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Finance (No. 2) Bill

My Lords, some people have top rate plus 1 per cent, but many still have an ultimate top rate of 40 per cent. Let us never forget that when my noble friend Lady Thatcher was elected in 1979, the top tax rate was 98 per cent, which applied in today’s money at an income threshold of about £76,000 a year. Think of that: 98 per cent at £76,000 income. I turn to the macroeconomic outlook. Britain’s economic growth fell to a rather poor 1.7 per cent in 2005, not that much better than the eurozone’s 1.3 per cent. This year it looks like 2.4 per cent, sadly altogether lower than the US’s 3.5 per cent. These figures are nothing compared with China and India, which are growing at 10 per cent and 9 per cent respectively—and China has no inflation at any rate. These countries are rapidly replacing the manufacturers of the western world. Britain has a big advantage in having already moved its economy away from manufacturing. In 1979, manufacturing made up 27 per cent of UK GDP and 28 per cent of employment. In 2004, manufacturing was down to 15 per cent of output and, last year, to 12 per cent of employment. Service industries now account for some 73 per cent of the economy. We must remember that there is still scope for growth in productivity and manufacturing, especially as we focus on high value and higher technology products. In 2004, output per head grew by over 6 per cent in manufacturing, the best for 15 years. Last year, however, I am afraid that it was down to 2.5 per cent. France and Germany, on the other hand, have retained a considerable manufacturing base which they seek to protect by every means possible. That is not necessarily in their national interest. The thesis of invasion of industries by new technologies is 40 years old, and was sponsored by the Americans at the time of the formation of Route 128 in Massachusetts and the subsequent various science parks. There have been so many examples since that time: IBM mainframe computers losing out to laptops, telex being replaced by fax and then e-mail, photographic film by digital cameras, Hoovers by the Dyson cleaner; the list is endless. The important thing is that government economic policy should encourage this process. Another way forward is through the so-called platform company, which organises the production of its products throughout the world, sourcing wherever materials, components, manufacture and assembly is cheapest. A good example is the Dell computer company: flat screens are made in Taiwan; the chip and software are American but the chip is made in Taiwan; the mechanics and box are manufactured and everything assembled in China. That enables national participation where appropriate. Profits and risks are spread between countries, as are jobs. The net effect tends to be broadly contra-cyclical—another plus. We have enjoyed an element of this with British participation in the Airbus. A word on monetary policy: I am a firm believer in its value, both to cool and to stimulate the economy. But to be able to use it in both directions means that there must be real interest rates to vary. Japan is an example of where the zero interest rate was a disaster, from which the Bank of Japan is only now freeing itself. The Fed got rates down to a dangerous 1 per cent level but, since June 2004, it has wisely raised rates to the present 5.25 per cent. Our own 4.5 per cent rate probably needs to go higher. The European Central Bank has bravely resisted French and German government pressure for loosening to help those countries avoid the necessary structural change. Indeed, the ECB has taken a first step to tighten. There comes the question of what is the right rate of interest. Two possibilities are: either a figure which gives some return to savers—I suggest 3 per cent real is the minimum—or a real rate roughly equal to long-term growth. In the West, that should also be about 3 per cent plus. Protectionism looms—the easy way out for politicians seeking re-election. How can Peter Mandelson agree to the ban on imports of New Zealand butter announced last week? Did he not learn a little lesson from his defeat over the bra wars with China? If this is the attitude of the EU Trade Commissioner, what hope has the Doha round got? Both Hong Kong in December and Geneva this month failed. In the absence of a Doha succession, the way forward for freer trade is almost certainly through bilateral deals. Four other factors are important. First, there is a need to deregulate. That applies at both EU and national level. It is much easier said than done. Governments are constantly trying to do it and the EU Commission is trying to do it. Some months ago, a commissioner told one of the committees I am on that, when he was trying to deregulate, he had discovered that many in the Commission thought their main job was to keep the chauffage—their jobs—going. Secondly, there is a need to face up to the demographics of retirement. It is frankly absurd and totally feeble that the British Government are still hiring public sector employees with a retirement age of 60. The present demographics suggest that, for a sustainable balance between the working and retired populations, the average retirement age should be over 70. Obviously there will be those in tough manual occupations for whom this would be inappropriate, but it is the average that matters. I would like to have seen more courage from the Government in tackling what will be a fundamental problem for our successors. Thirdly, there is a need to give state aid to those who need it rather than those who do not. One example: it is indefensible that benefits such as the winter fuel payment and free travel for pensioners should be untaxed. I recognise that those are rather hot political potatoes. Fourthly, I congratulate the Government on opening the door to nuclear power. I particularly congratulate the noble Lord, Lord Sainsbury, on his bold recognition that nuclear power is a renewable. The world urgently needs a massive nuclear power programme to combat global warming, to ensure that world supplies of hydrocarbons are kept for what only they can be used for and, not least, to reduce the cash flow and power of jihadist terrorism. We must all recognize that world economic prospects are dominated by politics, both national and international. In 1933, President Roosevelt, at the height of the depression, when Keynesian policies were about to rescue the world economy, reassured his fellow countrymen, "““the only thing we have to fear is fear itself””." If only that were true today.