John Redwood

Mr. John Redwood (Wokingham) (Con): I am a non-executive director of companies and I am also a trustee of a pension fund, as declared in the Register. I would like to begin by speaking to the amendment in the name of my right hon. and hon. Friends, beginning with the most important case set out in that amendment: that the Finance Bill fails to equip the UK to compete in the globalised world economy in the face of ever-increasing competition from India and China.

Whenever Opposition Members venture criticisms of the current state of economic policy and tax policy with respect to competitiveness, we hear from the Labour party—as we did again this afternoon—that things were worse during the worst period of the exchange rate mechanism. That is not only ancient history, it is agreed ground across the Floor of the House. It ill behoves those on the Liberal Democrat Benches to join in. They should understand that they strongly recommended that this country join the exchange rate mechanism and link its currency tothe Deutschmark. It is even worse for those on the Government Benches constantly to throw this back at us, when the Chancellor of the Exchequer was a keen advocate of linking our currency to the Deutschmark and has never yet apologised for the mistake that he made.

Of course, it was the Conservatives who made the mistake in office. The Conservatives have long apologised for it, moved on and learned from the mistake. I hope that the Government have learned from the mistake as well. There are some indications that they might have learned from it, because at the moment they do not wish to take us into the euro currency. The ERM was a stepping stone towards the euro, and had we gone the full way we might have had boom and bust—high interest rates and then low interest rates or inappropriate interest rates—because we would have been committed to the euro.

I just wish that the Government would learn the full lesson of those bad periods in the early ’90s. Surely the full lesson is learned only when a party comes out and says that it must be no to the euro—just as it must always be no to the exchange rate mechanism. We tried it. All three parties wanted it. Some of us disagreed. It failed. Now it must be no to the euro, as the hon. Member for Wolverhampton, South-West (Rob Marris) quite rightly said. I would feel happier if the Chancellor of the Exchequer would rule it out in principle for all time, instead of constantly going through this nonsense that there have to be five tests, and that there might be circumstances in which the euro would be a good idea.

If we wish to compete successfully in the world economy, we need to understand the weaknesses of our current position, as well as its strengths. My party and I have been the first to admit that it is not bad news that we had growth continuously during the last years of the Conservative Government and that we have had growth continuously during the Labour period. My party is delighted that we have had, on average, worldwide, low interest rates over the last decade. That climate has been extremely helpful. My party is glad that China and India have emerged as economic titans. They are so competitive that they are now helping growth in the world, because as well as producing good-quality cheap exports, they need imports, and because their cheap exports enable us to keep inflation down at a less penal cost in terms of interest rates and money control than we would need to incur were it not for that Indian and Chinese competitiveness.

However, the Government must understand that it is now 2007 not 1992, that an awful lot has changed since 1992, and that although some things are better—many of them because of the world background although some of them because of decisions made by Governments since 1992 and the exit from the ERM—there are still many things that are not ideal, and are limiting our ability to compete with the extremely competitive world economies emerging in Asia.

I asked a Labour Member if he was happy debating the Finance Bill and the tax incentives and changes for business against the background of the recent news that a large British shipyard is going to be literally unbolted and transported to Asia so that advantage can be taken of the better organisation and lower labour rates, and use can be made of the capital equipment that once fuelled a mighty British industry. I am sure that Labour Members are not happy about that. I am sure that they are not happy that Rover went bust on their watch, and that some of the equipment from the Longbridge plant was taken to pieces and exported to China so that Nanjing Auto can now make cars in China instead of in the United Kingdom.

We in this debating Chamber should ask ourselves collectively whether such accidents can be avoided in the future. Are there things that we could do through the Finance Bill that would create a more favourable climate for business here in the United Kingdom? The answer is yes. Things could be done to make it easier for manufacturing businesses to survive and flourish in the United Kingdom and to make it less likely that those businesses would go bankrupt, have to sell up, or have to sell some of their prime assets or capital equipment to companies in China and Asia that would use that plant and equipment to compete againstus and undermine other countries in the United Kingdom.

The Government understand part of the argument. I am delighted that the Bill and the Budget show that the Government see the need to lower the corporationtax rate in the United Kingdom. There is abundant evidence from throughout the world that countries that set a tax on profits markedly lower than the world average do a great deal better than the rest of theworld at attracting new investment, encouraging new company formation and attracting large enterprisesto choose that country to establish new plants to undertake their activity.

The single most important reason why Ireland has grown rapidly over the past decade or so has been its attractive corporation tax framework. The United States is far richer per head than we are, and despite starting off as a richer country, has grown faster than us for nine out of the 10 years for which the Chancellor has had responsibility. Again, lower tax rates on personal incomes and company profits—if one is established in the right state of the Union—have been an important influence on the United States of America’s better competitiveness. The countries in Asia that are doing best usually have a tax regime that attracts investment in the sectors and industries that they are keenest to attract.

The second thing that an economy needs to be attractive and competitive, and to take on the emerging might of China and India, is regulations that are not too complicated. This country is in danger, through regulations made by the House and by accepting a great deal of the regulation designed in Brussels, of over-regulating companies that are already here and creating a framework of over-regulation that will deter companies from coming here.

Hon. Members have drawn our attention to the growing complexity of tax legislation on this Government’s watch. The great increase of the number of pages in Tolley’s tax manual is one indication of how the complications have increased. However, while the clauses before us make up a Finance Bill that is relatively slender by the Government’s standards, that is because in most areas the Bill just says that something will be done to a tax measure, and more of the detail is in the many pages of schedules. In due course, the Treasury will probably produce lots of secondary regulations that will have a direct bearing on business and lots of interpretative documents that tax lawyers, company directors and others will have to master to determine their legal due to the Government, and so that they can find out whether the regime is still sufficiently attractive to allow them to carry on their business here.

The Government should take on board the warning about the complexity of tax legislation—and I am delighted that the Economic Secretary to the Treasury is in the Chamber, because he has been carrying out interesting work with those in the City who are worried about how competitive our tax system is.

The third important issue is whether we still have a fair system that is properly and consistently enforced by a Revenue that does not regard everyone and every business as someone who is trying to break the law or get away without paying a reasonable amount of tax. Many businesses have become concerned in recent months because they feel that the reasonably fair-minded Revenue now goes on fishing expeditions and tries to reopen old years that the businesses thought had been honestly and honourably settled. There is a worry that too many people who have been successful and made money individually or through their companies are being challenged unreasonably.

Kelvin Hopkins (Luton, North) (Lab): Is not the right hon. Gentleman in effect condoning VAT fraud? There is a vast amount of such fraud in this country, which costs the Exchequer billions each year. Surely we want more tax inspectors so that we can get more of that VAT in.

Mr. Redwood: I was careful not to condone anykind of fraud. If someone is guilty of deliberately misleading Her Majesty’s Revenue and Customs by not giving the correct information, or any information at all, enforcement measures must be taken. My party has always said that and the Government always rightly do that—that seems to be a perfectly fair system. I am getting reports from people who are nervous about being named because they do not think that the system is entirely fair any more. They say that there is a feeling that matters that were thought to have been honestly and honourably settled can be reopened because the Revenue takes a different view of a measure in tax legislation than that which it accepted, and whichthe company’s tax lawyers and advisers put to it, when the figures were settled in the first place.

The Government need to be careful. Of course they wish to raise as much revenue as possible without apparently upping the rates, but if too much of the philosophy and mentality of Customs and Excise is inserted in the Inland Revenue and operated against law-abiding businesses and people who just happen to be successful, the impact will be the opposite of that which the Government want. The country will merely be given a reputation as the kind of place in which people will not want to base their businesses or tax affairs because they fear that they will not be treated fairly, or where they will never know where they are, because something that was thought to have been settled with the Revenue will turn out not to be have been settled at all.

If the hon. Member for Luton, North (Kelvin Hopkins) does not believe me, he should talk to the people to whom the Government have been talking. They will confirm that the business side is worried. If that worry becomes more general, it will put big companies off coming to this country and encourage more big companies to do what Shell and some of the banks are doing: think of taking their headquarters offshore and going to a different tax jurisdiction that might not only have lower tax rates, but give a fairer response to their honestly filed tax returns, and a clearer answer.

Mark Tami (Alyn and Deeside) (Lab): Is it not right that people should pay the tax that they are due to pay? If they argue that they are paying too much, they can take that matter up. The right hon. Gentleman seems to be saying that people should be let off what they are due to pay to the Exchequer.

Mr. Redwood: On the contrary. Of course people have to pay the taxes that are due. However, wenow have the combination of thousands of pages of extremely complicated tax law and a fear that those who interpret the law—the tax inspectors—can change their minds. For example, a company could have honestly settled its tax affairs for a particular year with a tax interpretation that has been signed off by not only their tax advisers and accountants but by the Revenue—and then the Revenue can come along and say, “Actually, we’ve changed our mind. We don’t think that that clause meant this; it meant something else.” I am not talking about companies that are trying to get away with something.

Companies want certainty about how much tax they should pay in a given year. They take advice from tax lawyers and accountants and put a proposition to the Revenue. If the Revenue accepts the proposition, that should be the end of the matter. It should not be possible for the Revenue to reopen the case later and say that it has changed its mind. If the Revenue were to think that a company’s original filing misunderstood the tax law, it would be its duty to say, “We think you’ve misunderstood this point. This is how we interpret it; will you ensure that your filing is in line with that?” The process is iterative and requires discussion, because these matters are not as pure and simple as the hon. Member for Alyn and Deeside (Mark Tami) implies. Incredibly difficult judgments must be made, because of the thousands of pages of opaque material that the House passes as successive Finance Acts; we are discussing several hundred rather difficult pages today. It is not easy for law-abiding, decent citizens to know exactly what the legislation means, so they expect a bit of understanding from the Revenue.

Mr. Dan Rogerson (North Cornwall) (LD): Does the right hon. Gentleman agree that smaller enterprisesare fearful of experiencing problems because of the changes in HMRC that are moving it towards more of a call-centre approach? The closure of more local offices is threatened, which will make it more difficult for people to access someone to address their concerns.

Mr. Redwood: Yes. I was going to come on to smaller enterprises, but so far I have been discussing very big companies of the sort that go to the Chancellor’s City forum, and large industrial companies. They are professional and want to pay their dues, but no more than their dues. They want to know where they stand, but there is a growing fear that that they do not.

The hon. Gentleman is right to say that for smaller businesses the problem becomes overwhelming. They cannot afford to pay for really good accountants and tax lawyers who understand all the complicated detail. They will probably have a general accountant to help them, to whom they can afford to pay a modest fee. They, too, need help from the Revenue. It would be better if they could have a face-to-face meeting, if they really needed one. There needs to be understanding on both sides. If a person is normally co-operative, and is clearly trying to make an honest account of their business activities, the Revenue should help them to get everything straight from the Revenue’s point of view. That is what it used to do, but our worry is that it is wobbling in that respect.

Ed Balls: I am sure that the right hon. Gentleman is sincere in his statements to the House that he is in no way attempting to condone tax avoidance. In fact, his position has tended to be more open and public than that: he has been an advocate of substantial cuts in business tax, and of the abolition of stamp duty and capital gains tax. Are those proposals likely to make it to the final version of his competitiveness report?

Mr. Redwood: The Economic Secretary will have to contain his excitement. My personal position is well known and was put into print some time ago. I can tell him that not all the things that I would like to do will be part of my economic policy review, because I do not think that it will be possible to do them all in the very early stages of a Conservative Government. However, I can assure him that I fully support my right hon. Friend the Leader of the Conservative party and my hon. Friend the shadow Chancellor when they say that a lower-tax economy is a more successful economy—a line that I could have written myself—and when they say that they wish to share the proceeds of growth between tax reductions and better public services. That is eminently achievable, because there is a lot of waste and unnecessary expenditure in public services.

If we root out some of that waste, as I know the Government are trying to do— although they are not yet very successful at it—and if there is a reasonable growth rate in the economy, the economy can be
reinforced, because if some of the proceeds of growth are given back to taxpayers, that will raise the growth rate. After five years, if all went well, we could be spending more on public services than if we had not cut tax rates, because we would be generating more through the economy as a whole; that is the wonder of tax reduction.

Ed Balls: And the right hon. Gentleman would expect the public spending share of national income to fall over that period, would he?

Mr. Redwood: If we had a faster growth rate, I would expect the amount spent on public services to go up faster than if we had a lower growth rate and operated under the Economic Secretary’s kind of model, so public services would not be short-changed. But yes, of course the proportion spent on public services would fall; his arithmetic is clearly as good—or as bad—as mine. The proportion would fall, but that would be in the context of a rising total of public spending. Ironically, the faster the economy grows, the more quickly the proportion spent on the public sector falls, but the better the increases in public spending. That, to me, is success.

There was a period when the current Chancellor of the Exchequer followed exactly that kind of model; he kept public spending under some kind of control, and public spending fell as a percentage of national income because there was some growth in the economy. If he had reinforced that with more competitive tax rates, we would now face a very different position. We would be able to afford the public spending level to which the Chancellor has moved, but it would be lower as a proportion, because the economy would be bigger. It is a great pity that we missed that opportunity.

The Chancellor’s work has fallen into three parts. The first part was perhaps a bit tight on public spending, but it was very good in getting borrowing down, and in getting the public finances into good order. We could have used that as a launch pad for faster growth. The second phase was a pity; he overdid public spending and did not get value for a lot of the extra money that he injected into public services. The third phase will be the least pleasant, because all sorts of clamps will have to be placed on public spending, including the control on nurses’ pay. Obviously, that is not popular with nurses, and it will cause tensions within the labour movement.

Ed Balls: To summarise, the right hon. Gentleman is saying that the proceeds of growth rule will mean an acceleration in the fall in spending as a share of gross domestic product, and that will pay for the medium-term business tax cuts that he has talked about. Will he expect a fall in the share of spending in GDP over the medium term to pay for the tax cuts that he is proposing?

Mr. Redwood: The Economic Secretary is moving from being sensible to playing silly crude politics of the kind that he and his boss always play, and it does not do him justice. I was very clear; I said that the proportion would fall faster only if the amount spent on public services was rising faster because the overall growth rate had accelerated—and that is the statement with which I will leave him. I can tell him that I do not envisage a Conservative Government cutting the share of public spending in national income as quickly as the Chancellor did at the beginning of his period in office—but who knows? If growth were really fast, it would be possible to do that safely, and to give people back some of the proceeds of that faster growth; that would reinforce the growth rate. However, as the Economic Secretary well knows, one can play all sorts of tricks with compound arithmetic and percentages. If he now rushes out a press release saying that I have signed up to massive cuts, it will be another typical piece of misinformation, and will bear no relation to what I have just said to the House.

I am strongly of the view that we will need to increase spending on nurses, teachers and doctors, as the current Government did, and as the Conservative Government before them did. We will argue about the percentages and proportions nearer the time when we come into office, when we can see how big the need is, and how much resource there might be. There are lots of other areas in which we will not need to spend so much. When we come into office, we will be able to cancel the identity card scheme and the wasteful centralised computer schemes, if they are still running. We will be able to get rid of a lot of regional government; I recommend that to the Economic Secretary as a good cut to make.

Ed Balls: I assure the right hon. Gentleman that I have no intention of rushing out a press release. I was just interested in his views; as he will know, I have been a close follower of them for many years, and we have always enjoyed our debates. I am just worried that his position may be shifting. He previously supported a steady fall in spending to 35 per cent. of GDP. Is that no longer his medium-term objective? He has not been persuaded to back off from his previous positions,has he?

Mr. Redwood: I do not remember ever being so incautious as to name a figure as a proportion of GDP. The amount of spending depends entirely on the state of the cycle, the growth rates, the public spending needs and so forth, and those judgments have to be made from year to year, much as the Government are trying to make them this year, for the economy in its current state of play. I have no idea what judgment it wouldbe appropriate to make for 2011, which may bethe first Budget year for an incoming Conservative Government. It would be wise for my right hon. and hon. Friends on the Front Bench to continue to be a little cautious about making pledges on such matters until we are nearer that point, when we will have more information, as the Government do.

Ed Balls: I am slightly worried that the right hon. Gentleman is backing off from his previous positions. His principled approach has always been to advocate cuts in business taxation. For example, he has advocated the abolition of capital gains tax and stamp duty. I am worried that his radicalism is being blunted by external pressures. I hope that he can reassure us that he will continue to hold his previous principled positions.

Mr. Redwood: I have been crystal clear with the House: my personal position is that I would like to get rid of all those taxes that I have often argued we should abolish. I am asked to listen to all the different strands of opinion within and outside the party, and all the people who are giving evidence, and then to produce a policy report making recommendations to an incoming Conservative Government. In due course, I will publish that report. I assure the Economic Secretary that the report will be true to my principles, which are that lower taxes generate a more successful economy and that we need to move to lower taxes. He will have to wait for the final detail, as will I, because it is not only I who am involved in the production of the report. It has to be well judged and it has to speak to the wider nation. It will not recommend doing, in the short term, everything that I have personally pledged myself to do, but it will not rule out doing those things if the world turns out to be a really exciting and good place.

The Financial Secretary to the Treasury (John Healey): The right hon. Gentleman is whetting our appetite. Will he tell us when his report will be published?

Mr. Redwood: No, that is one thing that I cannot tell the impatient Minister, because the publication of the report is not in my control. The timing of the publication will be decided by my right hon. and hon. Friends in the shadow Cabinet, who will publish it when they see fit. They may, by then, already have considered it and thought about their response, or they may wish to publish some of it in advance; clearly, there is a good audience out there, and I am happy, in the remainder of my speech, to give the Government some advice on the Finance Bill.

John Healey: The right hon. Gentleman has been very kind in giving way, and I thank him for that. May we assume that it is not a question of when, but if, the report is published?

Mr. Redwood: No. I am sure that the report will be published; the issue is whether it will be published as a serial or in one glorious complete whole. Who knows? There may be so much demand that we need to publish it chapter by chapter, which might delight the audience and allow Ministers more time to read each piece and deal with it as they see fit. They could go through it and decide, “Those two ideas we will adopt; those three are rubbish.” I might recommend to my right hon. Friends that to make the Government’s life a bit easier we should give them more time by publishing it in bits and pieces. We have already published one or two things, which I am sure Ministers have already read and are deciding what to do about.

Having dealt with global competition, the Opposition’s reasoned amendment goes on to talk about our dislike for penalising small companieswith higher tax rates and a more complicated tax system—an issue that Liberal Democrat Members tried to draw me into a little prematurely. My hon. Friend the Member for Chipping Barnet (Mrs. Villiers) has already made a powerful speech about how unfortunate it is for small businesses that under this Chancellor there have been so many changes in rates and so many different signals over whether small businesses are welcome.

In the middle phase of the Chancellor’s period in office we felt that he was keen to raise the rate of small business formation, which is a very good thing to do. He sent strong signals by offering the zero rate—one cannot send a clearer fiscal signal than that—and it clearly started to work. It was miserable of him then to start saying, “Gosh, we didn’t expect that people would actually incorporate,” or, “Look at this—so many people are incorporating that here’s a wonderful source of revenue.” Step by step, including in this Bill, he has gradually upped the rate until it is no longer attractive as an incentive, as was originally intended.

That is a great pity. It is incumbent on us, as tax legislators, to send strong and consistent signals, and if the Chancellor wishes them to work and get companies and individuals to respond as he chooses, they must be applied over a period of years. It is no good putting in an incentive in one year and then ditching it in the following year— [ Interruption . ] Do Ministers wish to intervene again, or are they just having a private conversation?

Ed Balls: I am happy to take the opportunity to continue this most enjoyable debate. The right hon. Gentleman says that we are raising the small companies rate to a level that is no longer attractive, but it is still one percentage point lower than what we inherited in 1997. Did we inherit an unattractive tax regime for small businesses?

Mr. Redwood: The world was very different in 1997. Taxes around the world were a lot higher in our competitor nations then than they are today. The Government have got to live in the modern world. That is why I said that we are in 2007, not 1992 or 1997. The world has much lower interest rates and, in the better countries, much lower tax rates. Our leading competitor nations are cutting tax rates to send exactly that kind of signal on incentives to enterprising companies and individuals. The Government should understand how quickly the situation is moving. The threat of India and China—although in some ways their success helps us—is very real. The Government must understand that if we wish to compete successfully we must move with the times.

We bequeathed to the Government an economy that was performing very well and was well down the table of high-tax regimes. We had one of the lowest-tax regimes among the serious countries. Under this Government, we have crept right up the table of high-tax regimes. That is not because the Government have increased business tax rates—on the contrary, in some cases they have cut them—but because other countries have cut theirs far more, so we are not nearly as tax-competitive as we were in 1997.

David Taylor (North-West Leicestershire) (Lab/Co-op): While the right hon. Gentleman is in reminiscent mode, could he remind the House—perhaps this ispart of the leaden legacy—what proportion of gross domestic product was public debt when this Government came to power in 1997?

Mr. Redwood: That has nothing to do with this argument. The economy was growing strongly and the Conservative Government would have started to repay public debt over the cycle, just as the Labour Government did. I seem to remember that the Labour Government inherited Conservative spending plans and stuck to them. While they did so, the fiscal position improved greatly and we started to repay debt, so in a way it was a Conservative success that so much debt was repaid.

John Healey: Perhaps I could help the right hon. Gentleman. In response to my hon. Friend the Member for North-West Leicestershire (David Taylor), the level of net debt when this Government came into office was 43.6 per cent. of GDP; last year, it was a little over37 per cent.

Mr. Redwood: The Minister is wrong to provoke me on this issue, because, in citing those figures, he does not tell the House that this Government have been masters of off-balance-sheet financing. They have allowed the most colossal pension fund liabilities to build up and have not put them on to the Government balance sheet. The Government and their friends around the world have legislated to make every company put its pension deficit on to its balance sheet, on the ground that in due course that deficit will have to be paid for—partly out of company contributions and partly, we hope, out of asset gains—so it is necessary in order to understand the trading position of every company in the country. However, the Government do not do that for their own balance sheet. They produce a balance sheet with just the Government debt on it, very narrowly defined, and do what the Minister just did by saying, “Aren’t we wonderful? The debt burden seems to be quite low by international standards.” However, the debt burden would be a minor part of the problem if they had to account in the same way as plcs. The Government would have to put £700 billion on to the balance sheet for the accumulated pension deficit in the public sector.

Ed Balls: The right hon. Gentleman would agree that the way in which we treat public sector pensions in the national accounts is exactly the same as the position that the previous Government took in 1997 and fully in line with the European accounts standards of 1995. Does he think that the proportion of private finance initiative liabilities that are recorded on the Government balance sheet is higher or lower than the proportion of PFI liabilities recorded in 1997?

Mr. Redwood: Again, the world has moved on. In 1997, companies did not have to put pension deficitson to their balance sheets, and neither did the Government, so there was symmetry. Now, companies have to put pension deficits on their balance sheets, whereas the Government do not. The other big difference is that, in 1997, most pension funds were in surplus, as there were not these huge liability problems; now, they are in massive deficit. I have been persuaded that it is right to recognise those deficits and to require that they are properly reported. The Government should have to produce an accurate and honest figure with their actuaries for the pension liability deficit in the public sector. Any sensible analyst would then add that to the borrowings through the gilt market that the Minister reported to the House.

PFI liabilities are being understated. It is a question of the quality of the schemes and the likelihood of their going wrong, and the Government needing to spend a lot of money to reinstate the public services that were covered by them. There has been a massive build-up in PFI activity—the Minister will be proud of that—and it is now so important to the public accounts that it is misleading not to put on a much bigger figure for PFI liabilities on a contingent basis.

Ed Balls: The right hon. Gentleman knows that nowadays the majority of PFI liabilities are being recorded on the public balance sheet—indeed, over time, they all will be—whereas in 1997, a minority were recorded. His charge that it is this Government who have been concealing these things is not true. In the same way, if, in retrospect, public sector pensions should have been recorded on the public balance sheet in 1997, the position as regards national debt that we inherited in 1997 should have been much higher as a percentage of GDP than the 43.6 per cent. that my hon. Friend the Financial Secretary quoted.

Mr. Redwood: Of course, if one changes the accounting rules and puts on extra deficits, the deficit will be bigger. In 1997, the Conservative deficit would have been a bit bigger than the one that the Minister quoted, but this Government’s deficit would be massively bigger because, over the following 10 years, there has been a huge surge in pension and PFI liabilities. One reason why it now matters much more that PFI liabilities are not properly accounted for is that their quality has deteriorated. Under the Conservative Administration, when there were not many PFIs, there was a much greater attempt to ensure that there was a genuine transfer of risk to the private sector so that, if the scheme went wrong, the private sector, not the public sector, had to pick up the bill.I do not believe that that is true of the London underground public-private partnership, which constitutes a massively expensive and risky set of arrangements stretching over 30 years. I am not sure that the Government accounts reflect the full consequences of the cost of that scheme.

Paul Farrelly (Newcastle-under-Lyme) (Lab): The right hon. Gentleman says that risk was more properly transferred to the private sector. Will he comment on the massive profits that were made through refinancing the rolling stock leasing companies after the privatisation of British Rail?

Mr. Redwood: The fact that people make a profit out of something does not mean that they are not absorbing risk. It means that they have successfully managed it and moved it on. The point is whether, if something goes wrong, the risk resides with the public sector. In many PFIs in the health service and in education, the risk clearly rests with the public sector because it cannot turn around if the PFI goes wrong and say, “That’s all right, we’ll just close the hospital” or, “We’ll close the school.” Those public facilities are important and would have to be kept going. The private sector knows that when it enters into negotiations with the Government.

When I was in the Cabinet, I remember vetoing PFI schemes for hospitals in Wales because I believed that it was cheaper to pay for them out of the long bond market or through taxation. That is what we mainly did on my watch.

Mark Tami: Can the right hon. Gentleman send the money back?

Mr. Redwood: The hon. Gentleman makes a crass point from a sedentary position. [Interruption.]

Mr. Deputy Speaker: Order. I am sorry to interrupt the right hon. Gentleman, but there has been far too much noise from the hon. Member for Alyn and Deeside (Mark Tami). He should not intervene from a sedentary position—it interferes with the debate.

Mr. Redwood: If the hon. Gentleman examines the record, he will realise that I made health the No. 1 priority in the Welsh Office budget. I made considerable increases and backed several schemes to improve Welsh hospitals. I also kept smaller hospitals open—I understand that that is now more trendy with the Government after a time when they subscribed to the “big is best” idea that closing them made sense. I shall not therefore take any lessons from the hon. Gentleman about being nice to smaller hospitals that need investment.

The amendment goes on to discuss the “U-turns on pensions policy” and the failure“to tackle the UK’s worsening pensions crisis”.

We have heard a lot already about the subject, especially from the hon. Member for Wolverhampton, South-West (Rob Marris). It would be wrong to re-enact our debate last week on that important subject.

I agree with much of what the hon. Gentleman said about climate change but, in the least convincing part of his speech, he said that there were bad people around and that they had damaged pensions. However, the one “bad person” whom he did not mention was the Chancellor of the Exchequer. I am delighted that he admitted that, if one removes £5 billion a year of tax credit from the pension funds, they are worse off. Itwas extraordinary last week to hear the Chancellor answering my intervention by saying that they would not be worse off and that it was fine to take £5 billion from the pension funds. I believe that he also said from a sedentary position that, if I took away 20 per cent. of his income, he would not be worse off, either. My response is, may we please take away 20 per cent. of his income and give it to the pensioners who are suffering, because they would find that valuable, even if he does not think that a fifth matters much?

We cannot get away from the fact that the tax raid on pension funds did much of the damage. Actuaries and some of my hon. Friends have referred to the figure of £100 billion. That is a little more than the current accumulated deficit of the main funds, as recently stated. That symmetry is interesting.

The hon. Member for Wolverhampton, South-West is right that there is good news in that people are living longer and that that has a cost for pension funds. If one takes a piggy-bank approach, the cost is taken care of by the increased contributions that companies are now making, recognising the extra longevity to which the actuaries have woken up in the case of the pension funds. One is left with the rather neat symmetry that the combined pension deficits equal the amount of money that the cumulative effect of the removal of tax credit had taken out of funds, and that the deficits are now fortunately reducing because much extra money has been put into the funds—contributions are increasing because they are, at last, being a bit better managed.

Funds are now benefiting from the small increase in or stabilisation of the yield on long gilts in the past few months. When the long gilt yield was falling, the deficits continued to rise because that was the way in which the sums were calculated. It did not necessarily mean that the pension funds could not pay the pensions. The Chancellor’s success at selling billions and billions worth of Government debt on ever lower interest rates was one reason why the pension funds were so badly exposed because of the way in which the figures were calculated.

Paul Farrelly: Does the right hon. Gentleman agree that one of the problems with British business hasbeen a lower propensity to invest than some of our counterparts in the rest of the world and that that is partly due to the immense pressure on publicly quoted businesses to pay out larger dividends than in other countries? Does he also agree that any measures to level the playing field and encourage investment benefit our prosperity and pensioners over a longer period?

Mr. Redwood: That is not a difficult question. Of course successful investment is welcome in an economy. Any measures that we can include in the Bill to raise the rate of successful investment are welcome. I am not sure that cutting the corporation tax rate and taking away many of the allowances is the way in which to achieve the goal, but I would rather do that than nothing because the headline rate has a psychological effect. It is the first thing that any company considers when deciding where to locate its investment. However, we need genuine tax cuts—the Exchequer taking less money so that more money is left in company coffers to spend on investment.

The hon. Gentleman says that the problem for British business is that it distributes too much in dividends. I do not believe that that is the case from examining current world markets. A typical yield on a quoted British equity is 2.5 or 3 per cent. That is not a high rate of running return on a share and it does not represent a high proportion of free cash flow.

If the hon. Gentleman wants to know where much of the free cash flow is going, two things make big inroads into it. The first is the tax system, which we are discussing, and reducing the rate from 30 to 28 per cent. is only a small help when allowances are also being removed. The second is the need to invest far bigger contributions in pension funds because of the disastrous tumble into deficit, which we have examined at some length today and previously. If the Government could find a way to solve the pension problem and if they could get their corporation tax rate down a little more, there would be more free cash flow for British businesses to invest.

It is a good time for several sectors and businesses to invest. The rates of return on capital are not bad and there is a satisfactory gap between the borrowing rate—even at the new higher rates of interest—and the rate that one could expect to earn on one’s capital.  Reluctance to do more relates to pressures on companies’ cash flow from the Government and the pension fund element.

The relatively rosy picture is based on averages. Ministers will tell me—as I have just told them—that the rate of return on capital is not bad and that there is a worthwhile margin on average. However, people trying to run process industry in this country would say that it was not true for them and that the Budget does nothing to sort out their problems. A glass maker, a brick maker, a cement maker or a paper manufacturer has considerable problems, mainly from the gas price and energy prices but also from the regulatory backdrop. There is a dreadful exodus from this country of much process industry. The most visible example was the decision of British Steel——then Corus, now Tata Steel——to go to the Netherlands rather than Britain for its new big investment. It did not go to the Netherlands because labour is cheaper there—it is not—but because the Netherlands combines a better tax regime and a lower gas price. The Budget does not tackle that to try to claw back some territory so that we can reinforce those businesses that remain in Britain in process industries with big energy bills and encourage new investment and new companies to come here.

Perhaps the Government’s wish is to hit their climate change targets by de-industrialising Britain. One way we could hit the Kyoto-plus targets for climate change is to export all the heavy energy using industries. However, that would not help the world problem because we would simply export our heavy energy users to overseas territories that probably use even more energy less efficiently. I recommended that the Government see whether anything can be done to ease those pressures on British process industry, which is suffering particular problems.

Paul Farrelly: I was discussing the issue of gas prices with the pottery industry and the British Ceramics Confederation on Friday. I would like to correct the right hon. Gentleman on a point of fact, as the price of gas in Europe is lower now. The real issue is ensuring that structural impediments are removed in order to end the volatility in the UK. Although it may be against his better judgment, I urge him to support the EU in its efforts to do that.

Mr. Redwood: It is certainly true that the spot price is now lower than when we had a crisis, but people are still deterred from increasing their investment here or coming here to invest because of that volatility and because the spot price might move up again. Worse still, it could be possible to run out of gas completely. We reached that very difficult position the winter before last, when a shortage was a consequence of the fact that the right decisions had not been taken to put the necessary measures in place.

Do I support any EU attempts to solve this problem? Of course I do. What is the EU meant to do? It is meant to apply competition law to the gas industry in Europe so that when there is a shortage in Britain in future and we are sending strong price signals that we would like to buy more gas, more gas is actually forthcoming. It was a disgrace that the EU was unable to get the gas market to clear properly when Britain was bidding much more than the continent for gas, but the gas was not made available. I hope that the EU will solve that problem, but I fear that it is not about to, so the solution must lie here in Britain with a combination of financial measures and giving the right encouragement to the industry to put in the facilities that are needed to get available energy supplies competitively. New businesses here would then meet higher standards of energy conservation and fuel efficiency.

Our amendment says that we do not believe that the Government are getting very far in tackling climate change in the Finance Bill—and I agree with my right hon. Friends about that. I noticed that, under the section headed “Environment”, the Government put through a number of increases in fuel duty rates. I am sure that the Government would say that it is good to make petrol and diesel dearer as it may deter people from using as much at the margin.

It is curious to note that in clause 10, there is a 2p increase in biodiesel and bioethanol on a price baseof 28p and only a 2p increase in standard petrol and standard diesel on a price base of 48p. The Government are sending out a signal that they want people to stick with the more polluting methods and not switch to biodiesel and bioethanol at the margin, because there is twice the rate of increase on the fuels that are apparently more friendly than there is on the less friendly fuels. If we look at road fuel gas, which I thought should have a lower rate of duty because it is thought to be more environmentally acceptable, we see an increase of almost 3p on a 10.8p base, compared with 2p on a 48p base for standard petrol and diesel. That takes a bit of explaining.

Other Members referred to air passenger duty as being a clumsy mechanism for getting to grips with inefficient aircraft—older aircraft in the main—and air services that do not have many people on them. I agree with those who say that if we are to use tax as a means of trying to reduce air passenger journeys at the margin—it will reduce the growth rate rather than cut it—we need to look into ways of trying to capture what is meant to be the mischief here, which is people travelling on planes with not many people on them or travelling on old or dirty planes or a combination of the two. Clearly, there is a green case to be made there.

Any Government keen to do something about carbon output should do more audit work than the present Government have so far done on the ways in which carbon dioxide is emitted into the atmosphere. There are some glib assumptions in the present debate that are not always true. It is assumed that trains create no carbon dioxide emissions and are always a good thing because some of the sums are computed on the basis that trains run on nuclear power-generated electricity. However, even electric trains use a mix of electricity, including some electricity produced from fairly old and dirty coal power stations.

It is also assumed that buses are always better than cars, but it depends on how many people are travelling on the bus and how old it is. On average, buses are very old and have very few people on them, so the bus is not always the immediate green answer. If we are to take the issue seriously, we need tax incentives to promote new buses and we need a transport Minister who can design bus services that people, along with industry, want to use in order to make it a green option, which it
is very often not at the moment. I believe that we will solve most of those difficulties through technology, which is making far bigger strides in greening private motorised transport than in greening either the train or the bus.

Similarly, we need to do a proper analysis on the home of those measures that can make a really favourable impact. I understand the Government’s argument that they wish to reward zero-carbon homes. I am not one of those to make cheap jibes aboutthe matter tonight, because I am happy for the Government to reward something, and if it is possible to have a zero-carbon home and people are clever enough to implement it, I am happy for them to get off paying a bit of tax for the privilege. However, it is fair to note that that will not be a great world-beating policy. At the moment, it is difficult to secure a zero-carbon home and there are not many people immediately volunteering to get that particular tax relief.

Mark Tami: The right hon. Gentleman mentions a raft of measures that he believes could be taken. I believe that what we really need to do is invest in the next generation of nuclear power stations, but it is something that his leader seems very coy about. Does the right hon. Gentleman agree with me on that?— [Interruption.]

Mr. Redwood: I am wisely warned that that question invites me to stray rather far from the Finance Bill. If I can ask the hon. Gentleman to conceal his excitement, that is one of the issues that will be covered in the forthcoming economic assessment report. I warn him that it is not an easy question to answer, as an awful lot of complicated arithmetic will have to be done by all sorts of people to come up with a sensible answer to that problem. What I can tell him is that if we were in government, we would have decided it by now, because the matter is urgent. We need to know what the Government are going to do, because we are very close to the point where the nuclear stations have to be retired or closed. If we do not replace nuclear with nuclear, another fifth of our generating capacity is going to be generating carbon dioxide—unless there is a magic formula on renewables.

Paul Farrelly: The right hon. Gentleman is making a thoughtful contribution. I would like to turn not to nuclear, but to bioethanol, which he mentioned earlier. Crucial issues need to be addressed about the replacement of rain forests with sugar cane, just as they do about the total carbon impact of using palm oil from south-east Asia. What serious consideration is being given to those policy issues—apart from his own thoughtful remarks—by his Front Benchers?

Mr. Redwood: I am sure that that particular debate will be covered by my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer) in his forthcoming report. Our Front Benchers will then consider his remarks. I defer to my right hon. Friend, who knows rather more about that particular set of issues than I do. Once again, I think that we may be straying a little far from this year’s Finance Bill.

Rob Marris: The right hon. Gentleman mentioned earlier his personal views on certain taxation measures such as capital gains tax. He openly and commendably said that he thought that the policy review paper for which he was responsible may not embrace that in the short term. In respect of the Finance Bill, does he personally agree with fiscal incentives for the building of new nuclear power stations in the UK?

Mr. Redwood: No, I do not think that it could be done in this Bill because the homework on whether it would be wise and how much it would cost has not been done. The Government may need to organise a competition to find out what the effective subsidy is going to be. I am not persuaded that nuclear power can be done on an unsubsidised basis. The industry may tell me that it can be, but then state that the price of carbon needs to be reflected. I tend to look on that as a way of developing a so-called market-oriented subsidy. We need to tease out from the industry very quickly exactly how much it is talking about to establish whether it would be a good thing to spend that amount of money on this particular means of carbon saving or whether it is too expensive, so that the money could be better spent in other ways.

For the purposes of this debate, I am still an agnostic because I do not have all the information that I need. The Government have much better access to that kind of information, and they could trigger that information quickly if they were to license certain technologies as being acceptable from a safety and technical point of view, and if they would say that, in principle, they were prepared to give planning permission for the nuclear power stations. They could then ask the industry what it would need, and we could find out whether this was a wonderful deal that we should all accept or a lousy deal for the taxpayer that we would not want to accept. We could also tease out more information about the other risks that some of our constituents are worried about, such as how safe the technology is and how good the waste treatment systems now are. One cost that has to be wrapped up in the whole envelope is the long-term cost of closure and of handling the necessary waste. That could best be teased out by market competition, and I recommend that course of action to the Government to provide a basis of fact for determining these issues.

The Finance Bill invites us to legislate for three different years. This is a strange novelty. I presume that it is being done because this is the Chancellor of the Exchequer’s testimonial Finance Bill, and because he wishes to tie the hands of his successor in a number of ways and not expose himself to flak in others. For example, we are invited to settle income tax rates only for 2007-08. We know that the Chancellor is a very fair-minded man who likes to work closely with his colleagues, and we have been told what he would like the rates to be in 2008-09. Should the new Chancellor decide that he did not like the rates recommended by the outgoing Chancellor, he would presumably be free to change them. I would be happy to give way to the Economic Secretary to the Treasury if he knows something different, but I assume that that is why we are not legislating for those further rates. There is a degree of doubt; the new Chancellor might take a different view and decide that such rates were inappropriate.

We are being invited to legislate on corporation tax for the financial year 2008. We may legislate on small companies’ rates and fractions for 2007, but when it comes to inheritance tax, we can apparently legislate for the new Conservative Government, because we are invited to legislate for rates and rate bands for 2010-11. I do not know whether Ministers negotiated these proposals with my hon. Friend the shadow Chancellor, but perhaps they should have done so as a matter of courtesy, as it is quite a novelty to legislate so far ahead, long beyond the time when this Government could avoid a general election. While I am happy that we are being asked to legislate with a view to raising the threshold for inheritance tax, it would be more sensible to leave open until 2009-10 how high we should go. Perhaps £350,000 will not be enough by then. Perhaps we shall be able to afford a little more. That amount would not buy a one-bedroom flat in the centre of London today.

Paul Farrelly: Is the right hon. Gentleman implying that he foresees the economic boom and growth in the country continuing until 2010-11, and house prices continuing to rise?

Mr. Redwood: It is quite possible that house prices will be higher in 2010 than they are today, but I would not call the present economic conditions a boom. That illustrates the fantasy world in which some Labour Members live. They really must accept that an inflation rate of 4.8 per cent. is a disgrace. It is far higher than that of all our leading competitor nations. We must compare ourselves with the world as it is, not with the world as it was 15 years ago when everyone was performing rather less well than they are today. That inflation rate is too high. Our interest rates have been consistently higher than those of Japan, the United States of America and euroland throughout this Chancellor’s watch, and they are still at the high end worldwide. When companies think about where to borrow, Britain is not the best place to go, by quite a long way.

David Taylor: The right hon. Gentleman mentioned Japan. Will he remind the House of Japan’s growth rate at the time when its interest rates were effectively zero?

Mr. Redwood: It is true that, at the beginning of the period when Japanese rates were zero, Japan had no growth and that, once or twice, it was even going backwards, but that is not true today. Japanese interest rates are still only a fraction above zero, yet Japan is growing quite quickly by the standards of the advanced countries. The hon. Gentleman should not be so complacent. We have heard much complacency from Labour Members in this debate. They have consistently made two claims. The first is that everything is now wonderful, thanks to this Government, yet they have refused to look how we are doing against the international background. The second is that the Conservatives are not allowed to say anything, because things went wrong in 1992. I have gone over that subject endlessly: yes, we know that, we have said sorry, and Labour Members should learn from those mistakes as well. They shared those mistakes, yet they have never had the courage to admit in this House that they got it wrong in exactly the same way. It did not
happen on their watch, so of course they have not paid the price that we paid, but we have paid that price. Would they really like us to spend all our debatingtime going on about the winter of discontent, which happened on the watch of a previous Labour Government? I do not do that, because there is no point. It was a long time ago.

Paul Farrelly: I might have missed it—it might not have been reported—but will the right hon. Gentleman remind us when the right hon. Member for Witney (Mr. Cameron) said sorry? As I recall, he was a special adviser to the Chancellor of the Exchequer in 1992.

Mr. Deputy Speaker (Sir Michael Lord): Order. Historical background to a debate is always interesting, but I think that we ought to come back to the Bill before the House.

Mr. Redwood: I agree, Mr. Deputy Speaker. Of course, a previous Leader of the Opposition made such an apology, but it is no longer relevant because the world has moved on.

The Finance Bill is a mess.

John Bercow: In suggesting that some tax rates might be particularly short-lived, my right hon. Friend raises the enticing possibility that the decision to scrap the 10p rate might be reconsidered. Can he readily envisage a time when people existing—I use the word advisedly—on the minimum wage and perhaps earning less than £10,000 a year might pay no tax at all?

Mr. Redwood: That would be a very enticing prospect, but I do not think that it is about to happen any time soon under this Government. There is a serious problem for the incoming Chancellor of the Exchequer. If he or she meekly accepts everything that has been laid out for next year’s Budget in this year’s Budget, people will say that this man or woman is not a serious Chancellor of the Exchequer, that they have no independent judgment and that they are just a lackey of the Prime Minister. If, however, the new Chancellor were to go next door and say, “I’ve been thinking hard about this. Too many Labour Members don’t want the 10p band abolished. We’re going to have to keep it”, they might get a very frosty answer from the person who has just given them the job.

The present Chancellor has unwittingly made life difficult not only for his successor but for himself, because it will become a test of whether the new Chancellor has any bottle, substance or depth: whether they meekly accept all the measures that we havebeen told about—some of which will not have been legislated for—or whether they will see the need, in the probably different circumstances of next year’s Budget, to make changes.

I put that forward as an analyst; I am not making a party political point. It is not my problem but one created entirely by the Chancellor. What he thought was a clever move—doing two Budgets in the same year—will turn out to be one of his mistakes. It will place his successor in an impossible position and the journalists will soon start to say, “Surely this is a test of whether the new finance team at the Treasury haveany independence of judgment and can adjust these things.” It is unusual in a system based on annual judgments about the state of the economy and taxation, to make judgments a year ahead—or several years ahead, in the case of the judgment on inheritance tax.

I have been clear in saying that we need to set a course and stick to it without chopping and changing. We should not offer a tax incentive one year and withdraw it the next, because that is difficult for people to follow. But I have also said that I do not want our Front Bench to set out detailed tax proposals for three or four years hence. That would be too difficult to gauge because the world is too uncertain. It is surprising that, in the case of at least one tax in this Budget, we are being asked to legislate for the next decade. That seems premature, even though the movement is in the right direction and very welcome.

I shall conclude my brief remarks— [ Laughter. ] My brief remarks have been slowed down by many interventions. I conclude with this summary. Labour Members are far too complacent. It no longer serves proper debate to go back over things that happened20 years ago—Attlee was not very good either, but we are too polite to mention it—and we now need to discuss the current state of the British economy. Interest rates are too high, inflation is too high and taxes are still too high. We are not competitive when compared with the best countries around the world, and some patient work now needs to be done, in the way that I have suggested, to put those things right.