and the introduction next year of independent taxation for husbands and wives. [Interruption]. The Leader of the Opposition is welcome to intervene if he wishes.

Mr. Kinnock Get on with it.

Mr. Major I am tempted to say, “Temper, temper.” You will never lead the country if you cannot control your own temper.

Mr. Deputy Speaker (Mr. Harold Walker) Order. I have no aspirations to lead this country.

Mr. Major I beg your pardon, Mr. Deputy Speaker. No one would ever suggest that you would ever lose control of your temper, or anything else.

As my right hon. Friend the Chancellor of the Exchequer promised, this is a prudent and cautious Budget. It makes no reduction in the overall tax burden and provides strong fiscal backing for a tough monetary stance. My right hon. Friend continues with the policies that have produced the strongest fiscal position of any leading country. As a result, we are forecasting a further fiscal surplus of £14 billion – that will be the third successive year of surplus. As a result of these cumulative surpluses over three years, we will have repaid 16 per cent. of public sector debt and saved £3,000 million in interest payments each successive year. That £3,000 million will be available for more productive purposes than paying interest on past debts, many of which were run up when Labour was in government.

This strong fiscal position has been unmatched for decades and has enabled my right hon. Friend to promote several important themes which he has pursued steadily during his six years as Chancellor. The predominant theme continues to be tax reform, designed to improve and simplify the tax system, remove tax distortions and maximise the freedom of individuals and companies to spend their own money and organise their own affairs. In that context, the main reform in the Budget is to restructure national insurance contributions. We should be entirely clear as to what yesterday’s reforms mean.

At present, people earning just below the steps for each rate band face a reduction in take-home pay as a result of an increase in their earnings. For example, someone whose earnings were near the threshold of £115 who received an increase of £ 1 would, as a result of moving to a higher rate of national insurance, find his or her take-home pay reduced by £1.37. That is clearly unsatisfactory. My right hon. Friend’s reform has entirely abolished two of the three steps and goes even further to help those on lowest incomes. He retained the first step of £43 income a week – the point of entry to the whole range of contributory benefits – but at a much reduced rate. The initial contribution has been reduced by 60 per cent. – from £2.15 to only 86p. That is the cheapest entry fee to the highest contributory benefits since the Beveridge system was introduced in 1948. By any yardstick, it must be the bargain of the century.

The reform not only introduces this low cost contribution to benefits, but removes distortions and disincentives in the national insurance system and increases take-home pay for the clear majority of people in work by about £3 a week. Seventy per cent. of the total benefit goes to those earning less than average male earnings. The reform carries with it a substantial cost to the Exchequer of £2.8 billion in a full year. It provides a simple but well-structured system of contributions for the low paid.

Mr. John Battle (Leeds, West) The Chief Secretary has said that people will gain £3, but those who are also on family credit and housing benefits will have their benefits deducted and will therefore lose. Simply increasing wages in this manner does not free people from the poverty trap.

Mr. Major The hon. Gentleman is right about the impact on some benefits. As a result of the changes in National Insurance contributions, however, take-home pay will rise by £3. If we took the hon. Gentleman’s view we would never either reduce national insurance contributions or raise tax thresholds, both of which the Opposition are keen for us to do.

Mr. A. J. Beith (Berwick-upon-Tweed) By laying such stress upon the £3, the Chief Secretary has led many people to expect that they will be better off in terms of national insurance contributions. Will he confirm that someone earning £70 a week – which, by my standards and his, is surely low pay – will be only 21p a week better off?

Mr. Major Yes. The reason for that is that – with, I believe, the hon. Gentleman’s support at the time – my right hon. Friend, to help those very same people, reduced the national insurance steps in 1985. People have already been paying reduced contributions. That is why I said that the vast majority will receive another £3 – as I said, 70 per cent. of the total benefit.

In his shadow Budget, the right hon. and learned Member for Monklands, East also proposed a reform of national insurance contributions, but his proposal was to abolish the upper limit on contributions. That would add massively to public expenditure on state earnings-related pensions in the long term – as I hope that he will acknowledge – unless the contributory principle was ignored, with a “shadow” upper earnings limit on pension entitlement and employees receiving nothing in return for higher contributions. The right hon. and learned Gentleman is a little unclear about that, but with a “shadow” upper earnings limit – which is presumably what he has in mind – nearly 2 million employees would immediately be worse off, with the person on about one and half times average earnings paying £3.75 a week more.

My right hon. Friend’s reform maintains the contributory principle and helps the low-paid without creating losers – a much sounder system. I hope, therefore, that the right hon. and learned Gentleman and his party will support it.

Dr. David Owen (Plymouth, Devonport) Surely the Chief Secretary is not defending the national insurance contribution on the contributory principle. The contributory principle is a fraud in NIC terms. Surely the next step must logically be to go a stage further in each successive Budget to bring the national insurance contributions and income tax into the same relationship.

Mr. Major I am afraid that I do not agree with the right hon. Gentleman, although I understand his argument and am familiar with the arguments in the Green Paper. I think that the contributory principle has much to commend it. The introductory entry fee is now very low at 86p, and I think it entirely right that we should sustain the principle now and in the future.

If the Opposition support the national insurance changes, the possibility of a parliamentary novelty will be opened up – that is, the Opposition actually voting for a reform that puts more money into the pockets of those on modest earnings. They voted against cuts in the basic rate of income tax in 1979, 1987, and 1988, and we shall watch with interest to see how they vote on national insurance contributions this year.

Another significant measure in the Budget is my right hon. Friend’s pensions proposals. We believe that they will make an important contribution to simplicity and flexibility in pensions provision. The change follows the overwhelming logic of previous deregulation policies to maximise freedom and minimise Government interference. The proposals effectively take the Government out of the business of artificially limiting pension arrangements, and will leave employers the freedom to offer their employees whatever pensions they see fit to offer. No longer will their decision be determined by the tax regulations of the Inland Revenue.

The restriction that my right hon. Friend does propose is the limiting of tax relief to pensions based on earnings of £60,000, with full protection of existing rights, for existing members of occupational pension schemes. Their current arrangements will not be adversely affected. The £60,000 tax relief limit will be increased in line with inflation to ensure that it retains its value. Those earning more than that and others who find the Inland Revenue limits restrictive, will be able to receive a top-up pension without tax relief, which will not in future affect the tax privileges of the main scheme.

Mrs. Maria Fyfe (Glasgow, Maryhill) On the matter of employers who would like to do something of benefit to their employees, why has the Chancellor not lifted the high burden of taxation on workplace nurseries? Does he not want to get more women back to work in Britain to fill the jobs gap? Does he not talk to the Secretary of State for Employment?

Mr. Major I understand the sensitivity of that issue, but it is predominantly a matter for employers, not for the tax system. We look to employers and employees to make those arrangements.

Mrs. Fyfe rose –

Mr. Major I have answered the hon. Lady’s question and I have nothing further to say to her on that issue. I have made it clear that we will not change that tax and that it is a matter for employers and employees.

As a consequence of removing those artificial restraints –

Mr. John Smith The right hon. Gentleman was asked a straight question by my hon. Friend the Member for Glasgow, Maryhill (Mrs. Fyfe). He was asked to justify why workplace nurseries are the subject of taxation. That is a Treasury responsibility. Will he give us the answer?

Mr. Major It is a benefit in kind and all benefits in kind fall into that category. We are not in the business of dividing up benefits in kind in the arbitrary fashion proposed by the right hon. and learned Member for Monklands, East. It is not a’ wise way to proceed.

As a consequence of removing those artificial tax restraints, my right hon. Friend has also been able to make some other worthwhile changes in the pension regime. The rules affecting those who retire or leave early have been simplified and the arrangements for personal pensions and additional voluntary contributions have been improved. Contribution limits have been increased substantially for those over 35 and, for the first time, people will be able to manage their own personal pension investments. Taken together, those reforms will increase choice and reduce bureaucracy for employers and employees. I hope that these and earlier pension reforms will remove much of the complexity and mystery in pension provision.

Last year, the Inland Revenue published a consultative document setting out three main options for reform of the life assurance industry. As a result of the representations made, my right hon. Friend has accepted that reform was necessary but that it should be achieved within the existing system. The measures he proposes have three advantages: they remove current anomalies; they enable my right hon. Friend to reduce the rate of tax on policy holders’ investment income from 35 per cent. to 25 per cent. and the rate of 30 per cent. on capital gains to 25 per cent; and they also enable him to abolish entirely life assurance policy duty. We believe that those measures will result in a fairer and more effective tax regime as well as removing uncertainty and anomalies and establishing a stable regime for a unique industry.

The second theme that runs through this and previous Budgets is the Government’s determination to widen the ownership of property and capital. In this Budget my right hon. Friend has proposed a number of measures to encourage saving and capital growth through wider share ownership. Ten years ago, share ownership by individuals appeared to be a dying habit. There were only 3 million shareholders of equities, and the number was dwindling. As a result, companies found it increasingly difficult to raise equity capital from individuals. All that has changed. Partly as a result of the extensive programme of denationalisation – that is what privatisation is – there are now 9 million shareholders, one fifth of the adult population. Becoming a shareholder in industry and commerce and building up capital is now much more commonplace, and that is a welcome trend.

The Budget proposes a range of measures to give further encouragement to share ownership again building on schemes already in place. The most important of those is the personal equity plan scheme which is to be expanded by increasing the annual investment limit from £3,000 to £4,800 and by relaxing the limits on investment in unit and investment trusts. Furthermore, shares from new issues can now be held in a PEP. The scheme has been simplified and better tailored to small investors.

A further characteristic of the Budget is that it removes a number of fiscal injustices and anomalies. The most obvious example is the ending of the cliff-edge steps in the national insurance system, but there are others as well. In particular, there are two measures which will remove anomalies affecting elderly people. First, we have fulfilled the single unredeemed pledge from the 1979 manifesto and abolished the pensioners’ earnings rule. As a result, pensioners who choose to go on working will no longer be penalised for doing so. It is simply not wise to inhibit pensioners from working if they wish to do so. Overwhelmingly, they have a great deal to contribute and, in future, they will have every encouragement to do so if they wish.

Secondly, we are reducing to well below 40 per cent. the marginal rate of tax in the short band of income where age allowance is withdrawn. That was the subject of many representations last year, not least from hon. Members who served on the Finance Bill Committee. I hope that the change will be generally welcomed. At the same time, we have extended the higher level of age allowance, which my right hon. Friend introduced in 1987 for all those aged 80 or over, to those aged 75 or over. As a result, those aged between 75 and 79 will be significantly better off, with a gain of £1.73 a week for a single person and £2.55 for an elderly couple. Moreover, three quarters of those in that age group will now pay no income tax at all. That is a welcome measure which matches the social security increase in income support of £2.50 for individuals and £3.50 for couples over 75, which comes into effect in October.

The Government’s economic and fiscal objectives are clear, and the Budget reaffirms them. We wish to ensure growth without inflation and to minimise tax rates to enable the greatest possible degree of taxpayer choice. We do not believe that the Government know better than the taxpayer how to spend the taxpayers’ money. We continue to move towards our objective of a basic rate of income tax of no more than 20p in the pound as soon as it is prudent to do so.

By way of contrast, the Opposition are committed to increasing tax in every way they can. They are committed to increasing tax for basic rate taxpayers, abolishing the ceiling on national insurance contributions, increasing contributions by 9 per cent. on earnings over £17,000, imposing a wealth tax and much else. All that is well documented.

In this Budget we have further reformed the tax system. We have helped pensioners by abolishing the earnings’ rule. We have removed high marginal rates for those on low incomes by reforming national insurance contributions and further measures have been put in place to widen share ownership, including substantial improvements to PEPs. The taxation of pensions and life assurance has been modernised. All that has been done within a prudent and cautious fiscal framework in which we plan to make a further massive repayment of debt next year, thus providing a fiscal stance which will buttress monetary policy in its task of bringing downward pressure on inflation.

Mr. Kinnock The right hon. Gentleman has referred several times to the great virtue of using the Budget surplus to repay the national debt. Can he confirm that that will continue to be an objective of the Government, should they have surpluses, and that it will continue until the next general election and not be impeded by any desire that the Government may have to make a tax cut before the next general election?

Mr. Major Clearly, the right hon. Gentleman is aware of the danger to his party as the high-tax party and the support for us as the low-tax party. He is aware that we are enjoying the longest period of growth since the war, latterly combined with dramatic falls in unemployment. He does not care that our policies are working. The Budget sticks with our policies and I commend them to the House.