The Rt. Hon. Sir John Major KG CH

Tag: Inflation

  • Mr Major’s Parliamentary Answer on Monetary Integration – 5 July 1990

    Below is the text of Mr Major’s response on Monetary Integration made on 5th July 1990 in the House of Commons.

    Mr. Spearing To ask the Chancellor of the Exchequer when, and in what year, he placed his proposals for further monetary integration within the European Community before its Council of Ministers.

    Mr. Major I have not yet done so, but I expect to discuss it later this month.

    Mr. Spearing I thank the Chancellor of the Exchequer for that reply, especially as the question should have been “in what form”, not “in what year”. Does the Chancellor agree that in an authority that was charged with the responsibility of supervising a common currency, there would be some responsibility for the economy of the area over which that currency was dominant? If that supervising authority is to be accountable, should it be answering questions only to a person or body who must lump it or like it, or should it be accountable to a body that can do something about it? Will the right hon. Gentleman’s paper address the distinction between the two types of accountability and which form do the Government prefer?

    Mr. Major I certainly concur with the hon. Gentleman’s view that the question of precisely what accountability means and to whom will be critical in future debates in the intergovernmental conference and elsewhere on economic and monetary union – whatever sort may emerge in the European Community. As the hon. Gentleman knows, the Government do not believe that the Delors prescription for stage 3, with its single central bank, its single monetary policy and its present lack of accountability, is a concept acceptable to the House of Commons. I will carry that view to all my fellow Finance Ministers.

    Mr. John Townend Does my right hon. Friend agree that his proposal that the hard ecu should be accompanied by a European monetary fund which could require central banks to repurchase their own currencies with the ecu or equivalent hard currencies would be a powerful sanction against lax monetary policy and, as such, could be the beginning of an embryonic European federal bank?

    Mr. Major I agree that the hard ecu would be the most effective counter-inflation currency yet devised and, for that reason, may commend itself to people in future years. The essence of my scheme for a hard ecu is that it is optional, evolutionary and gradualist. That is an immense improvement on what is presently on offer in the Delors report.

    Mr. Bell In relation to monetary integration, does the Chancellor of the Exchequer recall the remark of Sir Alan Walters that by joining the exchange rate mechanism, currency speculators could force a realignment of the pound – and thus a devaluation – and take us back to the stop-go policies of the 1960s? In anticipation of our joining the exchange rate mechanism, has not the pound increased in value? How does the Chancellor reconcile the views of Sir Alan Walters with the pound’s stability now?

    Mr. Major I see no particular reason why I should. My view about the exchange rate mechanism is entirely clear – I believe it to be in the interests of the country to join, and in due course, when the conditions that we have set out are met, we will most certainly join.

    Mr. Dykes As the independent central bank has been so spectacularly successful in Germany, and as a similar mechanism is now proposed for the European Community, why are the Government, who are anxious to counter inflation, so timid about the suggestion?

    Mr. Major I certainly do not accept that we are timid about countering inflation or that there is a necessary parallel between the activities of the Bundesbank and the German national legislature, and the position of the Bank of England and our legislature. It is my clear view – I regret that my hon. Friend does not share it – that the man or woman responsible for monetary policy should be available to the House of Commons to answer for his or her policies.

  • Mr Major’s Parliamentary Answer on Inflation (Europe) – 5 July 1990

    Below is the text of Mr Major’s response on Inflation (Europe) made on 5th July 1990 in the House of Commons.

    Mr. Loyden To ask the Chancellor of the Exchequer how many European countries currently have a higher inflation rate than the United Kingdom.

    Mr. Major Two, Sir.

    Mr. Loyden The Chancellor of the Exchequer and the Prime Minister constantly make claims about the health of Britain’s economy, but Britain has the worst inflation rate of the seven most industrially advanced countries. Is not that a disgrace?

    Mr. Major The hon. Gentleman is correct. The rate of inflation is a good deal higher than I would wish it to be, or than it will be in due course. As the hon. Gentleman clearly shares my view, I am surprised that he supports Opposition policies that would raise inflation and keep it high for a very long time.

    Mr. Higgins Is my right hon. Friend aware that we may be giving the impression that our currency is declining in value faster than that of other countries because of the appallingly poor quality of the paper used for the new £5 note? Will he ensure that paper of the proper quality is used and that he does not harmonise in that respect with the other European countries, whose currency notes have always been of far poorer quality than ours?

    Mr. Major My right hon. Friend makes an important point that will be echoed in many quarters.

    Mr. John Smith Does the Chancellor reflect that it is a poor comment on 11 years of Conservative Government that we have the worst rate of inflation of all the G7 countries, and that nine of the European Community countries have a better inflation record than ours? After 11 years in government, is not that a pitiful record?

    Mr. Major The right hon. and learned Gentleman is being typically selective. He has overlooked the greatest growth in investment and productivity and the greatest underlying improvement in the economy over that 10-year period compared with any other nation in Europe.

    Mr. Beith Now that the Chancellor has had an opportunity to discuss with the president of the Bundesbank the working of the anti-inflationary policy, why does he still believe that an autonomous central bank, with responsibility to maintain price stability, has no place in Britain and can be no part of European monetary union?

    Mr. Major For precisely the same reasons as I have explained to the hon. Gentleman.

    Mr. Ian Stewart With the approach of 1992 and the greater harmonisation of many activities in Britain and the other member states of the European Community, will my right hon. Friend give serious and urgent consideration to introducing a more reasonable and equivalent measure of inflation than the retail prices index, which is quite unlike the measure used in other European countries? The inclusion of mortgage interest rates greatly exaggerates the supposed rate of inflation, although interest rates are raised to reduce inflation. Does my right hon. Friend accept that the sooner that change is made the better, particularly so that comparisons with other Community countries can be more realistically understood outside the House?

    Mr. Major My right hon. Friend is entirely correct that, on a more comparable basis that takes account of the differing factors in the relative inflation measures, the more correct rate of inflation in the United Kingdom is about 7 per cent., compared with a European Community average of about 5 per cent. He made an important point.

  • Mr Major’s Speech to Conservative Women’s Conference – 22 June 1990

    The text of Mr Major’s speech to the 1990 Conservative Women’s Conference, held at the Royal Horticultural Halls in London on Friday 22 June 1990. The speech was issued as a Conservative Party news release, reference 455/90.

    CHANCELLOR OF THE EXCHEQUER:

    Earlier this week, some of you may have seen Neil Kinnock on television. I did not myself see him since he clashed with the football. It was a difficult choice and Mr Kinnock lost. Nonetheless, I read the transcript. I found that he had got his facts wrong, as he always does. And John Smith had to issue a hasty correction, as he always does. And this added to the confusion, as it always does. It’s nice to know – in a changing world – that some things never change.

    But despite this carnival the truth remains as it always was. Labour cannot hope to honour their spending promises without increasing tax for a great many basic rate taxpayers. It simply cannot be done. Fourteen out of fifteen taxpayers will not pay the same as now. They will pay more. There are only two conclusions. Either Labour know their plans will put up taxes and are trying to hide it – if so, that is simply deceit – or they haven’t costed their plans and they don’t know the implications of them. That is simply incompetence. Either way it is no recommendation for Government.

    But I don’t want to spend time this morning talking about the deficiencies of the Labour Party. I have, after all, only twenty minutes. I do want to talk about where Britain’s economy has come from and what its prospects are. And in particular, I want to talk about inflation, savings and the present marketing of credit.

    The economy generally is the most important issue for us to face. Important not simply in terms of material wealth – for that is by no means all we care about – but important because without economic growth our long term plans for social and other improvements simply cannot be achieved. As Iain MacLeod once memorably put it: “Money is the root of all progress”.

    We should not underestimate what has already been done. In the 1980s we have seen enormous changes. Many problems that seemed insurmountable ten years ago have been swept away:

    – We have a proper balance in trade union legislation;

    – We have introduced the most far reaching corporate and personal tax reforms this century;

    – We have deregulated and hugely improved the supply side of our economy;

    – Investment has been growing on an unprecedented scale;

    – And these days, far from being a debtor constantly borrowing to finance spending, we have actually been able to pay back a large proportion of the debts accumulated by Governments over the last two centuries – over £25 billion repaid in the last three years.

    Whatever short-term difficulties now confront us, these are enormous achievements.

    But, the question for the future is clear: how do we build on these achievements? What are the essential prerequisites for further success?

    In essence we have one problem, inflation. But the question must arise:- why has inflation proved so stubborn? Why, indeed, has it actually risen recently, despite our anti-inflation credentials and our real determination to reduce it? I believe this genuinely puzzles many people and is a legitimate question we must answer.

    Whatever our critics might say, the problem does not lie in any relaxation of policy before or after the 1987 Election. On the contrary, it was in many ways the very success of our policies which caused the problem.

    We saw a tremendous surge in confidence in 1987 and 1988. Confidence on the part of industry, resulting in a 40 per cent increase in business investment in the three years to 1989. That investment was very welcome because it will lead to an increasingly effective industrial sector. But the scale of it did add to demand.

    And just as businesses felt confident and invested, so did millions of individuals. And they invested too – in a new house, a new car or some other expenditure. And that created a further bubble of demand. The combination of such strong growth of business and consumer investment was unprecedented in the last 50 years. And that is what created the growth of demand that is at the root of our present inflationary problem.

    As it becomes apparent what was happening, we responded by tightening policy. But with hindsight, we can see that our response underestimated the problem. But that was clear only with hindsight. It was not clear at the time when almost all outside commentators underestimated the extent of the inflationary pressures we faced. We need to reduce these pressures and that is why we have had to maintain a tight fiscal stance, with high interest rates.

    And we must continue that policy until we get inflation down. And when we have done so we must keep it down. It is not proving easy; certainly I know it is not painless; and it is slower than we had hoped. But that cannot lessen our determination.

    So our opponents misjudge us when they suggest we will engineer what they call a short-term pre-election boomlet. We will not. What we will do is to maintain a long-term attack on inflation so that we can build on the progress of the past decade and take up the opportunities of the present one.

    There are two over-riding reasons why we must defeat inflation – the first familiar, the second perhaps less so. The first is the damage that inflation does to our industrial competitiveness. This cannot be disguised. The higher inflation is, the less competitive our goods are in international markets; and if that continues, in due course, inevitably our relative standard of living will fall.

    The second – perhaps less often stated reason – is the social damage done by inflation. Inflation does most damage to those who are least able to protect themselves and often those who have contributed least to the problem.

    And the damage lasts. I suspect there are many elderly people today who are on social benefits – not because they failed to save and prepare for their retirement. They did – often from modest incomes. No, they are on social benefits because Governments failed to control inflation which destroyed the value of the savings on which they were expecting to live in comfort in their retirement.

    I have no intention of taking any risk of that happening again. We cannot have a society where saving is penalised in this way. For saving is vital. Vital to the economy. Vital to finance investment. And vital for individuals too.

    Too often as individuals we spend too much and save too little. And often that which we spend is from money that is borrowed and not saved.

    But those who have savings – and even more, I am afraid, those who do not – know only too well that savings provide security. To have money put by cushions people against the unexpected; it gives them freedom to make choices. It puts families in a position to take the opportunities that are available to them.

    These are the reasons we have consistently encouraged savings, throughout our time in Government. And also why, in this year’s Budget I introduced the new concept of a tax exempt special savings account, or TESSA, which will start next January. This is a five-year savings plan with a bank or building society in which everyone is entitled to save up to £9,000. And provided the capital is left untouched for the whole five years the interest will be completely free of tax. Early indications are that this scheme will be hugely popular. It is a tax incentive for the modest saver.

    In April of this year independent taxation for married women began. Your Committee campaigned for that for years, and rightly so. And one of the greatest benefits of this change is it removes the iniquitous penalty on married women’s savings. For the income from a wife’s savings, whether she had other income or not, used to be added to her husband’s income and taxed at his rate. From April this is no longer so. Nor, indeed, need she any longer inform him of how much she saved unless she chooses! Independent taxation means that 3 million married women will pay less tax, of whom two-thirds have incomes of less than £5,000 a year.

    But in this year’s Budget I also dealt with a further anomaly thrown up by these changes. Under the composite rate tax arrangements, those who save with banks and building societies have tax deducted from the interest they earn, which cannot be reclaimed. That deduction was automatic. But many of these wives, and pensioners and children too, had incomes below the tax threshold. That is why I decided to abolish composite rate tax from April 6 1991 – the earliest date that such a big change could be made. The principle was that tax should not fall on those who are not liable for it. From next April, it won’t.

    Taken together these changes represent a milestone in the taxation of savings; and they remove a number of anomalies that were particularly unfair to women. I would like here to pay tribute to the help I had last year – and that I know Nigel and Geoffrey had before me – from your National Committee. Their realistic submissions on budgetary matters were enormously helpful and played an important part in the final decisions we took. They should start work now: it is not too early to be thinking about the next Budget!

    I know too how worried many of you have been about the pushing of easy credit, particularly at the young and at those who may be tempted to incur debts beyond their capacity to repay. I share that worry, and I believe we should address the problem.

    Of course the vast majority of those who borrow are aware that interest rates can rise as well as fall and they can borrow responsibly. And those who offer credit usually look carefully to see that they do not grant credit beyond a person’s capacity to repay. But that is not always the case.

    And I believe there are worrying trends in the way some providers of credit market their products. Too often the implication is that further borrowing is a good idea for all regardless of their income or their existing level of commitments.

    That is why I have asked the financial institutions to reconsider their policy in this area and the banks and building societies to cover this in the code of good practice which they are drawing up. We shall look very carefully at what they propose to see whether it is sufficient, or whether any further action is necessary.

    For I believe there is a lot that lenders can do to improve the information available to potential borrowers, and to improve the tone of their marketing. For example, quoting a particular interest rate often does not bring home to people the full impact of their commitment. That impact ought to be made wholly clear to borrowers, in readily understandable terms. People need to have a full understanding of what it is they are taking on, and what the main terms and conditions of the loan are.

    And I would urge lenders – all lenders – to be conscious of the distaste many people feel for indiscriminate mailshots and credit advertising. Many people do not like unsolicited offers of free gifts and other inducements to borrow. They are an irritation when they arrive with the morning post – frequently sent to people who do not wish to borrow or who are in position to do so. I wish too that lenders would not constantly stress, as some do, that potential borrowers have instant and easy access to credit. This sort of approach contributes to the impression of carelessness in lending.

    Responsible lending is the flipside to responsible saving. In the Budget I announced changes which should give a real boost to saving in its most accessible form – in banks and building societies. I hope that the banks and building societies will put as much effort into marketing saving vehicles and their attractions as they have put into marketing loans in recent years.

    And since the Budget we have improved the return on National Savings products too. All these forms of savings are very desirable – low in risk, and for many people they are the essential first step towards share ownership or building up the capital to branch out on their own – start a new business or become self-employed. For at every level thrift and enterprise are closely related. And that is why, at every level, we shall continue to promote them.

    Madam Chairman, I have referred to inflation, which we must keep down. To savings, which we must increase, and to credit, which we must handle responsibly. These are all important policy ingredients as we continue to build a stronger economy.

    I have no doubt that we have the policies to keep Britain’s economy moving forward. The policies that will bring inflation down and keep it down. The policies that will promote saving. The policies that will allow enterprise to flourish, and the policies that will enable British businesses to take advantage of the opportunities before them.

    And as we look down the next decade these opportunities are enormous. The coming years will see great changes. The realisation of the single market in Western Europe. The dramatic opening up of wholly new trading opportunities in Eastern Europe. A wider and more prosperous world market. It will be a world in which British businesses can prosper and grow and help build a greater prosperity for all our citizens. After the economic changes of the ‘80s, we are formidably equipped to take advantage of the ‘90s. We start from a sound base, and with a determination to build on it. Provided we persevere, and stick with the policies we believe in, then our prospects for the future are bright indeed.

  • Mr Major’s Parliamentary Answer on the European Monetary System – 7 June 1990

    Below is the text of Mr Major’s response on the European Monetary System made on 7th June 1990 in the House of Commons.

    Dr. Moonie To ask the Chancellor of the Exchequer if he will make a statement on progress on the Madrid conditions for joining the exchange rate mechanism.

    Mr. Wallace To ask the Chancellor of the Exchequer which of the Madrid conditions concerning the United Kingdom entry into the exchange rate mechanism of the European monetary system have yet to be fulfilled.

    Mr. Bell To ask the Chancellor of the Exchequer when he expects that the conditions for the pound sterling’s participation in the exchange rate mechanism of the European monetary system will be fulfilled.

    Mr. Major A good deal of progress has been made in a number of conditions for membership of the exchange rate mechanism, but they have not yet all been met.

    Dr. Moonie Will the Chancellor tell us which condition is likely to be satisfied first: a satisfactory reduction in our underlying rate of inflation or the achievement of a level playing field through the abandonment of subsidies by our European competitors?

    Mr. Major Significant progress has been made in recent months on a number of the external elements that we require before joining the exchange rate mechanism. We have made our position on domestic inflation perfectly clear and I stand by that.

    Mr. Wallace At a recent press conference the Chancellor seemed to suggest that our underlying rate of inflation was much closer to Community averages than a proper statistical approach would reveal. Was he using that figure to try to persuade the Prime Minister that we really should be joining the exchange rate mechanism, and on those grounds should Opposition Members keep quiet about the statistical flaws in his figures?

    Mr. Major It is always a distinct help to the Government if Opposition Members keep quiet, whichever part of the Opposition they may represent. In the remarks to which the hon. Gentleman referred, I was drawing attention to the fact that the British rate of inflation appears misleadingly unreasonable compared with those of our European partners simply because we contain within our inflation rate that which other countries do not, and it was in response to a question about that matter that I made the remarks to which the hon. Gentleman refers.

    Mr. Bell When we enter the exchange rate mechanism, as the Chancellor of the Exchequer proposes to do in the summer, will he go in on the tight band of 2½ per cent. or on the broader band of 6 per cent? Will he share his views on that with the House?

    Mr. Major I can neither confirm the date that the hon. Gentleman surreptitiously slipped into his question as an assumption, nor enlighten him on his substantive point.

    Mr. Ian Stewart Will my right hon. Friend assure us that, regardless of the specific matters spelt out in the Madrid conditions, he will not contemplate the entry of sterling into the exchange rate mechanism until he regards it as fully compatible with the needs of domestic monetary policy and, in particular, that he will not do so at any time when it might mean that interest rates would have to be lowered more or more quickly than is necessary for the proper control of monetary conditions and the reduction of inflation?

    Mr. Major I am acutely conscious of the point to which my right hon. Friend rightly draws attention. The aim of joining the exchange rate mechanism is to support the policy to reduce inflation, not to damage it, and from that, my right hon. Friend will be aware of our policy.

    Mr. Budgen Will my right hon. Friend confirm that entry into the exchange rate mechanism is stage one of the Delors proposals? The Delors proposals are supported by all the Commission’s bureaucrats and by all the nation states of Europe, with the exception of ourselves. Paragraph 39 asserts that entry into the first stage shall be taken as acceptance of all subsequent stages.

    Mr. Major My hon. Friend has made assertions about what the purpose of stage one might be and about the extent to which that falls within the Delors plan. The fact that the proposal is supported by what he calls the bureaucrats in Brussels does not in itself make it wrong. We have a series of sound economic reasons for joining the exchange rate mechanism. The Government set out the policy that they would join the exchange rate mechanism when certain conditions were met. That remains the policy and it will be in the interests of this country.

    Mr. Tim Smith Now that United Kingdom membership of the exchange rate mechanism has become the fig leaf behind which the Labour party has chosen to hide the private and unpleasant parts of its economic policy, would not we be better advised to join sooner rather than later so that those inadequacies can be exposed to the public for all to see?

    Mr. Major If, as my hon. Friend suggests, the exchange rate mechanism will hide the shortcomings of Labour policies, it will need to be a good deal larger than a fig leaf. It is perfectly clear that the conditions that the Labour party has set out under which it would join the exchange rate mechanism make that pledge – –

    Mr. Skinner Not all of us in the Labour party.

    Mr. Major The hon. Member for Bolsover (Mr. Skinner) is correct. The conditions set out by the Labour Front Bench, without the support of the Labour Back Benches, for joining the exchange rate mechanism are essentially bogus, for the conditions mean that the Labour Front Bench could not enter.

    Mr. John Smith In the context of possible entry into the exchange rate mechanism, will the Chancellor tell us whether the sufficiency of any reduction in inflation will be assessed according to the retail prices index or according to the so-called “underlying” rate of inflation? May I have a direct answer, please?

    Mr. Major The direct answer, as I have often said, is that the rate of inflation will be assessed on the proximate rate of inflation, which means – –

    Mr. John Smith The retail prices index or the underlying rate?

    Mr. Major I am coming precisely to the point. The rate of inflation will be assessed not on the RPI, but o n a comparative basis to the measure in which European nations themselves assess inflation. I have repeatedly made that point clear for a long time.

    Mr. Nelson Does my right hon. Friend recall that when there were recent rumours that this country was about to become a full member of the exchange rate mechanism, the immediate effect was that the stock market rose, the exchange value of sterling became firmer and money market interest rates fell? In view of that positive response, which should have warmed my right hon. Friend’s heart towards the idea of joining the exchange rate mechanism immediately, will he bear it in mind that if he felt it necessary to take an executive decision, even while the Prime Minister is abroad, to embark on that, he would earn the recognition of a grateful nation?

    Mr. Major I have had some attractive offers in my time. I am not entirely sure to what extent my hon. Friend’s offer ranks among them.
    I have made it entirely clear to the House now and on previous occasions that I have reached the judgment that, when the conditions that we have set out are met, it will be right for us to join the exchange rate mechanism. We must be aware of the point to which my right hon. Friend the Member for Hertfordshire, North (Mr. Stewart), drew attention some time ago, that the balance of advantage in due course is clearly to enter the exchange rate mechanism, and in due course that is what we shall do.

  • Mr Major’s Speech at the Edinburgh Chamber of Commerce – 25 May 1990

    Below is the text of Mr Major’s speech to the Edinburgh Chamber of Commerce on Friday 25th May 1990.

    CHANCELLOR OF THE EXCHEQUER:

    Far too many people have no conception of the health and strength of Scottish business today. But you have in Scotland a very strong and active business community and a growing one, and I am delighted to see it so well represented here today.

    Ten years ago – even five – I think few people would have been bold enough to predict the dramatic improvement there been in the prosperity and strength of Scottish businesses. That is understandable, for in many cases it must have been hard to see beyond the short traumas of change to the longer-term rewards. But change had to come and now we can see how it cleared the way for a whole new generation of Scottish entrepreneurs, many of them in new and growing industries such as electronics or financial services. I have no doubt that they in their different fields have the ability to equal and surpass the successes of their predecessors.

    This revival of the spirit of enterprise is, of course, a nationwide phenomenon, and in my view it is one of the most important developments of the last ten years. More and more people have seen through that intensely damaging myth that profit was somehow not quite respectable, and that an enterprise society must by definition be a selfish society, and a materialistic one. It is not – and profits are the motor of prosperity. Adam Smith pointed out the folly of that attitude 200 years ago.

    But the simple truth is that the only way to make the improvements in quality of life and public services that we all want to see, and the only way to sustain them, is first to generate the resources to pay for them. You can’t do it by wishful thinking. You can’t do it by piling higher taxes and more regulations on business, because that destroys business and impoverishes the nation. And a poor nation cannot afford anything other than poor public services. No, if we want good services and high living standards as a nation, we have to be able to afford them. We can’t do that without a successful performance from business and industry, and that is one of the principal reasons why business success is so critical for us all.

    I know that some of you, inevitably, must be concerned about the health of business today, and worried that the present level of interest rates may put it in jeopardy. That is a natural concern. I understand it. Of course, other things being equal, we would all prefer interest rates to be lower. But the harsh truth is that if interest rates were lower, other things would not be equal. Most notably, so far from reducing inflation and getting it under control, we would see it racing ahead to levels that are simply unacceptable in today’s world – unacceptable in a whole variety of ways.

    Perhaps some people may have forgotten the damage inflation does. I do not want all of us to have to relearn it by a painful return to anything like the levels of inflation we saw in the ‘70s. For it is not just the damage inflation does socially – to the weakest in our society, to pensioners and others on fixed incomes. It is also that inflation damages business – indeed it destroys business. It destroys investment, it destroys competitiveness, and it is pure poison to industrial relations.

    For all these reasons, inflation must be forced out of the system. But it has not got any easier to do so: if anything, it has become more difficult. One reason for this is that, quite frankly, the economic success we have enjoyed in recent years has engendered a level of confidence amongst both consumers and industry which is hard to rein back. This has been compounded by the increasing shortcomings of our official statistics, which have at times given a less than clear basis for policy decisions.

    The consequences of this are well-known. At a crucial period, in the wake of the stock market crash, we did not appreciate fully the buoyancy of the economy, and interest rates were too low for too long – as we can see now, with hindsight. The result is what I have called an inflationary hangover, and that will take us a time to work off. But we must work it off, however long and painful the cure. For business’s sake, particularly. For in all other respects, British industry is well placed to benefit from a decade which offers enormous opportunities for businesses of all kinds. But we will not benefit from those opportunities as we should, if we continue to labour along under an inflation handicap.

    But that is the position at the moment: although the RPI overstates the extent of our inflation problem, particularly in comparison with our competitors, that does not alter the fact that inflation is clearly too high, and must be forced down. Our tight policy will do that, and is already turning a whole series of indicators in the right direction. But not enough of them, and as yet not far enough, I am afraid.
    The interest rate consequences of that assessment are clear. I am not in the business of overkill; but I can also assure you that I have no intention whatsoever of giving inflation a second chance. So, although there are plenty of signs that the economy is righting itself, there need to be a great deal more before anyone should anticipate interest rates being relaxed.

    So what does all this mean for Scotland? Sadly, there are far too many people who are prepared to run down Scotland’s prospects for the future – the old notion that when England sneezes, Scotland catches pneumonia. To my mind, that view is not only outdated, it is extremely patronising. And it is just plain wrong.

    For today, in many ways, Scotland has been enjoying better economic fortunes than other parts of the UK. Unemployment has been falling faster in Scotland than in the rest of the UK, and fell again last month. Self-employment, which has been growing very fast throughout the UK, has in recent years grown faster still in Scotland, rising by almost a fifth over the last two years. Business start-ups are buoyant, and all the signs are that output has been growing faster than in the rest of the UK in 1988 and 1989. There is no reason why this cannot continue in the coming years.

    There is nothing freakish about this at all. It demonstrates two things very clearly. First, that the improvement in Scotland’s economic fortunes is no nine-day wonder. And second that the interest rate weapon is, as we always maintained, well targeted on the problem we have to tackle. For it was not in Scotland, but in the South East of England that correction was most needed; and because house prices, and hence average mortgages, are so much higher there, that is where the correction will inevitably be focused. Unwelcome as high interest rates are – here, as South of the Border – it should be remembered that they seem to be having far less in the way of unpleasant side-effects for Scotland than many predicted.

    Another thing that will be of relative advantage to Scottish businesses is the fact that on average, Scottish manufacturing exports more per employee than the UK average. I am pleased to see from recent Scottish business surveys that the future outlook for exports continues to be optimistic. At a time when home demand is cool, a sustained export drive is just what we need. I hope that firms elsewhere in Britain will emulate your example, and indeed that both you and they will do even better in the years to come.

    No one knows better than you do that Scotland has faced some hard times over the last ten years. But in the last few years, the Scottish economy has been reaping the long-term rewards – more jobs than ever before in Scotland’s history, the highest growth rates in 15 years, and a flood of inward investment. I believe that will continue while overseas investors retain confidence in the British Government.

    The success story of Scotland is something in which all of us, whether we live in Scotland or not, take pleasure and pride. It is not something the Government will take any risks with. Above all, it is an achievement that we are determined to protect from the destructive power of high inflation. But Governments on their own cannot ensure the success of business. That depends on all of you, and the decisions you make every day as you run your businesses.

    This year, some of those decisions will be difficult. It is not going to be an easy year. Indeed, it cannot be, for we need a period of slower growth while we work off our present problems. But the short-term outlook has to be set against the longer term prospects, which are very bright indeed. The ‘90s bring the opening up of two enormous new markets – one, in Western Europe, which we have all been working towards for years; and one in Eastern Europe which has opened up in an utterly unexpected and dramatic fashion. The combination of the two represents an unprecedented opportunity; and it is a powerful reason for everyone in business today to look to the future with confidence, and plan for it. It won’t be easy. We will have to compete for these new markets. But so long as businesses control their costs at this crucial time, so long as they look ahead and make the right investment decisions for the longer-term, then our chances are very good indeed.

    You face some ambitious challenges ahead, but you have some considerable achievements behind you. You have every reason for confidence, and every expectation of success.

  • Mr Major’s Speech at the 1990 CBI Dinner – 17 May 1990

    The text of Mr Major’s speech to the CBI Annual Dinner, held on 17th May 1990.

    CHANCELLOR OF THE EXCHEQUER:

    I am very pleased indeed to have this opportunity to address your Annual Dinner, in this your silver jubilee year.

    Over the years the CBI has become a pre-eminent representative for industry and business. Not only pre-eminent but vocal. No one could accuse you of being shy in expressing your views either publicly or in personal discussion; and the Government invariably considers what you say with great care – even though we cannot always adopt the policy prescription you set out. It has long been a forthright and constructive relationship; and I hope and expect it will continue to be so.

    It is particularly important it remains so at present. For the economy is now entering a crucial period, which will test all that has been achieved in the last decade and which will set the base for our prosperity in the ‘90s. I believe that the British economy will pass that test – indeed do better than pass – but it may not be easy, for Government, or for business.

    Our objective in managing the economy and industry is simply stated: it is to outperform our competitors. We need to show the successes achieved in the ‘80s – in productivity, in export markets, and in increased investment in new equipment, innovation and training – these successes were not just a flash in the pan; rather that they were an example of just how much attitudes and performance have changed in Britain.

    The truth is that while 1990 is proving, as we expected, to be a difficult year, the 1990s will offer British businesses unparalleled opportunities. There is no need for despondency or hand-wringing. There is a need for businessmen and women everywhere to look to the future and plan for it. For the decisions which will spell success or failure for British firms in the years to come are already upon us.

    At the moment, we are confronted with an unwelcome resurgence in inflation and a difficult short-term outlook. That has led some commentators to write off the last few years as no more than a brief interlude of success, and to say that now we might be sliding back to where we started at the beginning of the ‘80s. I understand this fear. But I disagree with it. I believe that this thought is wholly wrong, and potentially very damaging. I was pleased to see John Banham making these points with his usual force a few days ago.

    Of course there have been setbacks. And I do not belittle the problems we face in the short-term. But however intractable they may seem to some, they are as nothing compared with the deep-seated weaknesses of the British economy at the beginning of the ‘80s. At that time our economic base was weak and uncompetitive, unhealthily reliant on declining industries, and contained some real pockets of economic deprivation.

    That was so because for too long, Governments had disguised the symptoms of decline, and neglected the disease itself. As a result, the real cure, when it came, was all the more painful. But it was the essential precondition for a sustained revival in our economic fortunes. With great effort the trend of decades was reversed, and we began to make up ground on our competitors, and even to out-pace them in many respects.

    And as many here tonight will testify, underpinning that recovery at national level were countless individual success stories: the thousands of people who began the decade working for someone else, and ended it as owners of businesses, creating still more jobs for others; the millions of individuals and families who in the ‘80s took the first step towards home-ownership, share-ownership or capital ownership. Remember too the re-birth of many of our regions, towns and cities – Glasgow’s nomination as this year’s European City of Culture being a striking example of this. The pessimists who look at where we are and worry should look also at where we have come from and how much has been achieved.

    All in all, it has been an astonishing economic transformation, and one whose benefits will continue to work through the economy for years to come. And it has a lesson for us. What was achieved in the ‘80s can be built on in the ‘90s.

    For the moment, the immediate priority of economic policy must be to bring down inflation. I am acutely aware that the measures we have to take hurt many of the people who regard themselves as the Government’s natural supporters – in particular, small businesses, and home-owners on modest incomes. I know there are some who are puzzled that we should keep in place policies that bear heavily on these groups. I understand that. But it is not hard to explain, not when one recalls the damage done by the high inflation of the ‘70s throughout society, to business, to investment, to industrial relations, to savers and those on fixed incomes. Anyone who recalls those days will know one thing very clearly: a period of high interest rates is infinitely preferable to the alternative of high inflation for good.

    And that is the problem: the only alternative to high interest rates is inflation. I know there are always plenty of people peddling apparently easy options, but that magic potion – a pain-free cure for inflation – simply does not exist. Nor will membership of the exchange rate mechanism of the EMS remove the need for a tight monetary policy. I am sure we will benefit from joining the ERM and join it we most certainly will when our conditions are met. But it is an added discipline, which will reinforce domestic monetary restraint, not replace it.

    There can be no doubt that interest rates have to be used to bear down on inflationary pressures. And there can be no doubt that they are working. The effects are clearly there for all to see – in the housing market, and in the high street.

    But I am afraid their job is not yet done. Yes, we are seeing an effect, demand is cooling, but as I have said before, it needs to stay cool for a time while we work off the inflationary hangover. In particular, it will be a few months yet before we see an improvement in the RPI, and in the meantime it has reached an extremely unpalatable level. Of course the RPI overstates the real problem: the idiosyncrasies of the headline rate are well enough understood, and I need not rehearse them again here. But the fact remains that inflation, however you measure it, is unacceptably high, and we must force it down closer to the average of our competitors, and when we have done that we must try to get it down even further still.

    We must do so because the reduction of inflation is not some abstract totem. It is the absolute precondition of all our hopes for the coming years. Low inflation will deliver them. High inflation will destroy them. From this it will, I hope, be clear that I have no intention whatsoever of relaxing monetary policy prematurely, and if necessary, I shall tighten it. And I should add that when I am able to reduce interest rates, I will do so cautiously and prudently. My aim is a resumption of steady and sustainable growth combined with low inflation.

    Because interest rates are so painful we need the best possible information about how they are working. That means we need to monitor what is happening in the economy with great care. And yet in recent years a problem has arisen: in a buoyant, unregulated economy the behaviour of firms and consumers has often been in sharp contrast to many of the established economic wisdoms.

    Most notably, we have found that people are prepared to live with far higher levels of borrowing and far lower proportionate saving than in the past. One reason for this is that credit has become far more widely accessible than in the days of the mortgage queue. But it is also the case that years of sustained growth in incomes and wealth here made people and firms more confident that they can service their borrowing in future.

    These factors have proved important upward pressures on demand and to an extent they were predicted. But what we failed to predict was how far, if at all, they would be offset by external shocks such as the stock market crash, and how much and how fast they would respond to the progressive tightening of monetary policy over the last two years.

    Such unpredictability is, I suspect, inevitable in a free and open economy, and I make no complaint about it. The freedom is worth the uncertainty. However, in addition to our inability to predict future behaviour accurately, it has become increasingly difficult to assess the present state of the economy with certainty – because of the growing gaps and inconsistencies in our official economic statistics.

    The development of the latest outbreak of inflation highlights this very clearly. On the basis of the information available, in common with other countries, policy was directed at avoiding a crisis in confidence and a recession in the wake of the stock market crash. Having avoided that recession, as we now know, policy should have been tighter to bear down on strengthening inflationary pressures. With hindsight, we see that policy mistakes were made – but only with hindsight. At the time, we were not exactly overwhelmed by calls for higher interest rates, and the statistics we had to hand did not reflect the buoyancy of the economy. Again, even when tighter policy was put in place, we still underestimated the strength of demand we were trying to counter.

    Since coming back to the Treasury I have given considerable thought to how to cure these statistical shortcomings. It is important we do because we need to ensure that we have the best information we can get, and as soon as we can get it, about the level and nature of activity in the economy, since it will inevitably carry on changing with ever growing speed.

    The statistics we have at present do not provide that. Too often the first estimates of key indicators have been radically different from the final revised figures. And many of the accounts do not add up. There is for example a huge balancing item (a technical term for errors and omissions) in the balance of payments statistics for 1989 of over 15 billion pounds. And our information on service industries is very patchy – even though they now account for over half our national output.

    In Parliament the Treasury and Civil Service Committee has emphasised the costs to economic policy of unreliable statistics. I know too that representatives of business have been pressing for similar improvements.

    I have therefore announced today a package of improvements to statistics that should considerably improve our ability to monitor and forecast developments in the economy.

    There are a number of elements to the package. It will involve enhancing existing surveys to collect more information on service industries, investment and profits and it will involve a thorough on-going review of the balance of payments statistics.

    I expect the first of these improvements to be introduced by the Autumn and Winter. Taken together with the improvements already in hand, the results of this package should be a substantial improvement in the quality of our key economic indicators. I believe that is essential.

    There will obviously be compliance costs, but we shall ensure that these proposals do not lead to unnecessary or excessive burdens on business. They will be kept to the absolute minimum necessary.

    I have no doubt that the modest price of the new information will be well worth paying, not least because there will be tangible benefits for business as well as government. Better statistics mean better understanding on the part of government and business. And this in turn should lead to better decisions. That must be good for us all.

    But more crucial than the decisions Government takes are the collective decisions of all of you in business, commerce and industry. On this front, I have two particular points I want to make.

    The first concerns the familiar problem of high wage settlements. In particular cases no doubt high settlements are justified. But often they are not. And at present it is clear that pay increases overall are running ahead much too fast. Too many negotiators simply assume that they have to match or more than match the RPI regardless of their business circumstances. This morning’s figures for unemployment show graphically what happens if you take that approach. Higher pay and higher costs squeeze profits, investment and output and lead inevitably to higher unemployment. Sometimes restraint is necessary – and that applies as much to management’s salaries as to those of their workforce.

    Some companies may imagine that if they price their goods out of markets the Government will accommodate this with a lower exchange rate. John Banham and Trevor Holdsworth have repeatedly pointed out the folly of such thinking – and they are right. It would be a great mistake to think the exchange rate can only move in one direction.

    My second point concerns investment. There is no more welcome sign of the improved health of British industry than the record rise in investment over the last three years. I welcome this unreservedly – even though it is costing the Exchequer a massive nine billion pounds a year through capital allowances. I recognise that the slowdown in demand and output makes it harder for companies to invest for the future. But wherever they can invest I hope they will. And I believe they would be wise to do so. For investment needs and opportunities do not simply disappear because the short-term position is tight.

    Indeed, in many respects the medium-term investment prospects in the world economy are very good indeed – especially in Europe. We are now only two years away from completion of the European Single Market – a huge market with a population approaching that of the US and Japan combined. The dramatic developments in Eastern Europe are creating fresh opportunities for business ventures of all kinds and will continue to do so. To give one example, hitherto East Germany has traded mainly within the Eastern bloc and UK exporters have sold very little there – only one hundred million pounds in 1989. As it becomes integrated in the Western economy we should aim and expect to account for as high a proportion of East Germany’s imports as we currently do of West Germany’s. In the long term that should bring as much as a tenfold increase in our exports, to one billion pounds – a substantial rise by any yardstick. And of course that is only one of the economies being opened up in Eastern Europe.

    I have no doubt British exporters can take these opportunities. In the last year exports have increased by 11%, which is the clearest possible illustration that many British companies are ready to profit from these developments. But many are not. I am concerned when I hear of British companies that have not yet developed strategies for getting the most out of the Single Market. Enormous opportunities exist, but only for those ready to compete for them. And that means preparing now. Not tomorrow. That will be too late. Others will be there before you.

    No-one should under-estimate the challenges before us, or the rewards available if we meet them. The 25 years since the CBI was formed have brought their share of problems, but looking across the span of years we can see also the enormous improvements they have brought to the general living standards and quality of life in this country.

    None of that would have been possible without the growth of British industry and commerce. It is incomparably better managed, better equipped, more profitable, and more productive than it used to be. The climate in which it operates is altogether better. Now is the time for you to build on these strengths; and to carry them forward into the 1990s. I am sure you will do so.

  • Mr Major’s Commons Budget Statement – 20 March 1990

    The text of Mr Major’s Commons Budget Statement made on 20th March 1990.

    The Chancellor of the Exchequer (Mr. John Major) : The Government’s economic policy has two main objectives. The first is to bring inflation down again. Until that happens, we cannot reduce interest rates and keep them down. The second is to enable this country to take the opportunities of the 1990s. In western Europe, the single market is nearly on us. And the whole of eastern Europe, where there is great good will for Britain, has opened up in a most dramatic way. We need to make sure that British business can take advantage of these changes.

    These two objectives are closely related. Unless we succeed in the first, we are unlikely to do so in the second. Therefore this Budget will take no risks with inflation. It will maintain a strong fiscal surplus. It will, above all, be a budget for savers. It will provide a range of incentives to save and a novel incentive to give. It will bring the introduction of independent taxation for married women. It will introduce important new measures for business and keep up the pace of supply side reform. It will remove an old grievance from the tax system and make the social security system fairer, and it will abolish two taxes.

    In framing the Budget, I have had the great advantage of the fiscal reforms of my predecessor, my right hon. Friend the Member for Blaby (Mr. Lawson). He has left the public finances stronger than at any time in living memory and he was also the architect of as comprehensive a tax reform as any other Chancellor this century. That will be an enduring record.

    I will come to the detailed measures later. First, I wish to review the performance of the economy in 1989 and look at the prospects for 1990 ; I will then deal with monetary policy and public sector finances. As usual, the Red Book, together with a number of press releases filling out the details of the Budget measures, will be available from the Vote Office as soon as I have sat down.

    ECONOMIC PERFORMANCE AND PROSPECTS

    First, the economic background. The year 1989 saw continued buoyant growth in world trade despite some slowdown in the main economies, particularly in the United States. However, increased inflation and fears of overheating in continental Europe led to higher short-term interest rates in most major economies during the year. More recently, we have seen a rise in long-term interest rates–particularly in Germany, where uncertainty about the effects of unification has been an additional factor.

    This general tightening of monetary policy is likely to mean lower growth in 1990 than last year and, in due course, a fall in inflation. We are likely, therefore, also to see slower growth in world trade in the current year, although the astonishing developments in eastern Europe improve the longer-term prospects.

    High interest rates also reflect very strong investment growth over the last two years in all the major industrialised economies. This rise in investment is to be welcomed–and indeed may be intensified by the emerging investment opportunities in eastern Europe–but it also emphasises the need for a healthy level of savings to finance it. The need for higher saving is greatest in the United States and the United Kingdom, where the shortfall is reflected in current account deficits, whereas in Japan and Germany domestic savings have remained more than sufficient to finance their own investment. In the medium term, the United Kingdom’s savings and investment need to come closer into line and we must ensure this occurs through a rise in savings rather than a fall in investment.

    During the last year, business confidence in Britain has remained a good deal stronger than many expected. New businesses have outnumbered closures, by around 1,500 every week; a larger figure than we expected and a record never before approached. Employment has continued to rise, and unemployment to fall. Almost 27 million men and women are in work today–a larger number than ever before and 1.5 million more than at the beginning of the 1980s. Business investment has risen by a further 9 per cent. in the last year, making a total rise of 40 per cent. over three years and taking it to its highest level ever, and a great part of this investment has been financed from rising company profits. In the last few years, profitability has recovered to the levels of 20 years ago.

    As companies have become profitable, they have been investing in more than just plant and machinery. Their spending on research and development has also risen in real terms by almost 50 per cent. in the five years to 1988. They now spend over £5,000 million a year on research and development, nearly all of which is allowable against tax. Similarly, in the five years up to 1989, the numbers of employees receiving training has increased by over 70 per cent. These are all favourable developments which reflect well on businesses’ preparation for the future, but recently, they have been accompanied by the return of inflationary pressures. That, beyond any doubt, is the most urgent problem before us today. To a degree, it is a problem common to all nations. Since its low point in 1986 and 1987, inflation has risen significantly throughout the Group of Seven–the leading economies of the western world–but our affliction has been sharper. There are a number of reasons for this–some welcome and some not. The record rise in business investment is obviously welcome ; but it has been accompanied by a rapid growth in borrowing and in consumer spending. Thus, investment has been rising but the savings to finance it have not. This has led to excessive growth in domestic demand, a revival of inflationary pressures and a current account deficit, a good deal of which itself represents suppressed inflation.

    Policy was therefore tightened, and interest rates have now been in double figures for 20 months. This tight monetary policy has been backed by large Budget surpluses throughout the last three years. So monetary and fiscal policy have acted together.

    Squeezing out inflation is always difficult, but there is now clear evidence that demand is slowing down. High street sales are now only 2 per cent. up on a year ago. The housing market has cooled off noticeably. New car and vehicle registrations are down, and import growth has been sharply reduced. As demand has fallen back, so has output growth, to just over 2 per cent. in 1989.

    No one likes to see the economy slow, but it is inevitable if we are to push inflation downwards. I now expect the economy to grow by only 1 per cent. this year, compared with the above-trend growth of 4.5 per cent. in 1987 and 1988. The size of this slowdown shows the extent of the downward pressure on inflation. But growth should return in 1991 towards its sustainable rate of around 2.75 per cent. I am confident that the period of low growth will be short-lived–not least because of the permanent improvements in in the underlying economy in the 1980s. For example, investment has grown more than twice as fast as consumption over the last eight years. As this additional capacity comes fully into use, inflationary pressures will lessen and more growth will resume. No one need have any doubt about that.

    Last year also saw a record level of foreign direct investment into Britain. Overseas investors see the potential for investment in this country in the 1990s. These investments are particularly welcome as they are in industrial sectors like cars and electronic goods, where a high proportion of the output is traded. For example, Britain already runs a trade surplus in colour television sets, and by the mid-1990s there will be a dramatic improvement in the trade balance on cars.

    Increased investment will enable British industry both to meet domestic demand and to respond to export opportunities. Indeed, that is already beginning to happen. The current account deficit for 1989 as a whole was over the £20 billion I forecast at the time of the autumn statement, but the deficit in the last three months was substantially lower than in the previous quarter and, in particular, the manufacturing deficit is now improving. Exports have been growing faster than imports since the early autumn.

    The reason for this improvement is twofold. In recent years, rapidly expanding domestic demand sucked in imports to meet a market that fast- growing manufacturing output simply could not satisfy. Moreover, that same demand absorbed British goods that would otherwise have been exported. This pattern is now reversing. Exports are now growing rapidly, regaining the share of world markets they lost in 1988. Last year, the volume of exports of manufactures grew by 11.5 per cent.–the highest recorded rate for nearly 20 years. So British industry is responding extremely well to export opportunities. The fact that it is doing so clearly shows that the present trade deficit is not caused by poor industrial competitiveness. It is caused by excess demand, and as that is reduced, the current account deficit will fall–initially to £15 billion in 1990 and further thereafter.

    But we cannot afford to relax policy, notwithstanding the prospect of lower growth. The buoyancy of past demand means that inflation has been far more stubborn than anyone expected. A significant fall is still some months away, and a number of factors will mean that the position will worsen noticeably before it improves. That will be reflected in the retail price index during the next few months. The largest single factor is the increase of some £5,000 million in local authority revenue spending next year. This is mainly responsible for the expected growth of more than 30 per cent. in average community charges compared with domestic rates. This will add more than 1 per cent. to the retail price index next month. Similarly, the further rise in mortgage rates last month will also increase the retail price index.

    As a result, I now expect that retail price index inflation may still be a little over 7 per cent. by the fourth quarter of this year, compared to the 5.75 per cent. I had previously expected. Beyond that, as the effects of these one-off increases drop out and the lagged effect of monetary tightening builds up, I expect inflation to fall below 5 per cent. during 1991.

    To summarise, the economy–both consumption and investment–has been very resilient in recent years. Adjustment so far has been gradual, but this is not necessarily a good guide to the future. The gradual adjustment may continue, but equally, the downturn may become quite sharp. It is against that uncertain background that I must set monetary and fiscal policy, to which I now turn.

    MONETARY POLICY

    I want to deal with monetary policy and interest rates first, for two reasons : because they are of great concern in the House and in the country, and because, as always, they provide the key to progress on inflation. I repeat, my first priority is to prevent inflation from entrenching itself, for inflation is immensely damaging socially as well as economically. It damages business by undermining planning and investment and it foments industrial strife–and, socially, it penalises the weakest most.

    I know that high interest rates are unpopular. They are generally most unpopular as they become most effective. They discourage spending and borrowing. They act directly on the things we have to control if we are to get inflation down. Interest rates are also the most flexible way of responding to what can be a rapidly changing situation. They can be raised quickly when necessary, and they can be reduced just as quickly when it is safe to do so.

    In recent months, I have looked carefully to see whether there is any effective alternative to interest rates. I have done so because I am very conscious of the burden they place on business and on individuals purchasing their own homes.

    I know that many people favour direct controls on lending, hire purchase and consumer credit. I understand that. In particular, I understand the distaste many people feel for the widespread marketing of credit that is so evident today and that is characterised by indiscriminate mail shots encouraging people to borrow. I believe that the financial institutions would be wise to reconsider their policy, and I hope that the subject will be covered in the code of practice the banks and building societies are currently preparing following the Jack report.

    However, having looked at the matter, I have concluded that it is extremely unlikely that credit controls would work in the modern world in anything other than the very short term. They were becoming less and less effective even before exchange controls were abolished over 10 years ago. Their main impact now would be to replace domestic borrowing with overseas borrowing. These days it would, for example, be a simple matter for any high street bank to arrange its lending through an overseas branch.

    That, of course, applies to other countries too, and it is for that reason that Governments of all persuasions throughout the western world are abolishing credit controls and are relying on interest rates to control money, and thus inflation. The same is true of those countries in eastern Europe which are seeking to adapt to the market system.

    In recent years, financial markets have become more open to competition, and their behaviour has changed enormously. As a result, monetary conditions have become more difficult to judge. This is one of the problems of financial deregulation, but one that must be set against the benefits that it has brought.

    Therefore although monetary policy remains the key to controlling inflation, it is not realistic to suppose that we can take decisions solely by reference to the way any one particular measure of money is growing. In a more sophisticated world, we must apply judgment and take into account the other evidence about monetary conditions that may be available.

    In recent weeks, I have looked afresh at the role of monetary targets. Having done so, I am clear that it is sensible to retain a target for narrow money, and that this is best measured by the familiar aggregate M0. Since this is essentially notes and coin, it clearly is not a comprehensive measure of money in all its uses, but it does have value as an indicator of transactions and has been a reliable guide for many years. For next year, I have set the target range at 1 to 5 per cent. Although the growth of M0 has fallen from its earlier peaks, it is likely to start the year above the range, and it may be some months before it falls within it.

    In this re-examination of policy, I have also looked closely at the case for reintroducing a target for broad money. I can understand why some favour this. At times, broad money has given a useful indication of the build up of inflationary pressure. The difficulty is that its message has always varied in quality : its growth can represent money that is about to be spent, or money that is very definitely being saved : savings which I wish to encourage, as will become apparent later this afternoon. Although we will monitor M4 carefully, and give it weight in our decisions, I do not intend to set a target for the year ahead.

    I have also reviewed whether there should be any changes in the Government’s funding policy. The objectives must be to manage public debt in a way that supports monetary policy in bearing down on inflation, without distorting financial markets. I have concluded that, in general, policy should continue to be guided by the funding rule followed in recent years, with the public sector avoiding sustained under or over-funding.

    However, I am also clear that, in practice, the rule cannot and should not be operated rigidly. In particular, in recent years there has been an increase in the size of the Treasury bill issue, largely as a result of a change in the financial position of local authorities. I therefore announced to the House on 15 February a range of measures intended to limit local authority borrowing from the Public Works Loan Board. This change should, in due course, allow a reduction in the Treasury bill issue, but in the meantime, the Government will adjust their funding operations if necessary, increasing gilt sales or reducing gilt purchases, to take account of the overall situation in the money market.

    Progress on reducing inflation is also a vital precondition of our commitment to take sterling into the exchange rate mechanism of the European monetary system. Our commitment to do so was set out at Madrid.

    It remains firm, and the conditions for entry remain unchanged. When we join the exchange rate mechanism, it will provide a new framework for interest rate decisions, but even then, no one should suppose it will bring a dispensation from the need for strong domestic monetary control–indeed, quite the reverse. Commitment to the one will reinforce the commitment to the other.

    To sum up, interest rate decisions will continue to be made on the basis of the growth of monetary aggregates, and a range of other evidence, most notably the exchange rate. This matters because it provides important information about domestic monetary conditions–quite apart from having an effect on prices. Therefore, I favour a strong exchange rate. However there is, as I have made clear, no single lodestar to guide us in monetary policy. Life would be simpler if there were, but it simply does not exist, so judgment is unavoidable.

    My judgment is that interest rates will stay high for some time to come. The moment I judge I can safely lower them, I shall, but to reduce them prematurely only to increase them again would be extremely damaging. When I bring them down, it will be because I believe that they are likely to stay down.

    In chapter 2 of this year’s Red Book, I have provided a much longer and more comprehensive account than usual of how monetary policy, including funding policy, is to be operated over the years ahead. I hope that this will be helpful to the House and, in particular, to members of the Select Committee on the Treasury and Civil Service when they come to examine the Budget documents in detail.

    FISCAL POLICY

    Although monetary policy must play the main role in tackling inflation, a tight fiscal policy is also essential. It cannot do the work of monetary policy, but it can and must support it. The dramatic improvement in the state of public finances over the past 10 years under the stewardship of my right hon. Friends is an achievement of which they can be rightly proud. For decades, successive Governments had spent more than they were prepared to raise honestly from taxation and they made up the shortfall by borrowing. They left that bill to be picked up by future generations. Over decades, it mounted to very considerable levels. Today, just paying the gross interest on the accumulated debt accounts for 10p on the basic rate of income tax.

    Over the past 10 years, we have reversed that trend and in the past three, we have repaid around £25 billion, reducing the burden of Government debt to levels that we have not seen since before the first world war. The rewards of this repayment will be felt by future generations, but they bring also an immediate benefit. As a result of the debt repayments, we are saving over £2,500 million a year in debt interest. That is sufficient to meet the annual cost of around 150 district general hospitals.

    The very large Budget surplus in 1988-89 owed much to cyclical factors. In the current year, as I told the House some months ago, we expect the surplus to fall back. The position, as usual, will remain uncertain until the year is complete, but our best estimate is that the debt repayment this year will be around £7 billion.

    The fall in the surplus owes less to the slowdown in growth than to a number of special factors. We have seen a fall in privatisation proceeds from the very high level achieved in 1988-89. There has also been a sharp and unwelcome increase in local authority spending. This has been particularly marked in their capital spending, as local authorities have sought to forestall the new controls which will take effect in April. As a result, we now expect the public expenditure planning total this year to be overshot by £2.25 billion. Central Government expenditure remains well under control.

    Another, but much more welcome, factor reducing the surplus has been the higher national insurance rebates which have resulted from the huge success of personal pensions. This extension of choice is a considerable tribute to my right hon. Friend the Member for Sutton Coldfield (Sir N. Fowler). Over 3.5 million people have now taken out personal pensions. As well as benefiting the individuals concerned, in the long term this will reduce public spending, but it also reduces national insurance receipts, by £2.5 billion this year. Next year, some of these factors will be partially reversed, but we will see the effect of slower growth on the debt repayment. In particular, corporation tax receipts are likely to fall a little after six years of rapid growth, not least because of the higher investment of recent years which can be offset against tax. These allowances will be worth more than £10 billion to companies next year, as opposed to £9 billion this year.

    It is against the medium-term fiscal prospect that I have framed the Budget judgment, for fiscal policy is not, in my view, a flexible instrument which should be altered to meet short-term contingencies. Fine-tuning fiscal policy is not only disruptive to the public sector, to business, and to taxpayers, but its effects on the economy are uncertain and often destabilising.

    Accordingly, I am budgeting next year for a further public sector debt repayment of £7 billion–the same as this year. Looking further ahead, I expect our fiscal position to move towards the medium-term objective of a balanced Budget–an objective that I reaffirm today. The overall effect of the Budget measures that I shall announce today will be to maintain a tight fiscal policy by modestly increasing the yield from taxation by about £500 million next year and just under £1 billion in 1991.

    BUSINESS TAXATION

    I now come to the detailed measures in this year’s Budget, and I shall begin with the taxation of business. Everyone in this country benefits from the success of British enterprise. Tax reform cannot create success, but it can help and encourage it. Within the tight fiscal position that I judge necessary, I am able to make some changes that should help small and medium -sized companies. Cash flow is particularly important to new and growing companies of this size. I have two measures that should help to improve it. At present, traders pay value added tax on all their sales, even if their customers do not actually pay the bill. They can claim VAT relief for a bad debt only when the debtor has been declared formally insolvent. As a result, the trader, who has dealt in good faith, can be out of pocket, in some cases for years, and often for large sums. This has long been resented by businesses and the time has come to deal with it. I therefore propose that, from April next year, all debts that are over two years old and written off in the trader’s accounts will qualify automatically for relief from value added tax. This will be worth about £150 million to business next year.

    I also propose to help smaller companies by simplifying the rules for traders registering for value added tax. At present, whether or not a trader has to register depends on quarterly and annual turnover thresholds. One only has to say that to realise how difficult it is. Businesses also have to peer into the future to see whether these limits might possibly be exceeded within the next year.

    That complication is unnecessary, so, as from today, I propose a simple rule for VAT registration. This will be based on actual turnover in the preceding 12 months and not unknown turnover in the distant future. It will bring certainty and simplicity in place of uncertainty and complexity. It has a second benefit for businesses : because they will, in general, register later than they otherwise would have done, it will save them £35 million in 1990-91 and £75 million the year after.

    I have two further value added tax changes. First, I propose to increase the VAT threshold to £25,400, a modest sum, but the maximum permitted under European Community law.

    The second change will affect companies that provide accommodation for their own directors. As things stand, the company can reclaim the VAT that they pay on this–for something that is more a fringe benefit than a legitimate business cost. Frankly, I do not believe that this generous treatment is justified. I therefore propose that VAT paid on directors’ accommodation should no longer be deductible. This will take effect from Royal Assent.

    I also have some changes to corporation tax. While the main rate of corporation tax will remain at 35 per cent., I propose to reduce the burden of tax for smaller companies.

    At present, companies with profits below £150,000 pay a reduced rate of corporation tax of 25 per cent. I propose to raise this ceiling by one third, to £200,000. This amounts to a doubling in two years of the profits level for the reduced rate. This will be of special benefit to smaller growing companies.

    For companies with profits above this limit, the average rate of tax gradually rises until their profits reach the upper profits limit of £750,000 a year. I propose to raise this limit, again by a third, to £1 million. This means that no single company will be liable for the full rate of corporation tax until its profits reach £1 million a year. These changes will mean that we will have the most favourable structure of corporation tax for small companies anywhere in the European Community.

    I also have a specific tax change to help training. One of the most welcome features of the last few years has been the massive sums of money being invested in training throughout the economy by employers in both public and private sectors, large firms and small. Our estimate is that in total this amounts to £20 billion a year. In addition, the Government are spending £2.5 billion a year on training programmes ; and the value of tax relief on companies’ spending must be at least as much again.

    In future, over £2 billion of our public expenditure on training will be spent through training and enterprise councils, or TECs as they are known, most of which will be coming into operation over the next year. I have no doubt that TECs will do much to improve training in skills and that we shall see the benefits of this in future. They give employers a genuine opportunity to determine their own needs and will provide generous cash help to meet them.

    The Government have already promised to match local business donations to TECs pound for pound within certain limits. I now propose to encourage business to maximise the money they put into training by providing tax relief on business donations to TECs for five years until April 1995. I propose to extend the same concession to local enterprise agencies until the same date.

    My next announcement has implications for one in four of the adult population, for that is the number of people–nearly 11 million–who now own shares in the United Kingdom. That remarkable figure–a new record–is published today in the annual stock exchange survey of share ownership.

    Over the next few months, the stock exchange will be taking crucial decisions on its plans for a new share-dealing system, affectionately known as TAURUS. This will cut costs, eliminate paper forms, and provide a modern computerised system for transferring shares. Decisions on the design of the new systems for TAURUS will have to be taken shortly. We need, therefore, to decide what stamp duty regime to apply to paperless transactions.

    As we approach 1992, we can expect even sharper international competition in financial services, much of it from other European centres. Competitive and practical arguments point in the same direction. I have therefore decided to abolish stamp duty on securities late in 1991-92 to coincide as closely as I can manage with the introduction of paperless trading. Stamp duty reserve tax will also be abolished at the same time.

    Both the abolition of the tax and the introduction of a more modern dealing system will help to secure the United Kingdom’s position as a leading financial centre in an increasingly competitive world market. They will also reduce transaction costs and permit higher returns for 11 million holders of occupational pension schemes, over 3.5 million personal pension holders, and the many millions of people who hold life assurance policies or unit trusts. It will also be of considerable benefit to small shareholders.

    The assumption in the Red Book is that abolition will be at the end of 1991, at a revenue cost of £120 million in 1991-92. This date will be subject to confirmation later, when I have fuller information about the progress of TAURUS. However, although there is some flexibility about the timing, there is no doubt whatsoever about the decision to abolish stamp duty on shares. I have made the announcement now for two reasons : to remove uncertainty, and to make it clear that there is no need to plan for stamp duty within TAURUS. I should add, for the avoidance of doubt, that stamp duty on land and property will be unaffected by this measure.

    The Finance Bill will also include a number of measures on life assurance, announced by my hon. Friend the Financial Secretary to the Treasury last December. These measures, which flow from the changes in the Finance Act 1989, followed extensive consultation with the industry. They put the taxation of life assurance companies’ unit trust holdings on a sounder footing, and make a number of technical improvements. They will yield £50 million in 1990-91. A further measure will be introduced to ring- fence long-term business assets. Without this measure, there could be a significant loss of tax. I also have a measure to announce that will clarify the tax regime for banks. Tax relief is rightly available to banks, as it is to other lenders, for bad and doubtful debts, but this has given rise to two problems. First, in recent years, the banks have increased very substantially the amounts written off for their lending to Third-world countries. That has been widely welcomed, but sudden increases do have an adverse impact on the public finances. Over time, the tax cost of the 1989 increases could come to an amount going on for £1 billion.

    Secondly, although the principle is clear, it is less clear how to implement it in practice. That is because the relief available depends on the extent to which the debts are estimated to be irrecoverable–and that is often far from clear-cut. This difficulty is magnified when the debts in question are those of sovereign nations rather than of individuals or firms.

    This is an extremely unsatisfactory position for the banks, for the Inland Revenue, and for the taxpayer. I have therefore decided to resolve it and to remove the uncertainties in the present law. Banks will continue to be able to offset their losses on sovereign loans fully against tax, but under a clearer mechanism than previously, which will be broadly based on the Bank of England’s present guidelines. There will be a limit on future increases in the cost of this tax relief between years.

    For the 12 months starting today, banks’ tax relief on such provisions will be limited to the same high proportion of debts as this mechanism indicates for 1989. Thereafter, the ceiling will be increased in steps of 5 per cent. a year, so that the banks will, in time, get all the tax relief to which they are entitled. If the banks sell their debt to a third party and crystallise their losses, their tax relief on them will be similarly phased, but where the debt is sold back to the foreign state, to reduce its debt once and for all, tax relief on that loss will be available in full and immediately. This measure will produce a yield of around £200 million in 1991-92, compared with what might have been expected if I had taken no action.

    TAXES ON SPENDING

    I turn now to taxes on spending. Given the need to keep a tight fiscal position, I have decided that the excise duties, taken as a whole, must rise broadly in line with inflation. Within that overall constraint, however, I have some modest adjustments to make. First, for vehicle excise duty, I propose a number of changes to remove anomalies in the taxation of different types of lorries. These changes will also dramatically reduce the present vast number of different VED rates. Last year’s Budget removed 80 different VED rates, and I propose to eliminate a further 188 today. This will greatly simplify the system.

    Vehicle excise duty on cars–the tax disc–will be unchanged once again this year at £100. Nor will there be any change in VED for public or private sector buses, coaches, taxis and many lorries. I will recoup the cost of this by increasing petrol and DERV duties by rather more than strict revalorisation would justify. These will rise by 10 per cent. This will add 9p to a gallon of DERV and almost 11p to a gallon of leaded petrol. For unleaded petrol, the cash increase will be smaller, at around 9p per gallon. This will widen the tax differential even further in favour of unleaded petrol. This will now amount to almost 16p a gallon. The market share of unleaded petrol has increased fivefold, to 30 per cent. since the changes in the last Budget. I hope and expect to see it increase even further.

    For alcohol, with one exception, I propose to raise the duties in line with inflation. This will put 7p on a bottle of table wine, but only 2p on a pint of beer. Spirits, however, have enjoyed a duty standstill since 1985. I propose therefore an increase of 10 per cent., which will increase the price of a bottle of spirits by 54p. Cigarettes also were not increased last year. This year I propose a 10 per cent. increase in duty, which will put 10p on a packet of 20 cigarettes. The duty on cigars will rise similarly, and will add 5p to the cost of a packet of five small cigars. But I do not this year propose any increase in duty on pipe tobacco. This at least will be one measure which should command the total support of the right hon. Gentleman the Leader of the Opposition.

    Mr. Neil Kinnock (Islwyn) : But not of my wife.

    Mr. Major : In that case, I shall make my apologies to Mrs. Kinnock separately.

    FOOTBALL

    I now turn to football. The tragedies at Bradford and Hillsborough football grounds shocked us all. The report by Lord Justice Taylor made recommendations to improve comfort and safety in our football league grounds over the next 10 years.

    Implementing the programme of work envisaged in the Taylor report will place a significant burden on football clubs, which many of them will find extremely hard to bear. For many are in a weak financial position, and only a handful are profitable. I recognise this problem, but I believe there is an acceptable way to overcome it. The first priority is to ensure that vital improvements in safety and comfort can be made, and the second is to avert what would otherwise be the closure of many of our grounds. If we help football now, I am confident that football will itself contribute to the improvements in facilities that are necessary.

    Let me say first that much of the expenditure required to meet the Taylor recommendations is eligible for capital allowances or for full offset against tax. I know that there has been some confusion about this, and I have asked the Inland Revenue to provide urgent guidance to clarify the tax position.

    However, tax allowances cannot help where there is no profit to set costs against. This is the case with many clubs. I have therefore reviewed the rate of pool betting duty–the tax which is paid by the pools companies on the stakes they receive. This currently stands at 42.5 per cent. I propose to reduce it to 40 per cent., on the clear understanding that the full amount saved is passed by the pools promoters to the Football Trust, and is used by it to improve the safety and comfort of fans at English and Scottish football league grounds.

    I am confident that such an arrangement can be negotiated with the pools promoters and the football authorities. Provided that we do so, the duty will be reduced, in the first instance for five years. At the end of that period we shall review the position again. [Hon. Members :– “You will not.”] At the end of that period, I will review the position again.

    This reduction will yield around £100 million for football over five years. This is in addition to the £75 million that the Football Trust has already said will be available over the next 10 years. These sums represent very large contributions towards making sure that football league clubs can implement the Taylor recommendations and bring their grounds up to the safety standards both we–and they–want to see. Millions of people watch football every year. With better and safer grounds, I hope that many more will join them.

    INCOME TAX

    Next, I turn to income tax, before turning to other matters. I have no change to announced to either the basic or the higher rate of tax. They will remain at 25p and 40p respectively. Notwithstanding that, I reaffirm our objective of moving towards a basic rate of 20p when it is possible to do so.

    I turn now to personal tax allowances. This year, I propose to uprate the main income tax allowances by the statutory indexation factor of 7.7 per cent., rounded up. The personal allowances will rise by £220 to £3,005. The new married couple’s allowance will be set at £1,720, as will the additional personal allowance for single parents and the widow’s bereavement allowance. However, the basic rate limit, the level at which higher rate liability begins, will be unchanged, at £20,700 of taxable income. This means that a married man with a £30,000 mortgage will not begin to pay higher rate tax until his income is over £30,000.

    The allowances for the elderly will similarly be fully uprated in line with inflation. For those aged 65 to 74, the personal allowance goes up by £270 to £3,670 and the married couple’s allowance goes up by £160 to £2,145. For those aged 75 and over, the personal allowance goes up by £280 to £3,820 and the married couple’s allowance will rise to £2,185. The income limit for these allowances will also be fully indexed to £12,300.

    I also propose to raise the inheritance tax threshold by £10,000 to £128,000, in line with inflation.

    The capital gains tax exemption–that is, the amount of real capital gains free of tax in any one year–currently stands at £5,000. However, from April, the introduction of independent taxation means that married couples will be entitled to not one but two exempt amounts rather than having to share one between them as at present. I have therefore decided to leave the exempt amount at £5,000 per person, which effectively gives a married couple an exemption of £10,000 in total.

    I also have to set the scales for the taxation of the private use of company cars. The tax treatment of this benefit remains generous, although less so than previously, as a result of the significant increases in these scales in recent Budgets. I therefore propose an increase–but a smaller one than in previous years–of 20 per cent. The yield from this will be £160 million in 1990-91. There will be no change in the fuel scales.

    In the tax system there is one allowance, the tax allowance for the blind, that, although anomalous, has long been accepted as a proper recognition of the special difficulties faced by blind people. The allowance is modest, but welcome, at £540 a year. I propose to make it less modest and more welcome and to double it. From 6 April, it will stand at £1,080.

    Before I leave income tax, I have a small supply side measure to announce that will help the labour market to work better. We have always made it clear that it is not for the Government to encourage or discourage women with children to go out to work. That is rightly a decision for them to take, and one in which the Government would be wise not to interfere. However, it is undeniable that an increasing number of mothers do want to return to work, and many employers, in private industry and in public services such as health and education, are keen to encourage them to do so. If an employer provides a nursery for his staff in order to recruit and retain skilled people, he can set the full cost against corporation tax. However, any employee who benefits and who earns more than £8,500 a year is required to pay tax on the value of the benefit in kind. Many employers have argued that this is an obstacle to the growth of nursery provision and has created recruitment difficulties for them, and many women see that as a positive disincentive to return to work. For those reasons, therefore, I have decided to exempt the value of workplace nurseries and playgroups from taxation as a benefit in kind. That will take effect from 6 April this year.

    CHARITIES

    I said at the beginning of this speech that this Budget would include incentives both to save and to give. I shall come to saving in a moment, but I want first to deal with giving. I have a number of proposals to help. We are by instinct a generous nation to causes that appeal to us. The tax system already offers a great deal of help to charities. It offers reliefs on their income and on their expenditure, and it provides incentives to encourage charitable giving. There is a relief for charitable covenants that has now been in operation for many years and is worth almost £200 million to charities every year. We have been considering how covenants can be made easier for charities and donors to use, and the Inland Revenue will therefore be issuing new guidance today to simplify them. Since 1987, relief for covenants has been complemented by the payroll giving scheme, a very user-friendly way to relieve regular giving from tax. The scheme has been doing well since its launch, and I now propose to increase the annual limit from £480 to £600. These reliefs are focused mainly on regular giving, which is of great importance to charities. However, they are ill suited to encourage the one-off gift which, for a variety of reasons, many people find more convenient. Over the years, that has been a persistent source of concern to charities. This year, I propose to go some way to meet that concern.

    I propose a gift aid scheme that will, for the first time, give tax relief for large money donations. It is simply not practical to operate a relief for all small one-off gifts–and in any event, I do not wish to undermine regular giving through the payroll scheme and covenants, which are very important to some charities. Therefore, this scheme applies to larger donations.

    The lower qualifying limit for gift aid will therefore be £600 per donation–the new ceiling for payroll giving. The relief will be available on one-off gifts up to an annual ceiling of £5 million per individual donor. The tax relief will be reclaimable by the charity, and payable to it at basic rate. As with covenants, the donor will get any higher rate tax relief that is due direct from the tax office.

    This relief, which will apply to gifts by both individuals and companies, will come into operation from 1 October this year. I am confident that it will maintain and strengthen the growth of charitable giving, and I very much hope that charities will promote it actively. It will, of course, be open to the whole range of charities, from social causes to those whose activities are devoted to the arts.

    I have a further measure to help charities. This is a package of value added tax reliefs, giving help especially to organisations engaged in sea rescue, medical care and research. These will come into effect on 1 May and give an additional benefit of about £5 million a year to charitable work. Full details are set out in a Customs and Excise press release issued today.

    SAVINGS

    I now turn to the taxation of savings, where I have a number of measures to announce. As I do so, I am conscious that the majority of personal savings are the fruits of earnings that have already been taxed.

    I start with saving in shares. The development of the personal equity plan, which stands to the immense credit of my right hon. Friend, the Member for Blaby (Mr. Lawson), has been an important boost for share ownership. I am pleased to report to the House that last year was a record one for PEPs, with 300,000 plans taken out, to the value of some £750 million. To build on this success, I propose to raise the overall annual limit on investment in PEPs by a quarter, from £4,800 to £6,000. Within that, the annual limit on investment in unit and investment trusts will be increased by the same percentage to £3,000.

    I am also sympathetic to the problems that investment and unit trusts face in qualifying for PEP treatment. This arises from the requirement that 75 per cent. of their portfolio should be invested in ordinary United Kingdom equities. I propose therefore to relax this rule to 50 per cent. I also propose to raise the PEP limit for those trusts that do not satisfy this rule from the present £750 to £900.

    Last year, my right hon. Friend put employee share ownership plans, or ESOPs as they are known, on the statute book. ESOPs are a vehicle for giving employees a direct stake in the business for which they work. They are an attractive option and deserve further encouragement. One impediment to their growth has been that the transfer of shares to the work force can mean that the company owner faces an immediate tax charge. To prevent this, I propose to introduce a rollover relief from capital gains tax for sales of shares to ESOPs. I believe that this will remove an obstacle to their development and give this form of employee share ownership the fillip that it deserves.

    In a moment, I will turn to some new and significant tax changes for savers, but first, I wish to discuss a reform which was announced in the 1988 Budget and which comes into effect next month–independent taxation for women. There is too little understanding yet of what this change will mean, but it will fundamentally change the financial affairs of women.

    At present, the taxation of married women’s income is wholly inconsistent with their role in society. In tax law, their income is still considered to belong to their husbands. The effect of this is twofold : it denies married women any privacy or independence in tax matters, and too often it results in heavier taxation than is fair. It is time for the system to go, and go it will from April. In future, a husband and wife will be taxed entirely separately. Every married woman will have a tax allowance of her own to set against her income–whether this income is from earnings, pension or savings. Three and three quarter million people will gain, of whom two million have incomes of less than £5, 000 a year. One million elderly married couples will pay less tax, and 200,000 pensioner couples will be taken out of tax altogether. No one will be sorry to see the old system go. One of its worst features was its treatment of the savings of married women. Whether they had other income or not, the interest on their savings was added to their husband’s income and taxed at his rate. This was a clear penalty on thrift. From April, all that will end. This may well be the area where the reform has its greatest effect and will be most welcomed.

    However, independent taxation has thrown into sharp relief another aspect of the tax system that affects all savers, and which no longer deserves to survive.

    Some women will see the benefit of independent taxation automatically, if they have their money invested in national savings, or other accounts which pay interest gross of tax, but many women with only small savings prefer to save with high street banks or building societies, and so, frankly, do many other small savers. For all these savers, income tax–or rather, a proxy for it, called the composite rate–is deducted before the interest ever gets to the saver, and whether or not the saver is liable to pay tax.

    Composite rate tax was introduced originally in 1894, and put on the statute book in 1951. It currently stands at just under 22 per cent. It is deducted at source. It cannot be reclaimed in any circumstances. This means that basic rate taxpayers gain by about 3 per cent.–the difference between the composite rate and the basic rate of income tax, which is what they should pay. And it means that non-taxpayers are worse off by 22 per cent.

    The attraction of composite rate has always been that it allows small amounts of tax to be collected with ease from very large numbers of people. It is very convenient and very cost-effective, but the fact remains that, with composite rate tax, we tax people on low incomes who should not be taxed.

    It has, of course, always been possible for these people to avoid taxation entirely, by saving in accounts that pay interest gross or tax-free, or where tax can be reclaimed, but the convenience of using banks and building societies has meant that many of them have not done so.

    The scale of the problem is compelling. Once independent taxation is implemented, there will be 14 million people–nearly one quarter of the population–who have savings income that does not merit taxation, but which will be taxed under present legislation. They include some 5 million married women with little or no other income of their own, 4 million pensioners, 2.5 million other adults, and 2.5 million children with small savings accounts–often funded with small gifts of money from grandparents, or savings from pocket money.

    There is no way out of this problem other than to abolish composite rate tax entirely. This I propose to do with effect from 6 April 1991, the earliest practicable date. From then on, tax will fall on those who should pay it, and will not fall on those who should not pay it. We shall discuss with the banks and building societies how to effect this enormous organisational change. I envisage a scheme of self-certification that will allow non-taxpayers to be paid their interest without deduction of tax. For other savers, tax will continue to be deducted at source, but at basic rate. However, unlike composite rate tax, any tax deducted will be reclaimable by any non- taxpayers who, for any reason, may not have been able to self-certify for gross payment.

    This change will significantly reduce the amount of tax paid by millions of married women, pensioners, children and others with small savings, and by removing the penalty of composite rate tax, it will play an important part in encouraging the savings habit. Meanwhile, the Department of National Savings also has a part to play in encouraging the savings habit. I am therefore announcing today a 1 per cent. increase in the interest rates paid on national savings investment account and income bonds, where interest is already paid gross. This too will help encourage saving, particularly by non-taxpayers.

    However, as well as removing the tax impost for non-taxpayers, I wish to do more to encourage the saving habit among taxpayers–all of them.

    In the 11 years that we have been in office, a series of Budgets have removed penal rates of tax, abolished the investment income surcharge and introduced important new schemes to encourage saving and investment. I intend now to build further on those measures, for everyone, and that means going beyond the incentives to saving that we have built up so far. These schemes have been immensely successful in spreading share ownership, and will continue to be so in the future, but I now want to extend savings incentives to the mass of ordinary taxpaying savers–and potential savers– who prefer to put their money in the familiar security of high street banks and building societies.

    My next measure is addressed precisely to them. I propose to introduce a wholly new tax incentive which will reward saving and encourage people to build up a stock of capital. The scheme will work as follows. Every adult will be entitled to one tax-exempt special savings account, TESSA for short. All commercial banks or building societies will be able to offer such an account. The essence of the scheme is to encourage people to save regularly over a five-year period. The incentive for them to do so is that all the interest earned on their capital will be entirely free of tax, provided only that the capital itself is left undisturbed over the five- year period.

    The annual limit on the amount that can be invested will be £1,800 or £150 a month. In the first year, anyone who has capital that they are willing to tie up for longer can put this money in their account from the outset, up to a limit of £3,000, but the overall limit of £9,000 for the whole plan applies nonetheless.

    To cope with the circumstances of many small savers–particularly pensioners–who use the interest on their savings for their everyday expenses, it will be possible to withdraw interest as it accrues, but only up to the net-of-tax level. At the end of the five years, the depositor then gets a bonus representing the money which would otherwise have gone in tax. The depositor will get this provided none of the capital has been withdrawn before the five years is up. They can, of course, withdraw the capital at any time, but without tax relief.

    This scheme is convenient, flexible and simple. It extends a form of PEP treatment to ordinary savings. It caters for those who want to save monthly, annually, or in irregular amounts. It represents a substantial incentive to save, and I am confident that it will play its part in reviving the culture of thrift. I also believe that it is both desirable and fair to reduce tax on small savings.

    This new relief will be available from next January. Its cost will depend on take-up, but could be at least £200 million in the first full year, and rising thereafter.

    This Budget has contained a whole range of savings incentives. It has done so because I believe it is economically right to encourage savings, and because I believe also that it is socially right–not least because of the independence and security it offers to savers as they build up capital of their own. However, there is little point in encouraging savings if we leave in the system an over-severe penalty for doing so. I turn, therefore, to the social security system and to what has become known as the capital rule.

    As the House knows, people with capital over £3,000 start to have their benefits reduced, and those with more than a certain level of savings –£6,000 in the case of income support and family credit and £8,000 in the case of housing benefit and community charge benefit– become completely ineligible for all means-tested benefits, however low their incomes.

    There must, of course, be some upper limits above which help is no longer given, but the present limits are widely resented as a penalty on thrift and self-provision. [Interruption]. This is particularly so in the case of elderly people with some capital but only modest incomes. They believe it is unfair that they must use the money carefully saved during their working lives while others, less provident, have immediate access to the benefit system.

    I have therefore reviewed the present limits with my right hon. Friend the Secretary of State for Social Security, and we have decided that they should be raised. The limit for income support and family credit, where the stress is less great, will rise from £6,000 to £8,000, but the problem is most acute for those whose savings disqualify them from housing benefit and from community charge benefit. [Interruption]. I propose therefore, to double the capital cut-off for both these benefits, from £8,000 to £16,000–for housing benefit and for community charge. This new limit will be of particular help to couples, but it will also apply to single people and therefore extend help to some widows and widowers who would otherwise continue to be excluded.

    This measure will benefit–

    Mr. Donald Dewar (Glasgow, Garscadden) rose–

    Mr. Major : No.

    Hon. Members : Give way.

    Mr. Deputy Speaker : Order. Clearly, the Chancellor is not giving way.

    Mr. Dewar rose–

    Several Hon. Members rose–

    Mr. Dewar : On a point of order, Mr. Deputy Speaker. I am sorry to interrupt, but an important concession is being announced at the beginning of the introduction of the poll tax system in England and Wales. The system has been running for over a year in Scotland–

    Mr. Deputy Speaker : That is clearly not a point of order for the Chair. Mr. Chancellor of the Exchequer.

    Mr. Major : This measure–[Hon. Members :– “Answer.”]–will benefit about a quarter of a million people, two thirds of them–

    Mr. Dick Douglas (Dunfermline, West) : On a point of order, Mr. Deputy Speaker. You are in the Chair, as Chairman of Ways and Means. Important tax concessions and changes are being made. A principle of taxation in this country–

    Mr. Deputy Speaker : Order. The hon. Gentleman knows that that is not a point of order for me to deal with. I am anxious to hear what the Chancellor has to say.

    Mr. Major : This measure will benefit around a quarter of a million people, two thirds of them pensioners who are at present–

    Mr. Brian Wilson (Cunninghame, North) : On a point of order, Mr. Deputy Speaker.

    Mr. Deputy Speaker : I very much hope that it is. It does the House’s reputation little good to have the Chancellor’s speech interrupted by points of order which are not matters for the Chair.

    Mr. Wilson : It is precisely in the interest of the House’s reputation that I ask, on a point of order, whether the Chancellor will make clear immediately whether the concessions that he has announced will be retrospectively applied to Scotland.

    Mr. Deputy Speaker : Order. That is not a matter for the Chair. Points of order must be for me and not for Ministers.

    Mr. Major : This measure will benefit around a quarter of a million people, two thirds of them pensioners who are at present wholly excluded from benefit–

    Mr. Jim Sillars (Glasgow, Govan) : On a point of order, Mr. Deputy Speaker. Given that many of us, especially Opposition Members, were unable to hear what the Chancellor said because of the noise, would it be in order to get him to repeat the last two passages to see whether that tax concession will be retrospective in Scotland, which got the poll tax a year earlier?

    Mr. Deputy Speaker : Order. I am not going to listen to any more bogus points of order. I hope that the hon. Gentleman shares my anxiety to hear what the Chancellor has to say.

    Mr. Major : For the avoidance of doubt, Mr. Deputy Speaker, I shall repeat that this measure will benefit around a quarter of a million people, two thirds of them pensioners who are at present wholly excluded from benefit. The total cost will be £120 million a year, which will be met from the reserve and will not increase the public expenditure totals.

    To avoid delay, my right hon. Friend is laying the necessary regulations today– [Interruption]. –so that the limits will be increased when benefits are uprated at the beginning of April. He will discuss the operational implications of this change with local authorities immediately.

    PERORATION

    This is a saver’s Budget. It takes no risks with inflation. It further strengthens the public finances. It helps the less well-off. It gives women a better deal. It offers help to charities and sport, and it reduces the tax burden on growing companies– [Interruption].

    Several Hon. Members rose–

    Mr. Deputy Speaker : Order.

    Mr. Major : It is the right Budget for this year, and it sets the right course for the ’90s. I commend it to the House, and the country.

  • Mr Major’s Parliamentary Answer on Inflation – 15 March 1990

    Below is the text of Mr Major’s response on inflation made on 15th March 1990 in the House of Commons.

    Mr. Steinberg To ask the Chancellor of the Exchequer when he expects to have zero inflation.

    The Chancellor of the Exchequer (Mr. John Major) I shall set out my forecast for inflation next week.

    Mr. Steinberg The fact is that the Government have no chance of getting inflation down to zero per cent., even though that was the stated aim of the previous Chancellor of the Exchequer. It will not fall significantly from the present rate of inflation. Many of my constituents are suffering great hardship because of the Chancellor’s and the Government’s policies. Many of them are facing hardship because of increases –

    Hon. Members Too long.

    Mr. Speaker Order. In fairness to the House, the hon. Gentleman should ask a single question.

    Mr. Steinberg Inflation has been fuelled by high interest rates, high rents, high gas and water prices and the dreaded poll tax.

    Mr. Speaker Order. I think that that is about enough.

    Mr. Steinberg rose – [Interruption.]

    Mr. Speaker Order. It is not at all fair to the hon. Gentleman’s colleagues for him to ask several questions.

    Mr. Major I thought for a moment that the hon. Gentleman was trying to talk out Question Time. The reality is that without utilising our present interest rate policy there will be no chance of bringing down the rate of inflation to a level that is tolerable for most people. To that end we shall continue to sustain monetary policy. It is important that we do so for economic and social reasons. The hon. Gentleman mentioned the community charge. It is perfectly true that the dramatic burst of spending by local government will raise the retail prices index, but much of that comes from local authorities of which the hon. Gentleman approves.

    Mr. Budgen Will my right hon. Friend accept my congratulations on the way in which, to date, he has borne down on inflation? Does he agree that it will be far more difficult in future to resist the demands of those, from every section of the community, who recommend and enjoy inflation, and who will look to him for a major relaxation of credit before the next general election?

    Mr. Major I share with my hon. Friend the belief that it is vital to take whatever action is necessary to bring inflation down.

    Mr. John Smith Is the Chancellor aware that all three local authorities in the Mid-Staffordshire constituency – two of which are Conservative – have set poll tax levels – [Interruption]. I have selected a constituency in which the Conservative party has a 14,000 majority. Surely that is perfectly fair. The three authorities have set levels significantly higher than the previous rate bills and far higher than the Government’s ludicrous guidelines. Do not those examples and others throughout the land show clearly that the Secretary of State for the Environment was perfectly correct when he said that the poll tax would have a devastating impact on the retail prices index? Does the Chancellor agree with his colleague?

    Mr. Major The right hon. and learned Gentleman was uncharacteristically unreasonable in omitting from the beginning of his question the fact that the Labour county council covering that area has dramatically increased its expenditure. He also did not mention, for example, the quite astonishing and unreasonable community charge of more than £600 to be set by Labour-controlled Lambeth.

    Sir William Clark Will my right hon. Friend remind the House what the rate of inflation was before 1979? Does he agree that if the Labour policy about which we know was implemented, we should have hyperinflation and a run on sterling?

    Mr. Major There is no doubt that Labour’s policy would cause a run on sterling – and we have yet to find out precisely what Labour’s policy will be in individual aspects. The Labour Government’s inflation record speaks for itself. Their best month was still higher than our worst.

  • Mr Major’s Written Parliamentary Answer on Inflation – 18 January 1990

    Below is the text of Mr Major’s written Parliamentary Answer on Inflation on 18th January 1990.

    Mr. Denzil Davies To ask the Chancellor of the Exchequer what assessment he has made of the effect of the growth of average earnings over the last six months on the rate of inflation.

    Mr. Major Excessive pay settlements primarily threaten job prospects. The Government will not bail out employers who do not control their costs.

  • Mr Major’s Autumn Statement – 15 November 1989

    The text of Mr Major’s Autumn Statement, given in the House of Commons on 15th November 1989.

    CHANCELLOR OF THE EXCHEQUER:

    The Chancellor of the Exchequer (Mr. John Major) : With permission, Mr. Speaker, I should like to make a statement. Cabinet agreed the Government’s expenditure plans this morning. I am now able to inform the House of the public expenditure outturn for this year; the plans for the next three years; proposals for national insurance contributions in 1990-91; and the forecast of economic prospects for 1990 required by the Industry Act 1975. The main public expenditure figures, together with the full text of the economic forecast, will be available from the Vote Office as soon as I sit down. The printed Autumn Statement will be published next Wednesday.

    Tight control of public expenditure remains a central element of the Government’s economic strategy. In the past seven years this has led to a sharp fall in the ratio of public spending, excluding privatisation proceeds, to national income. This fall has made it possible to improve dramatically the Government’s finances while still making substantial reductions in tax rates. The ratio of public spending to gross domestic product was nearly 47 per cent. in 1982-83. In the current year, it is likely to be 38.75 per cent., significantly below the level expected at the time of the last Autumn Statement. For the next two years the plans I am announcing today show ratios of 39 and 38.75 per cent. Those are unchanged from the ratios published in last year’s Autumn Statement, and permit a cash increase in general Government expenditure in 1990-91 of around £5.5 billion. By 1992-93 the ratio is expected to fall further to its lowest level since the mid-1960s.

    For the current year, the outturn of expenditure is expected to be about £168 billion–£1 billion higher than the original planning total. This partly reflects a lower level of privatisation proceeds, but its principal cause is massive overspending by local authorities on both current and capital account. As the House knows, new arrangements for the finance and control of local authority expenditure in England and Wales are being introduced on 1 April 1990. This year’s outturn shows how necessary those new measures are. Central Government spending remains firmly under control. The plans for the next three years have been set on the new definition of the planning total which the Government announced in July last year and which was welcomed by the Treasury and Civil Service Select Committee.

    This includes central Government support for local authorities, but excludes their self-financed expenditure. The composition of general Government expenditure remains unchanged. For 1990-91, the new planning total has been set at £179 billion and, in the following two years, at £192 billion and £203 billion respectively. Within that, the estimates of privatisation proceeds are unchanged, at £5 billion a year. There are also substantial reserves, rising from £3 billion in 1990-91 to £6 billion and £9 billion in the following two years.

    The new plans also show continued real growth in spending on the Government’s priorities. Thus, between this year and next, spending on the National Health Service in the United Kingdom will rise by £2, 400 million. Taking account of income generation and cost savings, that is equivalent to a £2,600 million increase in resources, or 5.5 per cent. in real terms. These plans will finance the improvements in the management of the service outlined in the National Health Service review. They provide more than £200 million extra for hospital building and other capital expenditure next year ; and they will finance continuing growth in services for patients. They are the clearest possible evidence of the Government’s practical commitment to improving the care available in the National Health Service.

    There will be substantial increases also for investment in transport. Spending on national roads is planned to double between 1988-89 and 1992-93. Extra financing of £400 million to £500 million a year is being made available for the railways and London Regional Transport, including upgrading the services on Network SouthEast and the London Underground, to relieve congestion and improve safety, and for rail services for the Channel tunnel. In total we have added £1.8 billion to the planned spending on transport in the next two years. The plans provide an extra £250 million over the next two years for a new initiative to tackle homelessness, to be announced today by my right hon. Friend the Secretary of State for the Environment. Central Government support for the provision of new homes by housing associations will more than double from £800 million in 1989-90 to £1,700 million in 1992-93.

    My right hon. Friend the Secretary of State for Social Security has already announced real increases in benefits which will help 1.5 million families and 500,000 long-term sick and disabled people. There will be a further increase of over £500 million in the total resources available for higher education in 1990-91 compared with this year. It will provide for the continuing growth in the number of students, which has risen by 30 per cent. since 1979, and is now at a record level and it will cover the cost of the Government’s proposals on top-up loans. There is provision for more environmental research, including the new climate change centre and the doubling of our contribution to the United Nations environmental programme. About £1.5 billion has been added to planned capital spending by central Government and public corporations in 1990-91. That represents a real increase of around 10 per cent. compared with 1989-90.

    Mr. Eric S. Heffer (Liverpool, Walton) : On a point of order, Mr. Speaker, I have been a Member for a long time, but I wish to know whether I am allowed to ask the Chancellor of the Exchequer a question. He is making a long statement. Am I allowed to ask a question and, if not, when can I ask him a question?

    Mr. Speaker : Surely the hon. Member does not need to pose that question. If I call him later, he can ask the Chancellor a question then.

    Mr. Major : The new plans include the money central Government provide to support local authority spending. The Government’s proposals for aggregate external finance in 1990-91 were announced to the House in July. Measures have also been announced which will ease the transition from rates to community charge. The cost to the taxpayer of these measures will be nearly £700 million in 1990-91, with further substantial sums in each of the following two years.

    Capital grants and credit approvals will provide central Government support for local authority capital expenditure under the new arrangements. The new plans provide support for a sustained programme of school and college building and modernisation, for local authorities to contribute to the homelessness package, for transport projects, as well as capital spending on other local services, including local roads and environmental improvement. As in the past, these improvements have been possible only through a rigorous selection of priorities, substantial gains in value for money, and a very welcome reduction in the burden of debt interest. They have been found within an affordable level of total public spending. Overall public spending excluding privatisation proceeds is expected to grow on average by 1.75 per cent. a year in real terms throughout the period between 1988-89 and 1992-93. This was the rate of growth projected in last year’s Autumn Statement and we have stuck to it. Over the 1970s, a decade of high borrowing and high inflation, as well as high public spending, it grew not by 1.75 per cent. a year but by 3 per cent. a year.

    The Government’s new plans demonstrate their continuing commitment to two vital principles : first, to maintain firm control over total spending; and secondly, to increase efficiency in order to provide more resources where they are most needed. I should like to congratulate my right hon. Friend the Chief Secretary on his skilful and successful conduct of the public spending round.

    I turn next to national insurance contributions. As the House knows, we have now implemented the reform of employee contributions announced by my right hon. Friend the member for Blaby (Mr. Lawson) in the Budget. From last month, two of the three step increases in contribution rates have been abolished. This means that employees who get pay increases taking them just above these steps can no longer lose more in higher contributions than they gain in extra pay. And the initial step at earnings of £43 a week, where people first enter the contribution system, has been more than halved. These measures have reduced contributions by up to £3 a week for nearly 19 million employees and are of particular help to many employees on modest incomes ; they have also removed some important disincentives. The usual autumn review of contributions has been conducted in the light of advice from the Government Actuary on the prospective income and expenditure of the national insurance fund, and taking account of the statement on benefits made in October by my right hon. Friend the Secretary of State for Social Security.

    Next year, the initial class 1 contribution rate payable on earnings up to the lower earnings limit will remain at only 2 per cent. This means that a payment of only 92p a week will buy entitlement to the basic pension and other contributory benefits for those who earn just enough to pay contributions. On additional earnings, up to the upper earnings limit, the rate will remain unchanged at 9 per cent. For employers, the main rate will also be unchanged at 10.45 per cent.

    The lower earnings limit will be increased to £46 a week, in line with the single person’s pension, and the upper earnings limit will be raised to £350 a week. For employers, the upper limits for the three reduced bands will be increased broadly in line with prices. I am also publishing today the economic forecast required by the Industry Act 1975.

    It is clear beyond doubt that the economy has greatly strengthened over the last decade. We have experienced eight years of strong and sustained growth with inflation at moderate levels. This has brought an increase in employment of about 2.75 million since March 1983 and a sustained rise in living standards. However, it is also clear that in the last two years, 1987 and 1988, demand, and with it output, rose at a rate which exceeded expectations and could not be sustained. That became apparent in increased inflationary pressures and the growth of the current account deficit.

    These pressures had to be reduced and monetary policy was tightened accordingly. The effects of this tightening are already apparent in recent retail sales figures, and the turnaround in the housing market. The Government’s fiscal position is also very strong. I now expect this year’s fiscal surplus to be about £12.5 billion, equivalent to 2.5 per cent. of GDP. That represents a very tight fiscal stance by any standards. Both tax yield and expenditure are higher than forecast at Budget time, but lower proceeds from privatisation and the very high take-up of personal pensions mean that the public sector debt repayment will be slightly below the Budget projections.

    Looking at the wider economy, as always, a great deal inevitably depends on the actions of companies and individuals. So there is bound to be uncertainty about the speed with which the economy will adjust to the present tight stance of policy. Our forecast is that growth in domestic demand will be a little over 3.5 per cent. in the current year–a sharp, but inevitable, slowdown from over 7 per cent. recorded in 1988.

    Non-oil GDP is expected to grow by 3 per cent. this year. GDP growth as a whole for the current year looks like turning out at 2 per cent., a little below the forecast published at Budget time. This results from lower than expected North sea oil production, which is taking longer than expected to recover from the several serious accidents of the past two years.

    Business investment is likely to increase by 9.25 per cent. this year, giving a total of over 40 per cent. in the three years to 1989. This is the largest-ever rise in business investment over a three-year period and is two and a half times as fast as the growth of personal consumption over the same period. This has inevitably contributed to strong import growth and a higher current account deficit in the short run. Notwithstanding this unwelcome effect, the resulting increase in productive capacity will help to sustain the growth of output and in due course bring the deficit down. Looking ahead to 1990, our tight fiscal and monetary policy will have an increasing impact both on household spending and on company spending, which typically reacts later than the personal sector. Investment should continue to grow, but it will do so more slowly. The slowdown in the economy means that GDP is forecast to increase by only 1.25 per cent. in 1990. This will bring the average growth in the four years to 1990 to 3 per cent. a year.

    As domestic demand slows, import growth should moderate. At the same time, the strong rise in exports, which has been one of the most welcome developments in 1989, is forecast to continue. Non-oil visible exports are expected to rise by over 11 per cent. this year, the highest rate since 1973, and we expect a further substantial increase next year. As a result, we now forecast that the current account deficit will fall from some £20 billion in the current year to about £15 billion in 1990.

    We will also see a further reduction in inflation. The headline measure of retail price inflation has already peaked at over 8 per cent. in May and June this year, and has since come down a little. Following the recent rise in mortgage rates, it will remain high for some months, but our forecast is for it to fall to 5.75 per cent. by the fourth quarter of 1990, and I expect to see it fall still further after that.

    Our main priority must be to bring inflation decisively down, and keep it down. To achieve this, the economy must slow down for a while. This does mean that 1990 may not be an easy year, but the economy enters the 1990s in incomparably better shape than it entered the 1980s. The supply side reforms of the last decade have left business and industry better able to handle both the short-term difficulties before us and the longer-term opportunities to come. I have no doubt that we must stick to the policies that have turned the economy around, and that we are determined to do.