Mr. Deputy Speaker:
I have to notify the House, in accordance with the Royal Assent Act, 1967, that the Queen has signified Her Royal Assent to the following Acts:
- 1. Consolidated Fund Act, 1972.
- 2. Transport Holding Company Act, 1972.
- 3. Transport (Grants) Act, 1972.
- 4. Harbours (Loans) Act, 1972.
- 5. Electricity Act, 1972.
- 6. Maintenance Orders (Reciprocal Enforcement) Act, 1972.
- 7. Stoke on Trent Corporation Act, 1972.
- 8. University of London, King's College (Lease) Act, 1972.
Mr Simon Digby (West Dorset)
The right hon. Member for Orkney and Shetland (Mr. Grimond) spoke of inflation and voiced fears about the money supply. He went on to say that he thought savings would not remain at the present record level, but he said nothing about deficit financing which is a more obvious doubt about this excellent Budget.
I rather liked the right hon. Gentleman's phrase about the backwoods beginning north of Watford, but as he developed his argument I realised that he was not in the same camp as I am. Just as the red on the map has decreased rapidly in recent years, so have the white areas of the maps at the back of the White Papers. Soon the only places that are not regions will be my constituency and London. I have doubts about these liberal advantages that are being handed out to so many others.
When the right hon. Gentleman condemned the extension of I.D.C.s on the ground that smaller factories were of tremendous use in the development areas, I thought of the tremendous advantage they are to places like West Dorset which badly needs them unless there is to be a complete atrophy of our economic development.
My main object in intervening is to refer to the Budget statement yesterday and to speak about shipbuilding. Before doing so, I should like to thank the Chancellor of the Exchequer, or the Minister of State on his behalf, for two things which he has done in the Budget. First, he has rendered help to the small fixed income group which is much represented in my constituency by his proposals for the age allowance and the age exemption. Secondly, the death duty allowance, especially the provisions for the surviving spouse, will be of enormous asistance to those who are living in retirement on small incomes in my part of the world—and in the Minister of State's part of the world.
It is appropriate that the Budget should contain help for shipbuilding. There is also a case for more of an inter-party approach to the problems of shipbuilding. In the past our debates have not been on party lines. Although we imagined that mistakes were being made by the Labour Government we tried not to exacerbate the situation. I was, therefore, sorry to hear the right hon. Member for Bristol, South-East (Mr. Benn) dragging in the question of nationalising the shipbuilding industry, which is a step in exactly the opposite direction.
The numbers employed in shipbuilding have declined dramatically from 126,965 in 1956 to 68,973 in 1971, partly due to the fact that few passenger liners are now being built. In earlier days once men went away from shipbuilding they were easily absorbed into other industries, but it is no longer the case and 90 per cent. of our shipbuilding is now to be found in the regions. Therefore, the employment angle is most important.
Fortunately, we still have a considerable order book of no fewer than 256 ships, amounting to over 4 million tons gross. The real trouble lies in contracts which were accepted without taking full account of the dramatic inflation which has occurred. Therefore, I believe the right way to deal with the matter is to offer a 10 per cent. overall grant. It would make no distinction between one firm and another, and would be some compensation for firms which, not unreasonably, miscalculated the rate of inflation.
It is only fair to note that similar problems are being faced in other parts of the world and that every major shipbuilding industry is in some difficulty. Even the Swedish yards, which have developed modern techniques, are in some difficulty. One of their most modern methods of moving sections of ships forward has been vitiated by the fact that ships being built today tend to be very much larger. The shipowners are not in a very much better position. Only the other day the Dutch increased the investment rebate for shipowners from 10 to 25 per cent. Even the Japanese, among other shipping communities, are in some difficulty. This is only a temporary phenomenon due to low freight rates. What is indisputable is the tremendous increase in world ship-borne trade. This is a matter in which our country should get its share of advantage.
It is only right that when extra money is having to be paid out to help shipbuilding, we should look back to the past, particularly to the Geddes Report. I have said often in this House, and must say it again, that the Opposition treated the Geddes Report as though it contained the law of the Medes and Persians. It was treated as something sacred which had to be carried out to the letter, and it was not intended to be treated in that way. Thank goodness, some of its recommendations were not carried out. Let us be thankful that some of the amalgamations did not take place and that Lower Clyde was not dragged down with Upper Clyde.
Some salutary lessons have been learned. This is a specialised industry and those coming in from the outside with a different type of experience are not necessarily the right people to grasp the industry's problems, as was well illustrated in the U.C.S. affair.
Nor can we be enthusiastic about the Shipbuilding Industry Board which, for various reasons, was a failure. I was astonished to hear the right hon. Member for Bristol, South-East (Mr. Benn) say that he thought the board should be revived for present purposes. When one remembers that it was connected with mistakes which have been made so expensively in the past, it is surely right that the Government should now try to help in a completely different way. The net result of its activities was that that help became lopsided. Help went to one yard and not to another, and it often went to those who least deserved it. Therefore, today we have a somewhat lopsided industry, which has the additional complication of contracts which are not paying because of wage and price inflation..
One of the great problems of this industry, as has been recognised in the White Paper, is that of labour relations. Traditionally they have not been of the best. I detect some signs of improvement, though I would not apply that argument to the Clyde where strikes have aggravated problems. No fewer than 398,000 working days were lost in 1970. Therefore, it is necessary that both sides of the industry should make a new effort to improve labour relations.
I believe there is a worthwhile future for the industry. We have only to look to other countries and to their problems to see how many of them consider shipbuilding to be a worthwhile industry. We have sunk from first place in shipbuilding to a position a long way down the list. However, we still have many advantages in our special skills, and our climate is still suitable for this industry—despite experience with some of the modern paints which are very much easier to apply in a southern climate.
Some of the lessons which were not learned from Geddes are now becoming more apparant. Certainly the idea of amalgamation was a false lesson, as was the idea of bulk purchases. One lesson which is being learned is economy in design, something rather nearer to a series production, although every single ship must differ. I can think of two groups in the North-East which have been prepared to learn this lesson in respect of two classes of ship, one class large and one small. We have learned that it is possible to build on slipways very large ships indeed. The idea accepted five years ago that it was necessary to build them in shallow docks has been found to be expensive and unnecessary. It is a fine sight to see an enormous ship many times larger than the QE2 going down the slipway without difficulty. Therefore, it was obviously wise that we did not spend a great deal of money on shallow docks.
The figures of 10 per cent., 4 per cent. and 3 per cent., wisely granted by the Government do no more than provide a survival kit. We are still left with a problem of fitting the industry for our entry into the Common Market. However, many of the shipbuilding industries in the Common Market countries are in a similar position to ourselves and face equal competition from the Japanese—competition they probably want to do something about. I hope that when money is being paid out some thought is given to reconstructing yards or building new yards suitable for the future.
I am glad to see the setting up of the new Industrial Development Executive; one sees its impressive layout in Appendix "D" to the White Paper. However, the layout will be only as good as the men appointed to the Executive. We have already been given one or two of the appointments, but we have not yet been told the key man who will be responsible for shipbuilding. I hope that will be done with the greatest care, and that it will be realised that somebody who may be good at handling an outside assembly industry is not necessarily the right man to deal with a shipyard. I am grateful for what the Government have done for the industry, but I hope that they will be looking to what will be the situation in two, three or four years' time.
Mr Hugh Jenkins (Wandsworth Putney)
There will be many hon. Members on this side of the House who will agree with the implication at the beginning of the speech of the hon. Member for Dorset, West (Mr. Wingfield Digby) that if this Government remain in office much longer the entire country will be a development area. I shall not dwell upon the corollary that I draw from that. I leave it to the hon. Gentleman's imagination.
In my view, this is a rather worse Budget than has yet been realised. It has its good points and it would be churlish not to say so. I welcome the approach towards a negative income tax. I welcome the method by which it has been decided to do it by appointing a Select Committee to examine the proposal in detail. That is the right approach because, although this proposal has many attractions, there are some possibilities of disadvantage in that if it is not approached carefully it could lead to a jelling together of the country's financial, economic and social structure and make it more difficult to change social relationships. Although the idea is one which many of us have been discussing for some time and are glad to see in concrete form, we have reservations about it and shall want to look at it carefully.
The bad features of the Budget are unlikely to be altered fundamentally by an Opposition back-bencher—
Mr Hugh Jenkins (Wandsworth Putney)
My hon. Friend the Member for Heywood and Royton (Mr. Joel Barnett) disagrees with me. But I have a good deal of experience on the back benches and of failing to alter decisions by Governments of both parties. For that reason I am not over-optimistic about my powers.
However, I propose to take up the invitation extended by the right hon. Member for Kingston-upon-Thames (Mr. Boyd-Carpenter), who suggested that we might provide the Government with the benefit of something to give away in the course of the Committee stage of the Finance Bill. I am glad to see the Minister of State on the Treasury Bench, because he knows what I am about to suggest he should give away in Committee. If when he replies to this debate he cares to say in advance what his intentions are, I shall be very happy to hear them.
I went to see the hon. Gentleman recently with a delegation of representatives from every section of the theatre—managements, trade unions, the societies, the Arts Council and all those concerned in the theatre. We made a plea to the hon. Gentleman, which is the subject of an early-day Motion in the name of the hon. Member for Peterborough (Sir Harmar Nicholls), supported by hon. Members on both sides of the House, that the value-added tax should be zero-rated in respect of the theatre.
I want to detail some of the arguments which it is hoped the Government will consider with a view to making this concession. The case for relief in respect of the theatre rests on a number of reasons. Taken separately, some of them might apply widely and thus open up the way to substantial exceptions which would be against the philosophy of the tax. I am not defending the philosophy of the tax. I do not like it. But I have to accept it for what it is, and I have to produce an argument which will enable the Minister to make the concession for which I ask without going too widely. I believe that the theatre is such a case. There is no instance that has such a combinaion of arguments which, taken together, are so persuasive. It is a combination of arguments which produces a unique case which can be conceded without creating a precedent for exceptions elsewhere.
The decline of the commercial theatre was recognised when it was relieved from entertainment tax and selective employment tax. The first point, therefore, is that the value-added tax would be a fresh imposition applied in an area which hitherto has been relieved of tax by Governments of both parties. It would not be a case of substituting one tax for another; for example, it would not be a case of removing S.E.T. and substituting value-added tax.
There is little or no long-term private capital going into the theatre. The most recent building and rebuilding of theatres has been achieved by public funds. The theatre has a high unemployment rate. Among performers it is about 50 per cent. Automation has hit the entertainment business earlier and more drastically in that the electronic reproduction of a single televised performance can engage a larger audience on one night than all the theatres put together.
I believe that the theatre can and will remain a mixed economy. Earlier today the Secretary of State for the Environment spoke about the permanence of the mixed economy. I do not altogether agree with that. I am more hopeful about the development of our country in economic terms than that. I should like to see a large-scale development of Socialism. However, the mixed economy of the theatre is a semi-permanent state, because we cannot distinguish between the public supported theatre and the commercial theatre.
The theatre as a whole is stronger in London than it is elsewhere. But thanks to Government help, provided by Governments of both parties through the Arts Council, it is recovering rapidly outside London. It is just at the point where it is beginning to recover with public financial aid that value-added tax will be most damaging. It will be a new imposition in an area which hitherto has been free from this or any similar type of taxation.
There is a growing recognition by Governments, by an increasing number of local authorities and by informed opinion generally that the theatre is a cultural need. In spite of certain manifestations which are really the "froth" of the theatre, fundamentally it should be part of the municipal furniture of every respectable community. In its way, it is as basic as food or housing, and it ranks in character with education. Indeed, its link with education goes beyond analogy. There is a close link between the progressive theatre and the educational system. The theatre is a feature of many education projects and of many local education policies. The Arts Council is financed through the Department of Education and Science and answers to a Minister associated with that Department.
On page 48 of Command 4929 about the value-added tax, the Government say that they intend to give zero rating to books, booklets, brochures, pamphlets and leaflets, newspapers, journals and periodicals. If that is to be carried out, why is not the theatre included? Are we not in the area of communications and the spread of ideas? There is no real argument for stopping at newspapers, books and periodicals.
The importance of the contemporary theatre in this area is considerable. If it is intended to avoid imposing the tax upon the spread of ideas and communications and the freedom of expression, clearly the theatre is in that area and is more and more in the area today. So that is another argument which perhaps does not apply so fully elsewhere. I should like to see the cinema excluded as well. But if the Minister says that that is taking matters too far, I shall be forced to say that the exclusive argument for the theatre cannot be challenged whereas, if I move into the area of the cinema, it may be that the Minister will be in a position to say that the next claim for exemption will be for sport, and so on. Of course, if he is prepared to make this wider concession, by all means let him do so. It is for the Minister to decide, but in any event there are solid arguments for excepting the theatre or providing it with zero rating.
The relief of the theatre from value-added tax would be in accordance with public policy. The Paymaster-General's endeavours to provide patronage would be greatly assisted, because he has several times said that he would like to increase the sources of subsidy to the theatre. I think that it will be more difficult if private patronage is going into a taxed article.
The British theatre is an acknowledged tourist attraction of major proportions because of the international reputation of both the subsidised and the commercial theatre. In regard to the balance of payments, therefore—I am afraid that it will need more attention before many weeks or months arepast—there is as little reason to tax the foreign consumer of British theatre as there is to tax the foreign consumer of British whisky. This factor ought not to be ignored.
I said that I would be brief and would confine myself to a single point. It is not that I am unaware of the many other things in the Budget which could be critically approached. However, my non. Friends and, indeed, some hon. Gentlemen opposite have dealt with some of the problems and will doubtless deal with others in future.
If the argument were—I do not think that the Minister will try to get out on this point—that there are some aspects of the theatre which are not of the public service character which I have described, and if the Minister were to say that there are some manifestations of the theatre which he would like to tax because he does not like them and does not think they contribute anything to the community and may indeed, in the view of some people, be doing less than a service to the community, that argument cannot be sustained because it stands equally in the area of books, booklets, prochures, pamphlets, leaflets, newspapers, journals and periodicals. As it stands, the Minister is proposing a policy of free porn but to tax Ibsen, Shakespeare, Chekhov and Shaw. No Government could possibly sustain that argument. Therefore, it is with confidence that I look forward to the concession later in proceedings on the Bill.
Mr Peter Trew (Dartford)
I listened with great interest to the hon. Member for Putney (Mr. Hugh Jenkins). Although I cannot aspire to his wide knowledge of the theatrical world I shall be speaking about value-added tax. I do not want to comment on the persuasive argument put forward by the hon. Gentleman except to say that, as he acknowledged, to allow one special case is to open the door for many others. The more goods or services that are zero-rated, the harder it is to keep the uniform rate down to 10 per cent. To adapt a well-known phrase, one man's zero rate is another man's tax increase.
This has been a bold and imaginative Budget. One of its most remarkable features has been its almost benign reception by the Leader of the Opposition. He rightly and understandably reserved his judgment on most of the proposals but declared his all-out opposition and that of his party to value-added tax. The more I study the tax as it has been presented, the more I wonder whether the right hon. Gentleman was wise to be so hasty in condemning it.
The Conservative Party has long been committed to the principle of shifting the burden of taxation from earning to spending. I can understand that on philosophical grounds the Labour Party might not agree with that principle and that this might be a legitimate division of opinion between the parties. If it were on this ground alone that the Labour Party was opposing the tax, I could understand and respect it. But for those who see some merit in shifting the burden of taxation from earning to spending—both the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) and the right hon. Member for Manchester, Cheetham (Mr. Harold Lever) are on record as acknowledging the disincentive effect of high direct taxation—the argument is not on the philosophical question whether one should tax spending at all, but on what is the best way of taxing spending.
A general tax on expenditure should fulfil four requirements. It should be broadly based, it should be possible to levy it on goods and services, it should be possible to charge it on imports and to rebate it on exports, and the rate should be comparatively low. All the candidates for this job of taxing spending fall down on at least one of those requirements with the single exception of V.A.T.
A purchase tax cannot be applied to services. A payroll tax cannot be charged on imports or rebated on exports. A retail sales tax would require too high a rate at the final stage. The cascade tax is not easy to rebate on exports because of the difficulty of calculating how much is borne by exports, and it has the further disadvantage of encouraging distortion of the industrial structure.
Therefore, by process of elimination, one is left with value-added tax which fulfils all those requirements. It is broadly based, it can be applied to services as well as to goods, it can be charged on imports and rebated on exports, and the rate is comparatively low. I believe that the tax would have been chosen on its merits, regardless of entry into the E.E.C. Indeed it has been chosen by Sweden, which is neither a member of the European Economic Community nor a candidate for entry.
However, any tax on spending is open to certain potential objections, both political and technical. Looking first at political objections, V.A.T. is potentially regressive, potentially inflationary and can be expensive to administer. However, its impact on lower income families, taking into account the range of zero rating and exemptions, has been greatly cushioned.
The research division of the Library has analysed for me in detail the 1970 Family Expenditure Survey to ascertain what proportion of family budgets in that survey would have been free of V.A.T. Taking three ranges of income, the answers are as follows. Between £10 and £15 a week, over 60 per cent. of family budgets would have escaped V.A.T.; between £20 and £25, the figure is over 50 per cent.; and between £35 and £40 it is over 40 per cent. Taking the average for all households, over 40 per cent. of the family budget would have been free of V.A.T. That is not my definition of a regressive tax or one which bears harshly on families with low incomes.
I noted with interest that when he spoke yesterday the right hon. Member for Stechford was careful not to say that the tax was regressive. In any event, it is not realistic to look at the effects of the tax in isolation. One must look at the operation of V.A.T. in conjunction with income tax and the social security system. It looks very likely that V.A.T. will be operating in conjunction with a form of negative income tax, which will be much easier to take account of the special circumstances of individual families.
There is the possible objection that the tax can be inflationary. The N.E.D.O. booklet, assuming value-added tax at a rate of 10 per cent. with rather less generous relief and exemptions then the tax introduced by my right hon. Friend, estimated that it might increase the cost of living by 1½ to 2 per cent. provided that both purchase tax and S.E.T. were abolished. That is not a tax which is highly inflationary.
However, we know that in some European countries the introduction of V.A.T. was used as an excuse to raise prices beyond the level justified by the rate of tax. It would be sensible of the Government to acknowledge that that happened in Europe, that it could happen here and we should take advantage of the time that is available to us to think of ways by which this might be forestalled.
There is then the objection that the tax could be administratively expensive. The N.E.D.O. booklet puts the additional number of civil servants required at 8,000, but it qualifies it by saying that the figure will depend on the number of rates and the coverage. Bearing in mind that my right hon. Friend has adopted only one rate with a generous relief, that is possibly a high estimate.
In any event, one must look at the question of additional civil servants in conjunction with the staff savings resulting from other reforms in taxation, and in those I include the abolition of the Land Commission. It would also be realistic to take account of the possible saving of 10,000 to 15,000 civil servants envisaged by my right hon. Friend as a result of the introduction of a form of negative income tax.
It seems, therefore, that none of the potential political objections to the tax—that it could be regressive, inflationary or expensive to administer—can be sustained. I am wondering what ammunition the Opposition will use when hon. Gentlemen opposite embark on the massive onslaught on V.A.T. to which their Leader has committed them. It rather looks as if he might be sending them into unarmed combat.
Just as my right hon. Friend has minimised, if not eliminated, the political objections to the tax, so I believe he has allayed fears on the two main technical or practical objections. The first was the question of purchase tax-paid stocks, on which his proposed transitional arrangements will satisfy most people. The second was the question of early publication, and by publishing the draft Bill and White Paper now he has made it possible for businesses to consider how their accounting systems should be altered, what the financial effects of the tax might be on their businesses and what they might require in the way of new or modified accounting machines or computers. There is still a question mark over whether there are enough such machines on the market to enable them to be in- stalled, programmed and made operational by April, 1973, and this is an important point to which the Government should give attention.
A point which has caused widespread concern and which does not appear to be dealt with in the White Paper or the draft Bill is the question of bad debts. Many people fear that traders might find themselves in the position of having to account to the Customs and Excise for V.A.T. which they cannot claim from a defaulting debtor.
I can understand why the Customs and Excise would be reluctant to forgo this revenue, because the defaulting debtor might have already succeeded in claiming V.A.T. on his inputs from them. However, it seems to me that where a debtor is actually bankrupt or has gone into liquidation and does not owe money to the Customs and Excise, there is a case for some relief to his creditors in respect of the V.A.T. which they have been unable to collect from him.
There are two other points on which I would like clarification. The first concerns excise duties. I understand that V.A.T. is to be superimposed on excise duties but that the total rate of tax will be unchanged, so that the present duties will be reduced by the amount of V.A.T. I should be grateful for confirmation of this.
The second point is the question of the use of the regulator in conjunction with V.A.T. An article appeared in today's Financial Times in which Mr. Kelsey van Musschenbroek wrote:
Mr. Barber is retaining the economic regulator mechanism—part and parcel of Purchase Tax which V.A.T. replaces, along with Selective Employment Tax—but with a power to vary it 20 per cent. either way, compared with half that figure under Purchase Tax.
I have read carefully through my right hon. Friend's Budget Statement and I can find no reference to that. Perhaps the author is referring to some earlier legislation which is remaining in being. I would be grateful if my hon. Friend would comment on this because it seems to be a factor which could greatly increase the flexibility of V.A.T.
Looking forward to our entry into the E.E.C. and the question of harmonising V.A.T., the British blend of V.A.T. is undoubtedly the mildest in Europe. We should make it clear now to our prospective European partners that any harmonisation will be downward, towards the British system, and not upwards, towards theirs.
I congratulate my right hon. Friend on the way in which he has devised and presented V.A.T. He has done this in a way which has minimised most of the objections. I also congratulate him on the whole of his Budget, of which these proposals form a part.
Mr Neil McBride (Swansea East)
I trust that the hon. Member for Dartford (Mr. Trew) will acquit me of discourtesy if I do not follow him into the realms of V.A. T. On another occasion I may take issue with him on this extremely interesting subject. I shall devote my remarks to some of the problems facing the part of the country which I have the honour to represent, namely, Wales.
In his Budget Statement the Chancellor spoke of many important matters including cost inflation and the need, in his view, to reflate the economy. I would like to know why he has felt it necessary to reflate on such a massive scale.
At no time did the right hon. Gentleman mention the inflationary effects that heavy rent increases will have. I refer, of course, to the swingeing increases which will be borne by half the population, local authority and private tenants, as a result of the enactment of the Housing Finance Bill. This Measure will take the pound out of the pockets of millions. The Government are seeking to place this legislation on the Statute Book. By it they will claw back millions of pounds beginning in the local authority financial year 1972–73.
Although the Chancellor and his colleagues speak glibly about the Housing Finance Bill. its full effects on the 270,000 local authority tenants in Wales have not been made clear. It will increase their cost of living and depress their standard of living. The arithmetic is simple. About 50 per cent. of those 270,000 tenants will have their rents increased from 1st April this year by 50p. This retrospective legislation permits that to happen. The other 50 per cent. will have their rents increased by £1 from 1st October, 1972.
It is obvious that millions of pounds of purchasing power will be taken out of the Welsh economy in this way. The global sum in terms of the national eco- nomy will be astronomical. On the one hand the Chancellor is talking about reflating the economy while on the other hand he is clawing back tremendous sums of money from local authority and private tenants. Over the nation as a whole this legislation will affect 5½ million local authority tenants. The clawback will be enormous.
What will be the result of all this in the Principality? It is clear that thousands of workers will have their purchasing power reduced to such an extent that wage claims will be lodged to offset the loss. We must never forget that the genesis of all wage claims lies in the kitchen.
The resultant triennial rent reviews and means testing for rebates for public and private tenants alike will see workers seeking to protect living standards from a vicious attack which is connived at by the Prime Minister, the Chancellor and the Secretary of State for Wales. The operation of the Bill, coupled with rating and valuation in 1973, will result in greater demands made on ratepayers and this ill-judged legislation will further exacerbate the clawback by a further demand for increased rates.
People in Wales and the United Kingdom generally look with a great deal of apprehension at this because they see the risk of inflation ripples reaching out and lapping to all sections of the economy. The result will be that workers will be forced to protect their living standards by lodging wage claims. This is particularly important to Wales where income is only 85 per cent. of the national average and the amount of weekly income paid in tents is 11·2 per cent., the third highest of any region in the United Kingdom. This is of importance to the Principality and it will be important in the Merthyr Tydvil by-election.
It is right to emphasise the nature and extent of the proposals in the Housing Finance Bill because in low-wage and low-rent areas such as Wales a surplus is produced and there is a legally defined limit in the Bill concerning the amount taken by the Government, only half of which is to be returned to local authorities. Half is kept by the Government for indefinite purposes. When we ask what those purposes are, we receive no answer. These amounts are paid into the Consolidated Fund and I think that is totally wrong. The clawback of purchasing power as a result of the Bill will offset to a considerable degree the tax remissions that the Chancellor has spoken about. That Bill, in addition to clawback of purchasing power and generating wage demands, is intolerable, vicious, antisocial and certainly anti-working class.
I look at the position of old-age pensioners and the Chancellor's decision to improve their already serious financial position. As a result of public pressure the Tory Government have been forced to make an annual uprating of pensions, but the increases are too small. When I speak about old-age pensioners I speak with feeling. I am working class and proud of it. Parents of working people in the evening of their days deserve the best that the nation can give and this Government are not giving them that best. [Interruption.] If the hon. Gentleman would speak more loudly, we would understand what he is saying. Tories are always good at firing from a sedentary position. They are fireside fusiliers par excellence. An increase of 12½per cent to pensioners will not make living easy for them. They will still have to count the pennies. It is a degrading prospect for them and no reward for a working life contribution to the country.
In September, 1971, a petition signed by 50,000 people in Wales was presented to the Secretary of State for Wales in Cardiff asking for £14 for a married couple and £8 for a single person in pensions. I agreed with that estimate. The first step in that direction could have been made in this Budget with an increase of £2. I deliberately ask the question, is £10·90 enough to maintain a married couple? It is derisory to believe that a single person can live decently on £6·75. Some people will spend more tonight having a meal in a London restaurant.
The old people are being asked to wait until the autumn. Help for them is always to be given in the future. It is in the nature of things that because of their age the need is urgent. The need for help is now and the increase should have been £2 extra. Even at this late stage the Minister of State, whom I respect and believe is not without compassion, should convey to the Chancellor the deep-seated feelings of resentment in the country about the smallness of this increase.
Mr Terence Higgins (Worthing)
Would not the hon. Member agree that if we had followed the policy of the previous Government of uprating every two years, it would be a question of waiting not for next autumn but for the autumn after next?
Mr Neil McBride (Swansea East)
Mr Neil McBride (Swansea East)
As to inflationary conditions in the country, it is a measure of the non-success of this Government that they have been defeated in that regard. The hon. Gentleman is amused but old-age pensioners are not amused. He could go tomorrow to a conference in Barry in Glamorgan, the county in which I live, and then he would laugh on the other side of his face. The Tory Party has never understood the great respect which working people have for their parents. They have never understood it and never will. I hope that the laughter by the Minister will be reported as something derisory and scornful which I would not tolerate from anyone else.
Mr Terence Higgins (Worthing)
I should make perfectly clear that any views we have expressed on the Government Front Bench referred to the hon. Member's arguments. I think I am right in saying that there are more pensioners in my constituency than in any other. The hon. Member has referred to parents and what he said on that is universally shared, but perhaps he should bear in mind the failure of his Government to do anything for the over-80s as we have done. When a Private Member's Bill was attempted on this subject hon. Members opposite, by constant filibustering, frustrated each attempt.
Mr Neil McBride (Swansea East)
I have heard the hon. Gentleman speak many times and I know that he has knowledge of accountancy. He knows that pensions are based on computation of payments made in industry of 10 per cent. over 40 years, but the over-80s have never contributed a penny to the pension fund. It is totally wrong to compare their position with that of those in the contributory scheme where pensions are given as of right to old-age pensioners. The hon. Gentleman's argument is not related to mine, and he knows it.
Mr Neil McBride (Swansea East)
No, I am sorry, I will not give way again.
The lack of success by the Tories to keep prices steady has resulted in heavy deprivation for our people. The Tory Government did not understand that the old folk asked for only sufficient to maintain decency and independence. It is a matter of deep personal regret, shared by all my hon. Friends, that at this time it has not been given to them at a moment when the country could have afforded it and the people of the country would have applauded it.
In regional development, there is plenty of scope for the new grants system in Wales and the opportunity here for the new Minister for Industrial Development is without limit, because in mid-March there were 55,000 people idle in Wales, which looks for labour-absorbing industries. The unemployment total in Wales is the highest for a quarter of a century. Allied to that is the poor record in advance factory provision by the present Government and the low rate of new industry which is being attracted. I have the Secretary of State's figures and my case is based upon information supplied by the Government. The redundancies in the Principality totalled 27,270 from 1st July, 1970, to 21st January, 1972. The new scheme will give the new Minister ample opportunity to shine in Wales. The Welsh people are realists. They judge performance and they will do so in this case. One knows of the special responsibility for private industry and industrial development in the assisted areas.
The economy of Wales must go forward in a programme of planned industrial development assisted by carefully-phased investment policy. I ask why there has been no planning for a specific period of, say, five years to ensure industrial development providing jobs for the present total of Welsh workers who are available for employment, plus con- tingency planning to provide opportunities for school leavers in the Principality. In this connection I share the view of the right hon. Member for Orkney and Shetland (Mr. Grimond), who said that it was ironical to train people and then provide them with £400 to leave the place where they had their roots.
The people of Wales have been, under the Tory Government, the unwanted step-daughter. They want to live and work in the Principality. As the right hon. Member for Orkney and Shetland has suggested, they should not be offered inducements to move but rather the reverse, through the provision of opportunities for work in Wales which is their right. We cannot any longer in Wales see the Tory Government disregard and fail to utilise the talents of the people. It has taken a long time for this Government, figuratively speaking, to stand on their heads and abandon the hit-and-miss policy. We shall wait and see with what speed they act to give Welsh industry revitalising confidence resulting in the attraction of more industry to Wales.
I have with me the Tory newspaper of Wales, the Western Mail. Yesterday it had the headlines
Faster economic growth my aim, says Barber
Industry will not rush to invest in Wales".
The latter headline can be disproved by the speed with which the Government act, and I put the challenge to them.
The Government are acting as a result of pressure by the Opposition and we shall examine the proportions going to Wales of the amounts stated in the White Paper in paragraph 59. Free depreciation and industrial building allowances are estimated in 1973–74 to cost a total of £115 million, rising to £450 million in 1975–76, with regional development grants of £250 million in 1973–74 rising to about £300 million in 1975–76. We shall be interested to know the total proportion of these amounts which will go to the Principality.
Paragraph 60 states that Government policy is giving to industry confidence to invest at least until the end of the transitional period of entry into the Common Market, which ends on 1st January, 1978. Is there a Common Market embargo on this? What is the reason? It is a fair question to ask.
The Government's social responsibility in Wales is above all to provide work for the people of Wales, who regard the Government as being responsible for the present position. I charge the Government with being proved guilty by reason of the failure of their policy. The Government are tattered and battered and that is the reason for their fiscal alterations. They have failed in Wales because of policies which are outworn and doctrinaire.
Today the Western Mail says:
The view at present seems to be that Mr. Barber's Budget will promote a national climate of expansion in which industrialists will want to move to areas such as Wales that are cushioned by the new grants. This prospect is uncertain for several reasons. The hope of nationwide expansion is admittedly strong but—on the showing of recent reflationary budgets—not assured. The resumption of the regional differential in grants has been accompanied by serious disadvantages to the poorer regions.
We shall want an answer to that one. That is what a Tory newspaper says.
Wales is faced with the enveloping shadow of unemployment. It is reckoned that over 50,000 people will be idle at the end of the next 12 months. I attribute this situation to the fading out of investment grants on 27th October, 1970. This was responsible for the shortage of cash liquidity which made so great a difference to industrial expansion in and industrial attraction to Wales. Therefore it is necessary that there should be created a new feeling of confidence in the Principality, and this applies to the country as a whole.
But I warn the Government that the unemployed of Wales will feel that to wait another 12 months would be insulting to the Principality, and I say quite deliberately that the people of Wales have waited too long already. I agree with Mr. Graham Saunders, Secretary of the T.U.C. Advisory Committee, that the re-introduction of investment grants is welcome and with him I also share the view that they should never have been abolished. But now the Tory Government are at the stone of repentance. I would not say that they are right honourable sinners, but they are culpable sinners.
It was interesting yesterday to see the Secretary of State for Trade and Industry, figuratively speaking, standing on his head. He did everything but ask for a form to join the Labour Party. Welsh Labour pressure has assisted in the overturn of Tory Government policies in the fiscal sense, but the industrial investment position must be radically changed in Wales—changed for the better, and soon—because the people of Wales are distrustful of a future under a Tory Government, and instead of spending money they are saving on an unparalleled scale. The average saving of each family is £40 more than the Government calculated, and this is an important factor for industry. The Government failed to consider that factor.
I ask the Government and the new Minister for Industrial Development to secure the secondment of a representative of his office to a centre in Swansea. I do so for a very good business reason. The City of Swansea is the natural centre of an area of 350,000 people. In the reaching of instant decisions, a representative of the new Ministry there would help very materially. He could assist in attracting industry to the new industrial estate at Morriston in my constituency, because the Government have failed so far to get tenants for the new factory building and for the rest of the sites.
I want to turn now to that section of the White Paper which deals with communications. It talks of entry into the Common Market and of providing ample capacity in and access to ports. I hope that we never join the Common Market, but the South Wales ports have access not only to Europe but to the world. Swansea is a shorter steaming distance from the Americas.
A recent British Road Federation report emphasised that all road networks were being directed towards those ports with a short sea passage to the Continent. It is wrong that, in an important area where development could benefit the Principality and the United Kingdom, careful thought has not been given to the British Transport Docks Board ports in South Wales. I agree with the assessment of Mr. T. S. Roberts, the Ports Director of the board's ports in South Wales, that these ports—particularly Swansea, which is wholly in my constituency—stand at the gateway to the world and not just to Europe.
That is how our trade should be orientated—not just to help trade across the Channel. It seems that the Common Market has no interest in South Wales—an impression which is borne out in the White Paper. I object to the omission of any reference to these ports and to road communications with them. I shall be glad when the M4 swings in closer to Swansea, but there is already road communication with the Midlands, in which direction I have always supported the idea of a clearway. On economic grounds, these ports have a major rôle to play in the future of the Principality and the whole United Kingdom. There is an early day Motion supporting this view and signed by many hon. Members.
The Government must now state their confidence in and the future rôle of the South Wales ports. That is the right of the Welsh people. That is why I have drawn attention to these important matters. The Budget, the annual state of the nation's housekeeping, is important, but those who live in the house have a right to have their views considered. No one has a better right than the people who have never benefited much from the Tories, the people whom I hope I serve, whom I live among and who have contributed greatly to our economy—the people of Wales.
Mr Robert Taylor (Croydon North West)
The hon. Member for Swansea, East (Mr. McBride) gave his view of the Housing Finance Bill. I do not think this is the right time to reply to that matter, which is best left to the next stage of the Bill. He then talked of the position of pensioners and his somewhat lengthy exposition was dealt with by the brief intervention of the Financial Secretary. If that is not sufficient, the record of the present Administration compared with that of the last is open for all to see. It would not be right for me to comment on the problems that face the Principality, so I will turn immediately to that part of the speech of my right hon. Friend the Chancellor of the Exchequer which I consider to be of the greatest importance for the country in the medium and long term.
I refer to my right hon. Friend's proposal for the reform of corporation tax in favour of the system recommended by the Select Committee. My right hon. Friend paid tribute to the thorough way in which the Select Committee examined this problem, and it is pleasant to see here my hon. Friend the Member for St. Marylebone (Mr. Kenneth Baker) who played such a prominent part in its deliberations.
Before that Committee reported, like my right hon. Friend I believed that the two-tier system would be the most acceptable, the easiest to understand and probably the most likely to be implemented in the forthcoming Finance Bill. But the decision has changed in favour of the imputation system. Having read the report, I now agree that that system is preferable. But whichever system was brought in, there is no doubt that most of our current problems—high unemployment, slow growth and low investment—stem from the taxation policies of the previous Administration, particularly their policies for company taxation.
When we were returned to office in 1970, in the unlikely event of a company distributing its entire profit, with corporation tax at 45 per cent. and income tax at 8s. 3d. in the £, the amount out of each £100 which would have reached the pockets of the shareholders was £32 6s. 3d. Many hon. Members may feel that that is the right balance—it is different with different companies and different industries—but if that entire amount were distributed the remainder would go direct to the Exchequer and nothing would remain for reinvestment. So if that was about the right balance, nothing would remain for the future prosperity of the companies concerned.
The right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) said of the Chancellor's proposals for the reform of corporation tax:
Equally misguided is the change in corporation tax.…The change will give far greater benefits to shareholders than it will bring to the economy of the country. There is likely to be a considerable increase in the proportion of profits now put out in dividends.…Companies which use their profits for investment will be worse off than before; yet the overwhelming evidence from other countries as well as from here—from the United States, Germany, France and Japan—is that the great bulk of companies' investment comes out of ploughed-back profits."—[Official Report, 22nd March, 1972; Vol. 833, c. 1531.]
That is absolutely true, but what the right hon. Gentleman did not say was that it comes from ploughed-back profits after those companies have paid their due taxes and a fair return to their shareholders—in other words, when there is money left
for reinvestment to be ploughed back for the future.
Under the situation which we inherited from the previous Administration, the amount remaining was absolutely negligible. That is why the right hon. Gentleman could say in the same speech, although a convenient distance removed from that first quotation, that the current rate of investment was derisory. He cannot have it both ways—that the current rate of investment is derisory and also that the current system promotes the greatest investment.
One part of the Chancellor's reform of corporation tax about which I have some doubt is his proposal that there should be relief for small companies, that companies with profits under £15,000 a year should have a reduced rate of tax and that there should be further marginal relief for companies with profits up to £25,000 a year. The Select Committee which inquired into corporation tax had before it a memorandum from the Inland Revenue which put forward objections to that. The objections are quite easy for anybody to see. First, there is the opportunity for companies to split up and create a multiplicity of companies so that they get the benefit. Secondly, big companies in bad years will get a benefit that is not intended for them. Thirdly, it may be that bad or weak management will be subsidised at the expense of dynamic and thrusting management.
I therefore hope that this particular point may be reconsidered and perhaps the help that is intended, if indeed it is necessary to give small companies help in this way, should be linked to the net asset value of the company. If this is around £50,000, with good dynamic management the profit can easily be in the region of £12,000 to £20,000. But it may be that a company with net assets of around £100,000 is producing a poor return, and that could get the benefit of this marginal relief.
I think that the Budget will put the country on a very sound footing for many years to come. I welcome the provisions in every respect except for the reservations I have declared. I am very sorry that the right hon. Member for Stechford should have poured scorn on the proposals for the reform of corporation tax. It can only be presumed from this that in the unlikely event of his ever having an opportunity to play a part in deciding the taxation of the country in the future, he would return to the present status quo. If that is so, it is a pity he did not submit a memorandum to the Select Committee on the reform of corporation tax so that we could have had that view on record, because it needs to be made very clear to industry as a whole that there is at least one person in high places who has not learnt the lesson of the past five years.
Mr David Ginsburg (Dewsbury)
The hon. Member for Croydon, North-West (Mr. Robert Taylor) concentrated his remarks on the reform of corporation tax—a very important subject. He seemed to be blaming all the nation's current economic ills on the tax policies of the previous Labour Government—a view he would not expect me to share because, after all, many of the problems with which the Labour Government were grappling had existed in this country for many years.
Although I shall have some very critical comments to make about the Budget later, I wish to begin with a brief word of thanks to the Chancellor. He is a Yorkshireman and he has made Yorkshire into an intermediate area. The Hunt Committee recommended this. Previous Ministers on both sides of the House have been very slow to move in this matter. The Prime Minister when he introduced the Local Employment Bill in 1959 would not help and the same was true of the former Labour Government, with the result that the older parts of the industrial West Riding and especially the centres of the wool textile industry were neglected, despite pressure from Members of Parliament and local interests. There were also very great anomalies until recently. In my own constituency it was difficult to justify a situation in which the whole of the town of Dewsbury, which is mainly a wool town, did not qualify for intermediate status yet a part of the Borough of Ossett next door, where the problems were no different, did.
The Chancellor will be the last to underestimate the task we face. Yorkshire badly needs new job opportunities. In my own constituency, for example, all three pits have closed in the past seven years and every year there has been at least one major mill closure in the area. This welcome news about intermediate area status comes only just in time to avert what might otherwise have been an extremely serious situation.
This is the right hon. Gentleman's second Budget. Both Budgets have been noteworthy as an exercise in tax reform. The Chancellor has shown remarkable ability and resilience in standing up to officialdom and getting his way, but an essential feature of all these reforms is that they are medium to long term in operation. Nothing will bite until the financial year 1973–74 and much will only bite a year or two later.
Of itself, this need not matter. Reforms are made to last and not to be ephemeral. But there is one important economic consequence, namely that those reforms which reduce tax burdens are not going to have an immediate effect on the level of employment. Moreover, a whole range of the other tax concessions that are announced in the Budget—I am not referring specifically to the reforms here—will have their major effect in 1973 and not in 1972.
It is the nature of Chancellors that they are remembered not by the purity of their intentions but by the consequences of their actions. That is why the job has been a graveyard of so many careers. My right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) has a secure place in history for restoring the balance of payments even if the ballot box prevented him from realising hits other fiscal, social and economic aims. I think it is equally clear that the present Chancellor could have a great place in history as a tax reformer, but only if he achieves his central economic design of promoting a stable level of employment with sustained economic growth. If he succeeds in that his reputation as a reformer will be enshrined; if he fails, another Chancellor will have to apply different medicine, and who in history will care about this Chancellor's reforms?
The Chancellor may argue that I am being needlessly gloomy. After all, he is injecting substantial purchasing power into the system this year. I would remind him that last year he injected as much as £700 million and it was not enough; he had to make more concessions twice in the year and still unemployment mounted.
Over last year he reduced the surplus transferred to the national loan fund by £900 million, and this year he intends to reduce it by £1,400 million. Is an extra injection of £500 million as compared with last year enough to double the rate of increase in the national product? The Chancellor may be right in his judgment, but I think we are entitled to sound a note of very great caution. It is quite clear to many of us on this side of the House that high unemployment is going to be pretty persistent. This year it should go down—owing not only to the measures but to the raising of the school leaving age—but it may go down later rather than sooner.
Two relevant comments need to be made, therefore. First, even more measures to encourage the employment of labour need to be adopted quickly. I must say that I am rather surprised that in this Budget, like the last one, the Chancellor should have eschewed making more use of the National Insurance Fund. He should have reduced and not increased the burden of national insurance on employers. There could have been—for an unorthodox man could consider some unorthodox ideas—a three-months' stamp-free holiday for employers of new employees. I would remind the House that Lord Beveridge always envisaged that at moments of high unemployment a greater burden of national insurance should fall on the Exchequer rather than on the employers or the contributors.
My second comment is that the test of the Chancellor's measures is whether he can sustain the momentum of expansion next year. Nobody wants another 1963–64 when, after expansion got under way, the brakes had to be slammed on again. The present Chancellor is more fortunate. He is able to build on a solid balance of payments surplus. But everyone agrees that the position next year cannot be so strong, and it would be tragic if a Government were then driven into a policy of restraint because of a weakening of the standing of the £ in the foreign exchange markets.
Many of us feel that the rate fixed for the £ by the Government in their negotiations last autumn was on the high side. A basic corollary to a sure policy of expansion for 1973, therefore, is a willingness by the Government to pursue a more flexible policy for the £ until a more settled international agreement has been reached. I trust that the Chancellor means what he implied on Tuesday, and not what the Prime Minister seemed to be hinting at this afternoon.
Turning to the Chancellor's reforms, I did not expect to welcome him, however cautiously, into the ranks of the egalitarians. Socialism is about equality, and the Chancellor's thoughts about an inheritance tax are not dissimilar to ideas which the late Hugh Dalton was adumbrating 30 years ago, based on the writings of the Italian Socialist economist, Rignano. Taxation must be viewed as a means of redistributing income and capital and not merely as a provider of revenue to finance public services or as a means of managing demand.
Taking the Chancellor's two plans the linking of social security with tax and the move from estate duties towards inheritance duties, he is at least providing the weapons for achieving more genuine egalitarian policies. I am not for a moment suggesting that he and my right hon. Friend the Member for Stechford would do the same things in such a situation, but the Chancellor will have provided the right machinery. He will thereby have done something good for parliamentary government. He will enable Chancellors of the left who wish really to attack the problem of poverty to make a real impact on the problem and not be frustrated, not so much by will but by defects in the machinery and system.
I note with pleasure, therefore, the Chancellor's positive recognition of the principle that the State must play a part in redistributing income. There is a parallel here in the redistribution of capital. The National Insurance Scheme could be used to make this a more genuine property owning democracy, which hon. Members on all sides of the House want to see. I recall my friend Mr. James Griffiths telling me how he wanted the National Insurance Scheme to provide modest dowries, for example, to women on marriage. The death benefit, which has remained unchanged for many years, could be substantially increased and used, for example, to provide small capi- tal sums to families of the deceased over and above the costs of the funeral.
But again, the tests of a Chancellor's egalitarian principles are not his long-term plans but what he does now. Here I regret that we are dealing with a Tory Chancellor. Accepting that we all welcome the increase in the personal allowance and the pension—though this could be paid much faster—the fact remains that the higher income groups will manage the inflation much more easily than the pensioner and the small income earner.
Therefore, I make a concrete suggestion to the Chancellor. If he really believes in integrating social service benefits with income tax and thereby reducing the number of means tests, let him postpone the Housing Finance Bill until he can incorporate it—this is a serious suggestion—within a more egalitarian general tax and social benefit system. That is the logic of what the Government are proposing. After all, two years is not such a long time, historically, to get the right answer; and it would engender much good will. Economically, good will is worth winning. Some economists tend to underestimate the value of a sense of social cohesion. But the Chancellor spoke strongly on Tuesday about the need for income restraint. If his words were not meant as mere rhetoric he is counting on a sense of fair play within the community. He can secure that only if he is sure that he has first made all the effort he can himself.
Mr Robert McCrindle (Billericay)
I find myself surprisingly close to a number of the remarks made by the hon. Member for Dewsbury (Mr. Ginsburg). He will find that I shall cover some of the same ground in my speech.
If we were ever to write an epitaph to my right hon. Friend the Chancellor, the word "reformer" would surely be very close to the top. So, too, would the phrase "tax simplifier". In the last two years we have seen the merging of income tax and surtax. We are on the verge of the abolition of purchase tax and S.E.T. Those two taxes are to be replaced by what I can only describe as a surprisingly simple value-added tax. I am among those who have, perhaps, been less enthusiastic in supporting V.A.T., almost entirely because of the complications I anticipate. To a very large extent the White Paper published two days ago eliminated some of my fears.
Moving on from those reforms, we are now given a glimpse of two future moves, both of which I want very warmly to welcome this evening. First there is the suggestion that we might have an inheritance tax in place of estate duty; and second, there is the possibility of a merger of P.A.Y.E. and the social security system. I should welcome the ending of estate duty. I speak as one who, in a certain way, has had a considerable amount to do with estate duty over the years. However, my hon. Friends who have indicated to me that they see a period ahead when tax on capital will be abolished completely are flying in the face of reality. For as far ahead as one can see, our tax system will be divided between taxation on income and taxation on capital. I suspect that the replacement of estate duty by an inheritance tax would undoubtedly be a move in the right direction.
Estate duty now brings into the net many people to whom it was never expected to be extended. The fairly average person living in the south-east of England in a fairly ordinary house, with perhaps a few shares and a few hundred pounds in the bank, and with probably a pension scheme which pays a death benefit of a sizeable amount, perhaps three to five times his annual salary, is well and truly in the estate duty net—certainly before my right hon. Friend's proposals. Therefore, I welcome very much the lifting of the estate duty threshold. But as I look at the possibility of an inheritance tax replacing estate duty, I am not sure that there should be a wide disparity between the tax charged on beneficiaries who are members of the family and that charged on beneficiaries who are not.
I am a considerable believer in the wider distribution of wealth. I want to encourage rich people to disburse their wealth over a much wider area than they have been inclined to do previously. I will accept that those members of a family who are dependent on a deceased person have a right to expect a preference. I am not sure that it would be right to make this a large preference if we are to pursue the idea of encouraging a wider distribution of wealth. In other words, I want to see this distribution of wealth but I want to see it by incentive to disburse and not by the confiscation which has sometimes seemed to be the objective of the party opposite.
I turn for a few brief moments to the possible merger of P.A.Y.E. and the social security system. I welcome this prospect. I welcome it especially because I see in it a much more direct and easy method of assisting the poor. I believe it is also a method whereby the proliferation of means tests—which has been recently mentioned in this House—could be concentrated into the one means test to which we are all subjected at this time. I should warn the House that I cannot conceive of any move in this direction which would provide a simple and uncomplicated process. I see, too, a considerable burden being added to the wages staffs of employers.
I want now to make a few comments on other aspects of the Budget, first on investment incentives. The question everyone asks himself is whether we have done enough. I believe that on balance we have indeed done enough about investment. We have tried to underline to industrialists not that we are in for growth simply for this one year but that we hope to be embarking on a period of sustained growth.
I am glad that in the shape of corporation tax concessions and the like we have turned our attention principally to the small firms. I suspect that hon. Members on all sides of the House will have had the same experience as I have had in finding that the depression which has been experienced by industrialists has been experienced in even greater measure by the smaller firms. I wish to welcome the indication given by my hon. Friend the Financial Secretary to the Treasury that the preference on corporation tax to small companies is to be extended to the building societies. This takes note of the fact that these really are what I might call semi-social institutions. As a lifelong supporter of the building society movement, I would perhaps feel that in the light of this preferential treatment, and in the light of the fact that funds are flowing into the societies coffers very quickly indeed, perhaps the time has really arrived when the societies can make a small contribution to reducing the cost of housing by considering a reduction in their rate of interest.
While on the subject of house purchase, I should like to express my disappointment that my right hon. Friend did not see fit to do away with some of the remaining duties which stand in the way of the young owner-occupier. I recognise that over the years a great many of these have been put aside or the floor has been lifted. The fact is that to buy a fairly average house in the south-east of England is to buy a very expensive property indeed. Any contribution that my right hon. Friend can still make in that respect will be warmly welcomed.
I should like to say a word now on the question of allowing tax against interest. In addition to the qualification which my right hon. Friend made during his Budget speech on Tuesday, there are one or two practices which were prevalent before the situation was changed which, as one who was professionally involved at the time, I should not wish to see return. Perhaps my right hon. Friend and I might on some occasion discuss these rather technical matters.
In general, however—and this will not please hon. Members opposite—I welcome the decision to restore those allowances against tax. I foresee in particular that there will be a number of parents who will wish to borrow money to send their children to fee-paying schools. While I quite understand that hon. Members opposite will find this disagreeable, I personally find it difficult to disagree with a situation in which a man, having paid his rates and taxes to send his next-door neighbour's child to a State school, should not be assisted in some small way if he is prepared to make the sacrifice of borrowing to send his own child to a private school.
Finally, I turn to the broad strategy of the Budget. There can be no doubt that one of the words rightly used to describe the strategy is "bold". The balance of payments will be under some pressure before too long a period has elapsed. I do not feel that the balance of payments should be seen as a sacred cow or virility symbol. I believe that the fact that we have a strong balance of payments is something to work on to achieve some of the objectives outlined by my right hon. Friend in his Budget. I believe that the Budget very closely meets the needs of the hour. It realises the great need for industrial expansion. It understands the requirement to reduce unemployment, to sustain growth and, above all, perhaps to return a large degree of confidence to employers and to employees.
I conclude by saying, without being accused of using clichés, that this is truly a Budget with something in it for everyone, but a Budget which expects the people to respond.
Mr Gerald Kaufman (Manchester Ardwick)
It is not surprising that the hon. Member for Billericay (Mr. McCrindle), as a Conservative, should welcome the Budget which he regards as helping to perpetuate divisions in this nation and further to create two nations. It is perhaps a little novel of him in doing so to present the cow as a virility symbol.
I judge this Budget on the simple question of how it affects my constituents in the Ardwick division of Manchester. Looking at the proposals which the Chancellor made on Tuesday afternoon, I can think of very few of my constituents who will benefit from the £300 million being given away in concessions to the top tax payers, and concessions on unearned income. I can think, again, of very few of my constituents who will benefit from the £68 million worth of concessions on estate duty, as distinct from the estate duty concessions to widows which I naturally welcome. I can think of very few of my constituents who will rush out into Stockport Road or Wilmslow Road and buy, if they can find shops which sell them, fur coats and perfume as a result of the cuts in purchase tax.
Nearly one in five of my constituents are retirement pensioners, and they will be bitterly disappointed by the mean and stingy pension increase of 15s. a week which the Chancellor has announced will not be paid until the autumn and which will be half eaten away by inflation by the time they eventually receive it. I can think of a couple who came to see me only the other day—a proud couple who refused, wrongly in my view, but nevertheless it is their view, to apply for supplementary benefits. They refused to apply for rate or rent rebates. They merely wanted the retirement pension which they have earned on their contributions. That couple will get the £1·20 extra and no more.
It is perfectly true that every income tax payer will benefit from the £1 a week income tax concession. Two-thirds of my constituents are tenants, either of private landlords or of Manchester City Council. When the Housing Finance Bill comes into law, those of my constituents who are council house tenants will get their £1 income tax concession taken right back again by the Minister of Housing and Construction. My constituents who are tenants of private landlords will also have to pay a fine on their income tax concession under what is so ludicrously described as the fair rents system.
Mr Joseph Kinsey (Birmingham, Perry Barr)
Is the hon. Member not aware that the people about whom he is talking, those in the lower income brackets, both in council houses and private houses will benefit? He should be welcoming the proposal rather than twisting it in this way.
Mr Gerald Kaufman (Manchester Ardwick)
The hon. Member for Birmingham, Perry Barr (Mr. Kinsey) lives in a bizarre world where a rebate on a massive increase which leaves the reduced rent higher than the original rent is regarded as some kind of concession. The Prime Minister today talked about 2 million people who will be paid rebates, but they will be rebates which for hundreds of thousands, if not more, will leave the rebated rent higher than the existing rent. If he thinks that that is a concession he ought to ask his constituents who will suffer from it how they feel about it when the Bill becomes law.
The announcement in the Budget which has been most welcomed, certainly by the City of Manchester, is the designation of the rest of the North-West as a new intermediate area, in addition to the existing Merseyside development area and the intermediate area. In making their announcements the Chancellor of the Exchequer and the Secretary of State for Trade and Industry would have been a little more gracious if they had paid tribute to the North-West Industrial Development Association for the pressure it has put on the Government to make this concession. I do not expect them to pay tribute to the Labour M.P.s who have fought for it, asking Questions and initiating debates about the subject. I asked the Government in a debate a few weeks ago to take this action but I was refused. It would have been a little more honest of the two right hon. Gentlemen if they had acknowledged the stark facts which have made designation of the North-West necessary.
Today's unemployment figures show that in March the North-West has the highest increase in wholly unemployed of any region, and that includes the traditional black spots. The figures show that the North-West is the only region in Britain where the number of adult vacancies has fallen. In the City of Manchester the number of wholly unemployed, already at a disastrous level, has risen again by 216. The percentage of unemployed today is 4·7 per cent. compared with 2·9 per cent. last March. A year ago when the Government's policies were already proving disastrous unemployment in Manchester was 12 per cent. below the national average. Today it is 9 per cent. above. The position in the country has deteriorated and Manchester's situation has deteriorated relative to the rest of the country. We have achieved our objective of intermediate area status but this is not the end of the fight. It is a successful achievement in a fight we shall continue to wage.
I have four specific questions about our new status to which I hope I will be given answers. Since the Housing Bill came before the House last year I have been pressing for an extension to the additional improvement grants, which were available to assisted areas, for the City of Manchester. I was turned down not only regularly but monotonously from the Second Reading of the Bill until the debate we had on local government on Friday. Now, suddenly, improvement grants are to be increased.
The trouble is that Section 1 of the Housing Act, 1971 specifies the starting date for eligibility for the additional improvement grants as 23rd June, 1971. The grants will expire after two years on 23rd June, 1973. The Act specifies that it is possible, by order, for newly designated intermediate areas to qualify for these increased improvement grants. The North-West will have lost exactly nine months of the concession. Only 15months are left to run and we have great unemployment in the construction industry in the greater Manchester area.
Will the Minister give us the full two-year period which the Act lays down, extending the provisions for the new intermediate areas for nine months until 23rd March, 1974, and give us a fair bite of the cherry?
I come to the question of industrial development. Here again, I have pressed for almost eight months for a concession on the directive which was laid down by the Department of Trade and Industry on 8th July last year. That directive, published in the Journal of the Department of Trade and Industry, laid down guidance for the issue of industrial development certificates as follows:
In Greater Manchester I.D.C.s would be available for reasonable expansion by existing firms with ties to the area, but I.D.C.s would not generally be granted for new projects or for entirely new lines of production or for substantial expansion which could be undertaken elsewhere.
Now that we have been granted intermediate area status is that guidance formally to be withdrawn, and since we are now to become an intermediate area will industrial development certificates be freely available for Greater Manchester?
I should like to ask about assisted area policy as operated within the Department of Trade and Industry and as it will be administered by the Minister for industrial development when he is appointed. A large proportion of the country, in one form or another, will be an assisted area. Will the Minister guarantee that there will be no private or secret administration of priorities which would give one area an advantage over other areas under criteria which are not revealed to hon. Members and others? Will he guarantee that all the new intermediate areas and the formerly designated intermediate areas will be given an equal chance under the new dispensation?
Fourthly, as an intermediate area we shall be given the new building grants, and we are of course very grateful for that, but we are not allowed to have the plant and machinery grants which go to development areas and special development areas. Will the Minister consider giving the intermediate areas a 10 per cent. plant and machinery grant as against the 20 per cent. grant for development areas? This would take us back to the relative position we had under the investment grant system. The Government having bitten on that bullet, I hope they will now agree to give us a plant and machinery grant, which would increase the incentive attraction of Manchester now that it has intermediate area status.
The Government in the course of the past few months, and particularly the past few weeks, have changed many of the policies upon which they were elected. They are now pouring money by the bucketful into U.C.S. They have brought back investment grants, though under another name, and they have brought back the Industrial Reorganisation Corporation, though in another guise. They have also changed, happily, their policy regarding intermediate area status for Manchester. Their slogan of "Stand on your own feet" should be changed to "Stand on your own head."
We are grateful that they have changed their policies. But we understand why they have made all these changes and why the Budget was presented on Tuesday as it was. Every Conservative Member knows in his heart that it is a Budget of desperation, a Budget of a million unemployed, of run-away inflation, of stagnation. It is a Budget to cure all that. It is a policy of hands to the pumps and excess Tory baggage thrown headlong overboard. The Government, with their record over 21 months of cold-hearted arrogance, do not deserve any success, but for the country's sake I hope we are now at last on the path of growth and full employment.
Mr David Madel (Bedfordshire South)
I hope the hon. Member for Manchester, Ardwick (Mr. Kaufman) will excuse me if I do not follow the line of his speech too closely. Although I was born in the greater Manchester area and worked there, I cannot claim detailed knowledge of it, as my constituency is in South-East England.
In an early part of his long and detailed Budget speech on Tuesday my right hon. Friend the Chancellor listed five reasons why he felt we had a unique opportunity to secure a substantial and faster rate of economic growth over a considerable period of years. I particularly welcome two points from his reasons. The first was his statement that our potential growth of productivity is greater than it was on previous occasions when we were about to embark on a period of expansion, and the second was his statement that it was not necessary to distort domestic economies in order to maintain unrealistic exchange rates. The commitment to a policy of much faster economic growth has received widespread support. It is particularly welcome in my constituency, where commercial vehicle, car and engineering plants have all suffered from previous stop-go policies.
In addition, industry obviously welcomes the announcement on free depreciation, a policy for which it has been calling for a number of years. We should not feel that the Budget is a complete give-away to employers, because they will face an extra bill for increased social security payments, but I feel that one of the main aims of the Budget was to restore confidence throughout industry and I am certain that increased capital investment will come about due to greater confidence. The 5 per cent. growth rate target implies the prospect of lasting profitable growth, and the fact that the policy on free depreciation is guaranteed until 1977 instead of the frequent changes that have haunted industry in the past will also bring about confidence.
I also welcome very warmly the nationwide initial allowance for new industrial buildings outside the assisted areas. As my right hon. Friend the Chancellor said, this was due to fall to 15 per cent. this April. The fact that it has been increased and extended to the whole economy will be particularly beneficial to certain industries.
Any Member coming from a car-making area such as mine will obviously have a few words to say about value-added tax and the special rate on cars. My right hon. Friend will not be surprised to hear that I am not very happy about this. Some interesting estimates have been made as to what, say, a £1,000 car will attract in tax now and April next year. The tax attraction at the post-Budget rate is £167. Next April, with the car tax of £67 and the value-added tax of £87 there will be a tax rate of £154, assuming no rise in prices in the meantime. Let us remember that labour costs are by no means the only determining factor in the cost to the manufacturer. Steel, electricity and coal are very important indicators. We cannot say exactly what the value-added tax will be next April, because it will depend on the manufacturers' costs. The gambling machine makers must be breathing a sigh of relief that they did not attract the special tax. The car industry is not too happy about the way in which it has been singled out.
I know that the Government are anxious for public support on their attitude to wage claims, but more could be done to explain to the public exactly what a wage claim would cost if it is granted. Have the Government considered referring some pay claims to the Office of Management Economics, not in a spirit of "Over to them, and let them decide", but merely as a means of obtaining an independent assessment of the true cost of a wage claim?
We heard on a television programme a little while ago that the engineering unions were asking for a 40 per cent. increase. All sorts of wild allegations and accusations were made of what it would or would not mean. Such a claim could be examined carefully. I do not believe the public really know what is being asked for by the unions and what it would cost.
I hope that the Chancellor will consider reducing the special car tax if at any time he feels that the domestic demand for cars has been distorted by an unrealistic tax rate.
While on the subject of value-added tax, I should also like to ask my hon. Friend the Minister of State to clarify the point about zero rating on advertising in newspapers. I immediately declare a financial interest in publishing. We are told that newspaper advertising will attract the zero rate. Will that also apply to advertising in magazines, periodicals, journals and directories? The publishing industry is interested in this and would be grateful to hear a little more about it.
The Chancellor's strategy of sustained economic growth depends to a great extent on industry's ability to keep costs steady. I know that my right hon. Friend will have the situation under constant close review. It lies in his power between now and next April to reduce indirect taxes further, and take some more pressure off prices. Obvious candidates are fuel oil and petrol. I sometimes feel that we forget how dependent the country is economically on the motor industry, how much it costs to run a car, and how the price of petrol reflects itself so much in prices in the shops. I hope my right hon. Friend will not hesitate to act on this tax if he feels that the movement of costs and prices warrants such action.
If we are to move quickly to our growth target of 5 per cent., we must ensure that our factories are free from stoppages and industrial discontent. I very much welcome the talks which have begun, and which I hope will continue on a regular basis, between the Government, the C.B.I. and the T.U.C. But so much of the responsibility for industrial peace rests with management. Coinciding with the Budget, my constituency heard the good news of a return to a five-day week in the truck plants of both Vauxhall and Chrysler. When the management at Dunstable announced this return to a five-day week it said:
During this period"—
the period of a three-day working week from 21st January—
management have been conscious of the problems employees have faced, and express their appreciation of the tolerance, co-operation and understanding displayed by everyone.
If management on a nationwide basis can get the tolerance, co-operation and understanding of organised labour, that plus the Chancellor's welcome measures will surely mean that we can attain the magic 5 per cent. growth rate.
Mr James Bennett (Glasgow Bridgeton)
I am grateful for the opportunity to say a few words although they will of necessity be of an ad lib variety. I do not rise to castigate the Budget. Rather do I say to the Chancellor with all the passion I can command that I sincerely hope that this Budget achieves the hoped for results. I come from the City of Glasgow, which has an intolerable unemployment situation. In 1969 the unemployment figure was 21,000. Today it is 44,000. If this Budget can do anything to alleviate distress in that great city, I welcome it 100 per cent.
Most of the criticism of the Budget has been not so much about what is in it but about what has been left out. I share the concern of many that little or nothing has been done for workers who do not earn enough to pay income tax. It is also said that here is not enough for our older citizens. In all honesty I have to say that no matter what Government are in power, when an increase in pensions is announced it is never enough and I doubt whether it ever will be. Similarly, when an increase is announced for a set date the criticism is always made that it should be given earlier. I do not want to make any party political point on this because it is a fault of all Governments. In this climate I try to be realistic and I fervently hope that the Budget will achieve what it sets out to achieve.
During my travels I came across an old cutting which I would like to quote. I am doubtful about the reference but it is alleged to have been made about 50 years ago by one of the political greats, David Lloyd George. It refers to our older citizens and it says:
How we treat our old people is the crucial test of our national qualities. A nation that lacks gratitude to those who have honestly worked for it in the past while they had strength enough to do so does not deserve a future for she has lost her sense of justice and her instinct of mercy.
In my lifetime in politics I have never known any Government or party to measure up to the sentiments expressed in that quotation. I sincerely hope that if this country reaches the growth rate anticipated in the Budget, not just one section but all sections of the community will benefit, particularly those most in need.
Mr Kenneth Baker (St Marylebone)
I should like to welcome the hon. Member for Glasgow, Bridgeton (Mr. James Bennett) to our economic and financial debates. It is a great pleasure to follow him. I am not surprised that he gave a general welcome to the Budget because coming as he does from Glasgow he knows that there can be few cities in the whole of the country that will benefit so much and are benefiting from the action taken by the Government.
I express general support for the Chancellor's Budget judgment. The Budget judgment was to go for expansion, and essentially this was correct. It was correct because last year was a year of sluggish growth—about 1 per cent. of the gross domestic product.
Furthermore, if one studies Table 4 in the Financial Statement one can see that there has been a slippage in the expectation of growth in the last year. When the Chancellor introduced his July measures he was talking of growth from the first half of 1971 to the first half of 1972 of about 4 per cent. to 4½ per cent. Table 4 shows that that has slipped, largely due to the coal strike, to something in the region of 3·9 per cent. This reinforces the Chancellor's judgment to go for growth. I hope that he will be successful in obtaining a 5 per cent. growth over the next 18 months.
I also support the method used by the Chancellor of injecting something like £1·2,000 million into the economy. He has done it in such a way that the demand effect is very high. A lot of that money will be spent quickly. This is not a rich man's Budget, because the greatest amount of tax relief goes to the average earner and the person who earns either £5 above or below average earnings. That is the wage level of the mass of the working community. By cutting income tax here the demand effect is concentrated. To some extent this is a psychological judgment. I do not think that much of the £900 million cut in income tax is likely to be saved. A large proportion of it will be spent and that, after all, is the Chancellor's object. That money will be in circulation in the first week of May and the slightly disinflationary effect of the higher insurance payments will not come about until September.
The effect of these is very small because the average wage earner will have to pay an extra 5 new pence on his stamp so he will still benefit to the extent of 95 new pence. That means there will be a strong follow-through of money going into the economy, agitating and increasing economic activity.
Hon. Gentlemen opposite have said that this does not assist the working man yet we have taken 3 million working men and women out of tax altogether—the largest number of people ever taken out of the tax bracket in any Budget. I support the Chancellor's Budget judgment completely. It is fully justified. For the rest of this year the inflation effect is £1·2 thousand million but if hon. Members add up the columns on page 20 to see what the effect will be in 1973–74 in a full year, if these measures remain, the amount is £2,000 million.
Mr John Roper (Farnworth)
I did not hear the first part of the hon. Gentleman's remarks. As well as the inflationary effect on the tax side there is the reflationary effect on Government spending announced yesterday and today.
Mr Kenneth Baker (St Marylebone)
Indeed, and that supports my argument and the Budget judgment. The great danger that the Chancellor has decided to run in his Budget judgment is that if we go for expansion like this in 1973–74 we may run into a grave balance of payments crisis. I think it is possible that we will and therefore the words of the Chancellor in column 1354 are possibly the most important words in the Budget and possibly the most important words ever used by a Chancellor since 1945.
He said that we are going for domestic growth and if we get into trouble because of a balance of payments crisis this will not distort the domestic economy. That is one of the most important economic statements since the war. It means that the Government have learnt the lesson the previous Conservative Government and the previous Socialist Government did not learn. From 1964 to 1967 the previous Socialist Government decided not to adjust the exchange rate and as a result clamped down on the economy with long-term damaging effects. The Chancellor said:
Moreover I am sure that all hon. Members in this House will agree that the lesson of the international balance of payments upsets of the last few years is that it is neither necessary nor desirable to distort domestic economies to an unacceptable extent in order to maintain unrealistic exchange rates…".—[Official Report, 21st March, 1972; Vol. 833, c. 1354.]
This is a major breakthrough. Many of us have pressed the Chancellor and the previous Chancellor to say this. It means, I hope, that we shall move into a period where domestic economic growth will be continuous and sustained.
I utter a word of caution about the expectations the Budget will have of reducing unemployment. From 1966 this country has been literally in a different ball game. The old pattern of unemployment since 1945 of 1, 1½ or 2 per cent, was susceptible to fine tuning—put a bit in the Budget, take a bit out. One then had Budgets of £100 million or £150 million. Those days are gone.
There are long-term changes happening in our economy—the unemployment of progress. We have all experienced in business and in our constituencies technological change and structural change. Managements, whether of collieries, farms, large firms or small factories are all combing through pay-rolls trying to find a more efficient way of producing more goods. The forces of shake-out are very strong in our society, and they will not be countered, met or reduced to any substantial extent by massive demand inflation. In the next 18 months I do not expect unemployment to fall much below 750,000 or 800,000.
Those people who say that what manufacturing industry sheds service industry will take on must also be aware that service industries are equally receptive to shake-out and productivity improvements. I will quote one example of this. The same number of people in 1970 worked in hotels, catering and restaurants as worked in those occupations in 1960. After a decade of tourist boom and of hotel building, exactly the same number of people worked in that industry. I ask my right hon. Friends not to be sanguine in the belief that we can jack down unemployment, because the unemployment of today is an essentially different animal from the unemployment of the 1920s and 1930s.
The proposals in the Budget for corporation tax were submitted to a distinguished Select Committee which came to some very distinguished conclusions, and I am glad that they were accepted in full. Those conclusions were unanimous and I regret that the Opposition have decided to mount a substantial attack upon this part of the Finance Bill. The reform of a fundamental tax like corporation tax is much better done with a degree of unanimity. This will be largely fought out in Committee I suspect and we shall go through many of the arguments again.
Irrespective of our entry into the Common Market I have for a long time been a supporter of value-added tax. It is the only tax on the fiscal horizon which has a real buoyancy of revenue in it. The only other tax that is buoyant at the moment is income tax. The yield of V.A.T. to the Treasury will go up as economic activity goes up. The Treasury Bench is to be congratulated on devising a scheme of V.A.T. which is unlikely to be regressive. Hon. Members opposite who opposed V.A.T. from the beginning would have mounted a much more effective campaign against it if it could have been shown to be regressive in effect. My reading of the White Paper on value-added tax is that it is unlikely to be regressive and the Government are to be congratulated upon that and upon achieving one rate of V.A.T. I never thought that the Treasury would have the courage and sense to have one rate of V.A.T. This makes the tax impartial and we get away from those phoney decisions on which goods are luxury, less luxurious, more necessary or just necessary.
The estimated yield of V.A.T. according to the Financial Statement is £1·6 thousand million. It replaces two taxes, S.E.T. and purchase tax, the yield of which is £2,000 million at the old rate of S.E.T. Taking the first year of operation of V.A.T., there is evidence that we have reduced direct taxation by about £400 million.
I will turn briefly to the positive tax credit system. I welcome this change of heart. It is a change of heart because Treasury Ministers were very cool about negative income tax—
Mr Kenneth Baker (St Marylebone)
I have worked on committees on this in the past with the Financial Secretary and he has always shown great interest in it, but there has been a slight coolness in atmosphere over the last year or so. I did not have the feeling that we should move to this great reform—
Mr Patrick Jenkin (Wanstead and Woodford)
I should like to dispel my hon. Friend's suspicions in this regard. Neither I nor any of my colleagues have ever been other than keenly anxious to find a solution which has baffled successive Governments for many years. There has never been any opposition to this, and, like my hon. Friend, I am delighted that we have solved this problem.
Mr Kenneth Baker (St Marylebone)
I am glad of that. The impression was given that a solution would be difficult to find.
Before the debate is over I hope that someone from the Treasury Bench will be generous enough to congratulate my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams). He has soldiered on, a pariah, an outcast and even—the highest term of political approbation—a crank, in standing by the scheme that his mother and he worked out. Treasury Ministers should not be grudging over this. When they say that it is not quite the Rhys Williams scheme, there have been many Rhys Williams schemes and this is very close to the latest one. He wrote an article which came out only last week—I did not realise that Budget proposals could be fashioned so quickly—that set out the Government's scheme.
The right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) in his speech yesterday gave a welcome to the Budget which was rather less than fulsome. I suspect it was less than fulsome because he is engaged on a great political crusade in the Labour Party, the object of which, I understand, is to bring him and his devoted followers out of the saloon bar into the public bar. If he achieves that, I hope when he blunders with his devoted followers into the public bar he will make sure that he does not get into the line of fire between the dart throwers and the dart board. He will find that some of his colleagues in the public bar of the Labour Party are not only wild men but have a deadly aim.
He was rather less than fulsome in welcoming these proposals because, I suspect, in his second great speech to the country he would have talked about negative income tax. I am not surprised that the right hon. Gentleman has not been here today because I suspect his third speech would have related to the need for a new regional policy. I suppose he is having to give a little more thought to a rethink in the Labour Party.
Finally I turn to regional policy. Opposition Members had something of a field day yesterday in reminding the House of some of our words in the last Parliament. I think it was Sir Winston Churchill who said that one's own words are a wholesome diet, and I would not entirely disagree with that. Some hon. Members ought to do a charitable act by going to the Library and borrowing on permanent loan the Hansards for the whole of the last Parliament so that neither side could be quoted.
I very much welcome the rethink on regional policy which has been carried out by the Conservative Party. I have never been one of those in the Conservative Party who believe that one can ignore the regions and let the workers and society slowly filter to the South and South-East. There is a great deal of logic in taking the jobs to the people, rather than letting people find their way to jobs in the West Midlands or the South-East. A party that maintains a devotion to the concept of one nation cannot afford to see a large part of the country become subject to endemic decay and do nothing about it. Therefore, I entirely welcome the Government's initiative on regional policy.
I welcome the fact that we are to have a Minister who is to be responsible for this work, and I also welcome the fact that there is to be a stability in the incentives until 1978. May I make a suggestion to my right hon. Friend the Chancellor of the Exchequer on the question of regional policy? The suggestion is that if our regions are to become vital and active sources of economic growth, a great deal of it must be spontaneous within the regions. I therefore hope that in the organisation which is to be set up great emphasis will be laid on the regional committees and organisations. We shall not create regional invigoration from Whitehall in London. I hope that real teeth will be given to the regional committees which are envisaged in paragraphs 43 to 45 of the White Paper.
It was one of the features of the last century that the House of Commons was full of Conservatives and Liberals who had built up their own businesses in their own areas. They were Victorian entrepreneurs who had gone into politics. Robert Peel to the end of his days always spoke with a broad Lancashire accent. But this century has not produced the same regional entrepreneurs. I do not know whether it is a second or third generation problem, but it is a fact. In the new regional rethink we must create initiative within the regions. We must leave more decision-taking to the fringes so that greater spontaneity is found there.
I very much support the Budget. I believe that the Budget judgment was correct and has a very good chance of succeeding. If it succeeds, it will be the first time since 1945 that we shall enter a period of reflation without excessive inflation. I revert to what I consider to be the most important economic statement made in this House since the war: the fact that the present Chancellor of the Exchequer has learned the errors of previous Chancellors and is not prepared to sacrifice the wealth and prosperity and well-being of the people of this country for a totally unmaintainable foreign exchange rate.
Mr John Roper (Farnworth)
I agree with a good deal of the remarks of the hon. Member for St. Marylebone (Mr. Kenneth Baker) although, as I shall show, there are some parts of his speech with which I disagree.
Like the hon. Gentleman, I served on the Select Committee which examined the corporation tax and I was pleased that some of our recommendations were accepted by the Chancellor of the Exchequer in his Budget Statement. It was a fascinating Budget and, like last year's, one cannot complain about its dullness. There is once again a whole series of interesting tax proposals which no doubt we shall be considering in much detail in Committee either upstairs or on the Floor of the House. I am reminded of the old Chinese curse "May you live in interesting times." That applies to those in this House who are interested in finance matters, because if one lives in the time of interesting Budgets this inevitably means that more time has to be spent discusing Finance Bills upstairs in Committee.
Like many hon. Members who have spoken in this debate, I was particularly interested to hear reference in the Chancellor's speech to the study undertaken by Mr. Cockfield and the proposals which are to be set out later in a Green Paper to link social security benefits with P.A.Y.E. It would be interesting if we could be told when those proposals will come before us and whether the Chancellor will act on them in next year's Budget. If, as has been suggested in the Press, the proposals are not to be published until July, my experience of the Select Committee on Corporation Tax suggests that a Select Committee of this House would not have time to consider such proposals and to make recommendations to the Chancellor in time for him to take them into account for next year's Budget. Therefore, a period of 18 months to two years would be far better spent on this subject than attempting to cover this important matter in time for next year.
There are snags involved in the proposals referred to briefly in the Chancellor's speech to combine P.A.Y.E. on a non-cumulative basis with social security benefits. This could cause hardship to those involved in industrial disputes, but general problems are involved for those with fluctuating incomes. I hope that experience in Australia, where there has been considerable difficulty on the part of those with fluctuating incomes, has been taken fully into account in the proposals which are to appear later in a Green Paper.
I was unable to agree with the remarks of the hon. Member for St. Marylebone about the Budget judgment. Unfortunately, this year the Chancellor of the Exchequer appears to have been particularly coy in that he has not yet told us what will be the demand effect of the tax changes and public expenditure changes which have been announced over the last three days. For example, we do not know how much additional expenditure there will be on industrial expansion. When my hon. Friend the Member for Greenock (Dr. Dickson Mabon) asked the Secretary of State for Trade and Industry how much would be available for selective assistance via the new Industrial Development Executive he was told that he would have to wait for the Bill, which presumably we shall not see until after Easter.
We do not yet know how much of an effect the whole group of Budget measures will have on demand. My guess is that it will be somewhere around £1,200 million or £1,300 million to be taken into account in terms of expenditure measures as well as fiscal measures, of which we have had some details. I suggest that this probably will be inadequate. The Chancellor of the Exchequer has underestimated each time he has attempted to make a Budget judgment of this sort. The recently published statistics of industrial production and consumer sales, and today's figures of unemployment, show that there is as yet no real sign of recovery. I fear that once again the Chancellor has grossly under-estimated the needs of the economy and that we shall see no sign of an improvement in unemployment during the next 12 months.
Like the hon. Member for St. Marylebone, I should like to say something about corporation tax. I found membership of a Select Committee to be a useful experience and I am glad that the House will be discussing the Cockfield Report on P.A.Y.E. and combinations of social security benefits.
However, it is important to point out that the Select Committee on Corporation Tax was not asked to consider whether it was right to change from the present system of corporation tax—the 1965 system—to a new system. Therefore, to some extent the hon. Member for St. Marylebone was misleading the House when he complained about the Opposition now attacking the Chancellor's measures. The Select Committee was given a very much narrower remit. We were asked merely to consider which form of corporation tax was preferable if there had to be a change. We did not set out to take evidence on the desirability or otherwise of a change, nor did we attempt to come to any judgment on that matter. I believe that that is a matter for the House. A Select Committee cannot get involved in the broad political issues which that question raises. I think that the narrower issue of which is the appropriate form of corporation tax was the right sort of subject for a Select Committee and, as the hon. Gentleman said, on that we were unanimous.
I believe that the judgment that we came to after considerable discussion was the right one on balance, despite the warning that we had from the Inland Revenue of the dangers of political erosion which were more likely under an imputation system and which had been less likely under a split-rate system—more likely under an imputation system because it is much easier to hide political erosion under an imputation system than under a split-rate system.
I am glad that the Chancellor of the Exchequer so far has resisted the pressure put upon him by firms operating on an international basis and has insisted upon the minimum corporation tax charge which we put forward in our report. I suspect that there will be pressures in the future, and I am sure that we on this side of the House will assist the right hon. Gentleman in resisting any attempt to erode the minimum corporation tax charge. The arguments in favour of the imputation system were primarily those of the balance of payments. These, on balance, carried the day.
On the corporation tax changes, perhaps I may say as a Co-operative Member how pleased I was with the treatment announced last night by the Financial Secretary for co-operative societies and building societies. It was agreed by the Select Committee, as it has been by the Chancellor, that their financial structure meant that the normal imputation system would not be appropriate as it should be and, therefore, the position which the right hon. Gentleman has suggested—that there will be a lower charge of something like four-fifths of the full charge—would be appropriate. The alternative certainly appears unjust.
I turn to the question of value-added tax. Though there may be arguments in general in favour of and against such a form of tax in the abstract, I believe that the tax has been introduced in a premature way this year. There will be a great many administrative problems because the Government have pressed ahead so fast before the technical problems have been resolved. What has been said about the non-regressive nature of the tax has also to be examined with a great deal more care. We have not yet had a chance to examine the full effects of such a tax, and I shall want to consider some of these points this evening.
In an intervention during the speech of my hon. Friend the Member for Willesden, West (Mr. Pavitt) on Tuesday night, the Financial Secretary suggested that there would be less value-added tax for the next year than the purchase tax and selective employment tax forgone. That is true if one takes value-added tax as against S.E.T. net and purchase tax. But the hon. Gentleman left out of account the £125 million of car tax which will also be charged next year for the first time and which must be taken into account if one wishes to make a calculation. If one adds together the £224 million net yield of S.E.T. forgone next year and the £1,275 million of purchase tax and sets them against the £1,475 million of value-added tax and the £125 million of car tax, there is a £100 million increase in indirect taxation next year.
If one not only considers the addition to indirect taxation but looks further up page 28 of the Financial Statement at the reductions in direct taxation which are already predicted for next year and which will be highly regressive because of the unified system, largely going to those with investment income, next year's Budget already will carry out a £500 million transfer from direct taxation to indirect taxation. That is a regressive switch if ever there was one.
Although the system put forward by the Chancellor of the Exchequer for dealing with V.A.T. will cause less administrative costs than some opponents of the change have suggested, there will still be higher administrative costs under this system than under the purchase tax system in the past. V.A.T. is a good tax, for countries which have bad taxpayers. On those grounds, it is not necessary to introduce it in this country at this stage.
I still believe that the number of items which are to be zero-rated could have been extended considerably. We are told about the non-regressive nature of this tax. However, if one looks at other items which could have been included at zero rate, there are a considerable number. In the area of clothing and footwear, for example, children's clothes and children's shoes for the first time will be subject to a form of indirect tax. As an hon. Member representing a Lancashire constituency, I am especially concerned since the proposals for value-added tax will bring clogs into tax for the first time. Until now they have been exempt from any form of indirect taxation, apart from the element of S.E.T. falling on their distribution. But clogs and wigs will fall into the V.A.T. net in future, not to mention, on those occasions when Her Majesty sees fit to decorate one of her loyal subjects, the decorations, medals and miniatures which will also be subject to tax where they have not been in the past.
It is the parents of young children who will be specially hit. Babies' nursery furniture has been excluded from purchase tax in the past but now will become subject to tax at the 10 per cent. rate. A large number of household items which are basic needs of life, like household brooms and mops, cooking stoves, Vim and other forms of domestic cleaner, will all become subject to tax for the first time.
This is a degree of regressivity which must be calculated. We have seen already that even within the exemptions and the zero ratings included in the Bill there is room for a great deal of exploitation. The fitted carpet system has been discussed already in the Press. Central heating systems, which until now have not been subject to purchase tax, will be subject to V.A.T. unless they are installed at the time that houses are built. Until now children's swings have been exempt from purchase tax. They will become part of V.A.T. So will miners' lamps, caravans, toothbrushes and a host of other items.
There is one area which causes great concern. While it might be considered reasonable to bring into tax meals which are eaten out in general, meals in canteens will also be included under V.A.T. I hope that the Minister of State will be able to tell us what is the position about school meals. From my reading of the White Paper and the draft Clauses, it looks as if school meals will also be subject to V.A.T. The same probably applies to school milk in those places where it is now sold. These, too, will come under value-added tax.
For hon. Gentlemen on the Government side to say that this is not a regressive measure when all these basic needs of life will come into taxation for the first time strikes me as ludicrous to say the least. In Committee we shall want to probe these and many other items which I believe should have been zero-rated if we were to introduce a tax of this kind.
I turn now to the Chancellor's proposals on regional policy. I was very interested in them and welcome the fact that my constituency has been included in an intermediate area for the first time.
We are all waiting to see what will be in the Bill which the Secretary of State for Trade and Industry is bringing forward. We want to see the precise measures which he wishes to introduce. At the moment this looks like an operation of changing the labels on the doors in No. 1 Victoria Street. I trust it is more than that. At the moment it does not look as if it need be much more. We shall see what it implies when we get the legislation in due course.
The most important thing which the Chancellor could have done about regional policy he failed to do. He failed to give any clear indication of what is to happen to the regional employment premium after 1974. This instrument has been shown to be of value in creating jobs and maintaining employment in development areas. The present ambiguous and unsatisfactory form of words in the Chancellor's speech and the greater degree of ambiguity in the White Paper which has been issued should be remedied in the near future. I believe that firms going into development areas should have a clear indication where they stand regarding regional employment premium.
The Budget has technical fascination but it does not go far enough to deal with the economic problems of the country and it worsens considerably our social problems.
Mr David Mitchell (Basingstoke)
Before the Chancellor rose to make his Budget Statement I gave some thought to the things which I hoped would be included in it and I made a list. I thought that afterwards I would check off that list to see what progress had been made. My list went as follows: that value-added tax must be simple; that there should be measures to reduce unemployment; that there should be encouragement to industry to expand, not just to invest, because quite often investment means spending money to put in machinery and save jobs; that there should be special measures to help seize the opportunity in Europe; that there should be measures to halt the rise in prices; that there should be protection for the poorest in the land from hardship; and, in particular in that sphere, that the problem of the widow and the widow's home should be recognised.
Therefore, when the Chancellor of the Exchequer sat down, although perhaps I was not one of the first to rise and cheer, I found much in the Budget with which I agreed and welcomed. However, I also found some aspects about which I have some concern and reservation which I feel I should express to the House.
First, value-added tax. I congratulate the Chancellor on the simplicity of what he has done. Indeed, I am particularly glad to see my hon. Friend the Minister of State, the hon. Member for Worthing (Mr. Higgins), on the Government Front Bench, for I believe that he has done much of the back-room work which has produced this form of value-added tax.
What a nightmare it would have been if we had had multiple different rates which they have in some countries. That would have created a problem especially for the small business in the country—I take a special interest in this sphere—which an accountant in my constituency has referred to as "out in the sticks" where the keeping of records may leave something to be desired. Trying to keep the input tax, the allowance side of the value-added tax, would have been an absolute nightmare if we had different rates for different purchases. Therefore, I welcome the form that has been chosen.
I particularly welcome the 10 per cent. rate, which is the lowest in Europe. The House should recognise that we have an enormous benefit in having only a 10 per cent. rate. Therefore, hon. Members who have already started to queue up with groups of exemptions which they would like to see from the tax and extension to zero rating should take a realistic view and say to themselves: "If we are to have a 10 per cent. rate, we cannot allow through anything more than the very minimum of special cases over and above those which the Government have already set into the Bill."
We are fulfilling the promise to tax more from spending and less from earning, which must be wholly desirable.
I turn now to the problem of unemployment. This is more long term and deep seated than many hon. Members have recognised. It is easy for the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) to say that, despite what the Government have done, they will not reduce unemployment by more than 200,000. That figure is probably correct. Equally, I beg to doubt whether any Government can do anything within reality which will take more than 200,000 off the unemployed in the course of the next 12 to 18 months.
We should pause to recall the principal causes for the level of unemployment today. We have had for some time—in fact, since 1968—less growth in demand than we have had in the underlying productive potential of British industry. We have had an underlying productive potential growing at about 3 per cent. a year while demand has not grown at that rate.
It was not in 1968, 1969 or 1970 that a Conservative Government were in office. Unemployment doubled under that Labour Government. For hon. Gentlemen opposite to wash their hands and pretend that they had nothing to do with the present situation is plainly dishonest and deceptive.
We must recognise the important part that is played by the long-term trends of employment. One of the signs of a more advanced economy is that manufacturing tends to be static in its employment demand, but that the service industries are a growth area for employment. Therefore, the natural normal growth of employment in this country over recent years should have been in the service industries. But this is the precise area on which the right hon. Member for Cardiff, South-East (Mr. Callaghan), when he was Chancellor, put a tax—selective employment tax—specifically bearing on the service industries.
The right hon. Member for Stechford, when he was Chancellor, doubled that tax. I believe that we should give credit where it is due and recognise that the right hon. Gentleman, ex-Chancellor of the Exchequer, dilettante, connoisseur of good art and good claret, is also architect of much of our unemployment today. [Interruption.] Hon. Gentlemen opposite may say "Come, come", but this is the reality of the situation.
Unemployment did net start to rise when we came to office. It was rising long before. It doubled under Labour. I am not saying that hon. Gentlemen opposite sought unemployment. They pursued measures which had these consequences, and once one kicks that sort of football hard, as Labour did, with the doubling of S.E.T. by the right hon. Member for Stechford, the momentum carries the ball along, and it has been running forward until now.
Mr David Mitchell (Basingstoke)
I welcome the coming demise of S.E.T. I welcome the moves for greater growth because they will do much to deal with the problems of unemployment.
Remember that it is consumer-led growth on which the Government are relying. In this connection I have some worries. I am not wholly satisfied—I make these remarks with care and having given the issue considerable thought—that the increased consumer demand which my right hon. Friend is bringing about will be satisfied by British manufacturers and British industry generally.
There is a grave risk that it will be satisfied increasingly as the year passes by Common Market manufacturers, who will see that if they pre-empt the tariff cuts which will come in future years they can establish themselves in our market here, with a firm foothold at this time of growth in consumer demand. I therefore have some reservations about the method on which the Chancellor is relying so greatly.
We must recognise that industry is a living organism. Older businesses and processes die. They contract and shed employees and thereby add to the pool of unemployment. New industries, new firms and new products are a growing organism and they expand and take on workers. Today we have the shedding of old industries, but we do not have sufficient birth and expansion of new ones.
What is it that new industries need to give them incentive to expand? The answer is, of course, post-tax profit. People are in industry for profit and not for the love of hard work. I hope that the Chancellor will hold in reserve the possibility of a reduction in corporation tax if he finds this to be necessary later in the year.
I am bound to look with some concern at the proposals in respect of corporation tax and the changes involved in the new system. If we are to have a system in which corporation tax will be heavier on retained profits and lighter on distributed profits—I understand my right hon. Friend's concept in that he wants to see a better allocation of resources, with the use of the market as a means of re-allocating; this is fine and dandy for quoted companies on the market—my right hon. Friend must recognise that for companies which are not quoted on the market, the market is not the place where they reallocate their resources or raise expansion finance. They achieve that through retained profits, which are to be taxed higher under my right hon. Friend's proposed system for next year.
I welcome the fact that the Chancellor recognises that there is a problem in respect of small businesses, which must be treated differently from large ones, but one is bound to ask if my right hon. Friend is aware that the same problem applies to all unquoted companies, small and large. Should they not be given a different form of treatment in relation to corporation tax, since they raise their expansion capital differently? I hope that further thought will be given to this by my right hon. Friend.
The Budget gives no indication of anything in the way of a taper against the level of capital gains tax continuing evenly through the years. At 30 per cent. it is a cumulative disadvantage and disincentive.
As the years go by, the amount of capital gains tax liability which is built up by those who own businesses becomes an increasing disincentive to investment in the smaller companies which finance expansion through retained profits. All the time the proprietor of a small business has to remember that if he puts more money into his business, not only will he pay corporation tax on the profits but, over and above that, there will be eventually rising capital gains tax which he will have to pay in cash.
Many large employers in my constituency will find that such a large liability that there will be an enormous locking- in effect. The old managing director or working proprietor who ought to retire from his business or to sell it, will have to stay on until he goes to his grave because of capital gains tax for which he has not the cash to pay out.
When I look at the injustice of taxing the paper gain of inflation, I remember my hon. Friend the Member for Worthing speaking brilliantly on this subject when capital gains tax was first put on the Statute Book in 1965. I shall not embarrass my hon. Friend by quoting his words today, but I could not have put the matter better. That no doubt is why he is in his present position. I urge him to bear in mind his own words about the injustice of taxing inflation and paper gains and remind him that since 1965 there has been a rate of inflation which neither he nor I nor anyone on either side of the House foresaw when he was making that speech in 1965. Again and again, the strength of the case he made has been reinforced.
It reinforces the case for a tapering device such as there is in the United States. I do not want to see people who find a way of making a "quick buck" by a capital transaction escape paying tax. I do not believe that is right, but over a long period of time it ought to have an offset for inflation. We should say that the longer the asset is held the less is the rate of tax. If it takes 10 or 20 years to build up a business, we should say that from 30 per cent. the tax should taper off to nil at the end of the period. Then we would do away with many of the injustices and particularly disincentives caused by the tax at present.
It is of crucial importance to this country that our businessmen should seize the opportunities which going into Europe will provide. Joining the Common Market presents an opportunity. It is no more, it is no certainty of growth and no certainty of an extra market for our manufactures, but an opportunity. The Government ought now to be giving help to market research within Europe for British manufactures. If they set up an organisation subsidised by the Government deliberately to help all kinds of manufacturers, particularly small ones who have not the resources to travel in Europe and do market research for themselves, that would do much to bring the opportunity home to British manufacturers and to ensure that they seize the opportunity rather than our becoming the soft under-belly of Europe in which our market would be exploited by E.E.C. manufacturers.
The Chancellor is to be congratulated on the measures taken to halt the rapid rise in prices. His cuts in purchase tax make a record for all-time, the zero rating of food, fuel and rent, particularly as these things enter into the budgets of old people, in relation to value-added tax are important. Since the economy of this country has been suffering and is suffering from wage-cost inflation, I welcome the £1 reduction in tax, or the £1 increase in wages immediately given to all in the taxpaying bracket. I hope that this lead will be followed by the trade unions who should recognise that, having obtained that £1, there is no need to press for more in inflationary terms in the wage increases for which they are asking at present. Justifiable wage increases can certainly be made, but within the general ambit of what industry can afford and not the sort of inflationary settlements which rob workers, pensioners and society as a whole of stable money and bring inflation back at full cry into the economy.
The pensioners are also to have an increase. Some people have said that it is less than last year's increase, but one must recognise that we now have annual reviews and that with a pound after two years and 75p after one year there is a greater increase on the 75p than the pound last November.
Finally, I welcome the special help for widows, who were so vindictively treated before, returning from their bereavement to face the reality of having to sell house and home. I am delighted that my right hon. Friend has recognised that something needed to be done for them.
There is much in the Budget that I welcome, but there are aspects of it with which I have some concern and I felt it right this evening to draw attention to these and not seek to conceal them.
Mr George Cunningham (Islington South West)
I intend to speak not about the economy in general but about two particular points arising from the Budget Statement. First, I want to pick up one remark made early in his speech by the hon. Member for Basingstoke (Mr. David Mitchell). He said that we are perhaps all wrong in not recognising—this was his implication—that the number of unemployed is less amenable to change as a result of Government activity than we imagine. I support that view.
The hon. Gentleman suggested that the level of unemployment rose during the period of Labour Government and, of course, it has gone on rising. There is an underlying trend there which cannot be denied and it is to some extent independent of Government action. We have to recognise that two factors govern the level of unemployment. First there is Government action—corporation tax and other fiscal devices of a helpful or unhelpful nature. Secondly, and perhaps more significant, there is the degree of current enterprise or initiative on behalf of the business community.
It may be that what has happened in this country is a long-term decline in the degree of enterprise and initiative possessed or at least currently exercised by the business community—
Mr George Cunningham (Islington South West)
—and that it is not easily susceptible to inducements or enticements by taxation. If that is the case, there is justification for more robust and more direct intervention by public authorities in the economic situation than has been the case in the past. If the business community is not able to make use of 1 million unemployed to produce the goods for the community to consume, the public authorities cannot remain indifferent and must in some way step in. There is no time to develop that point now, but we need to recognise that corporation tax and other fiscal devices are not by any means very direct in their influence on the number of unemployed or on the amount of business activity.
Will the Minister of State be good enough to remove a suspicion which exists, which I think may not be justified but which should be removed? We were told last year that when the change in the taxation system was introduced in a year's time, with the removal of the earned income allowance, it would be necessary to raise the level of personal allowances in order to preserve their value under the present system of taxation. The Chancellor mentioned that in his Budget Statement last year. Section 33 of the Finance Act listed the personal allowances as they now exist and said that, for the year 1973–74, they would be raised to nine-sevenths of the previously prevailing level. The figures in pound terms were stipulated.
This year the Chancellor has raised the personal allowances to a level which in the case of the married man's allowance is identical with the level to which it would have to be raised next year for the technical reason I have mentioned. The question is whether, in a year's time, the personal allowances will be raised again for that technical reason. The answer must surely be "Yes", but the Chancellor did not say so and the Resolutions do not provide for it. If it is not done, however, he will get back next year, because of this technical change, almost all of what he has given away this year. The "Chancellor's give-away" will become "Barber's boomerang" and he will have it all back again.
I hope that my suspicious mind can be put at rest on that and that the Minister can make it clear that the Finance Bill will provide an amendment to these figures to ensure that they rise to a level which is nine-sevenths of what has now been provided, subject to any small changes which the Chancellor might decide to introduce next year in the normal way.
Mr Terence Higgins (Worthing)
The hon. Member will appreciate that this is not exactly a simple matter and it is not appropriate to answer it in an intervention in his speech. Since I already have a large number of points to answer in my own, perhaps I might bring this point to my right hon. Friend's attention.
Mr George Cunningham (Islington South West)
I am grateful to the hon. Gentleman. I would prefer, if there is any uncertainty, that he should look at the matter carefully and have that point dealt with in some other way.
Finally, I take the strongest exception to the provision in the Budget which restores tax relief on all interest on loans, for whatever purpose the money is borrowed. I know that it was foreshadowed in the Conservative Party manifesto. Goodness knows how it got there. This was surely one case in which the Conser- vative Party would have been justified in saying that it would not carry out the pledge because it was crazy.
There is no logical justification whatever for giving a man tax relief because he borrows money. The amounts that people borrow may not be large, but it is inflationary to the extent that they employ this device at all and it has no basis in logic. If I choose to spend my money buying a motor bicycle and instead of using my own capital to do so I borrow money, why should that reduce the tax that I pay for community services? I know it is the system which existed up to 1969 but it existed because of an historical situation which has no relevance to the present day.
If the Chancellor had to do this he could at least have rationalised the system by making this an allowance. It is not a tax allowance; it was not a tax allowance before 1969. It was regarded as an outgoing, and I suppose it will still be regarded as an outgoing; and in the nature of an outgoing it will therefore not have any top limit. Consequently people will be able to borrow as much money as their wealth can command—of course, only the wealthy can borrow—and the interest rate will be subsidised out of taxation. The amount of that subsidy to the interest rate they are effectively paying is enormous.
Taking the new rates of taxation and assuming that the borrower is able to get his money for 9 per cent., even on the new basic rate of taxation it will only be costing him 6·3 per cent. Anyone who can borrow money at that rate can make a profit on it because he can invest it with a better return than that even after taxation; and if he is much better off and on a 40 per cent. or 50 per cent. tax rate, he will be able to get his money for about 5 per cent. That is one abuse of the situation which played a large part in leading to the termination of the relief in 1969.
The Chancellor, in announcing the return of this nonsense, indicated that there would be some qualification in one respect. If I understood him correctly, however, he did not indicate that he would be taking steps to preclude the abuse which I now want to mention—that is, the scheme for endowment insurance which is taken out specifically to take advantage of the tax relief on borrowing. What will happen when this ridiculous provision gets back on to the Statute Book is that anybody with enough wealth to take out a highly expensive endowment insurance scheme will do so. He will take out a scheme with a premium of £5,000 a year and will have enough money to pay the premium for a couple of years. He will borrow all the rest against the endowment that finally matures and will borrow the interest to service that loan. Therefore, what would normally be a highly unprofitable venture if he got no tax relief on the interest will be highly profitable because he will get relief.
There is not a country in the world that permits such an obvious loophole to exist. The Chancellor has committed himself to the return of tax relief for borrowing, but surely this does not mean that he has committed himself to permitting that abuse of tax relief for borrowing. I hope that at some stage, as the legislation goes through, the Chancellor will feel able to say that the abuse must not return and that measures will be taken to prevent tax relief for borrowing for this kind of purpose.
Hon. Robert Boscawen (Wells)
The hon. Member for Islington, South-West (Mr. George Cunningham) will forgive me if I do not follow his technical argument since I only have a few minutes at my disposal.
This gives me an opportunity, since my hon. Friend the Minister of State is present, to pay tribute to him for the painstaking way he has dealt with representations from small constituencies all over the country in connection with the application of value-added tax. I am highly impressed by the way he has overcome the very difficult problem of phasing out purchase tax into value-added tax, and I also want to congratulate his right hon. Friend the Chancellor of the Exchequer on the single rate for the value-added tax. This is a masterpiece of simplicity. Furthermore, I think that my right hon. Friend is absolutely right in the exemptions he has made, because fuel, fares and food are the main things that affect the elderly and the less fortunate.
It will be necessary to go very carefuly through the zero-rating exemptions in the schedule of the White Paper. In particular I should like to see group 7—the health exemptions—gone through because I think that the intention to exempt all health appliances and so on is absolutely right. By the time the Finance Bill becomes an Act, I hope we shall make it clear that things such as hearing aids, surgical boots and all the appliances that are very necessary to some people are exempt from the tax.
I have also noted the point recently made about children's shoes. It concerns me that the cost of children's shoes may rise because of taxation for the first time. I quite see that these could not be exempted from V.A.T., but when my right hon. Friend the Chancellor considers such things as family allowances and, in particular, family income supplement, this should be taken into account, because certain factors are very necessary in the case of poorer children of large families. Anyone who has a large family knows how quickly children grow out of shoes.
I am very glad, too, that the protection for those in the greatest need is nowadays taken care of in Budgets. My right hon. Friend's two Budgets have introduced measures to help the pensioners, the severely disabled and others. Though it may not be central to the Budget strategy, it is right that at present, in one of the most important announcements of Government policy, we should announce any measures that can be introduced to help the less fortunate. I disagree with hon. Members on the Opposition side who say that this is a one-sided Budget, that it is divisive and that it is not seeking to help those who are most in need. My right hon. Friend the Chancellor has gone out of his way to single out groups of people who are in need of help and to increase the help to them. The Budget is particularly good in respect of the increase in all the social insurance benefits, not only the pension increase but also the increase for war pensioners and the severely disabled.
As I have mentioned in the House previously, the severely disabled war pensioner, particularly from the First World War, who is also receiving an old-age pension is today well done by in this country. A 100 per cent. disabled war pensioner from the First World War will now be receiving about £22 or £23 a week. If he is exceptionally severely disabled and is receiving other allowances, he will be getting probably over £30, some of which is not taxed. That is a sign of a civilised country and a civilised way of treating the very deserving few who remain in this category.
The most exciting and interesting Budget announcement was the proposal to look seriously into the tax credit system and the system of a possible negative income tax. This will help to eliminate some of the injustices and oddities that we have had in the past. Even in this Budget we are unable to help those on very low incomes who are not paying tax. Under the new system, however, which I hope will be introduced soon, we shall be able to include those in a Budget of this kind.
I congratulate my right hon. Friend on his aim to make our taxation as simple as possible to understand. Ordinary people want to be able to understand why they are paying taxes and the way they are paying them. That is what my right hon. Friend has set out to do, and he deserves the gratitude of many thousands of people.
Mr Joel Barnett (Heywood and Royton)
Normally when there is a maiden speaker during the course of the debate one congratulates him. This time we do not have a maiden speaker; we have one giving what I might call his swansong. I am sure we all listened with great interest to the right hon. Gentleman the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter). Speaking for myself, I have always found his contributions to our debates more than worth while. I have also found that his chairmanship of the Public Accounts Committee made my job on that Committee a most interesting and worth while one. We in the House of Commons will miss his contributions to our debates.
There are a number of things I would like to welcome in this Budget. First of all, I wish to congratulate the Chancellor on his proposals for amalgamating the P.A.Y.E. and social security systems. We welcome the setting up of a Select Committee. I hope that we shall have the Select Committee soon and that a great deal will come out of it.
Equally, I want to pay a warm tribute to the historic statement in the Budget that the Chancellor would be prepared to devalue rather than allow balance of payments or an exchange rate to prevent us proceeding to a more sustained rate of economic growth.
As a Lancashire Member I should also like to say "Thank you" for having now included what was not formerly an intermediate area.
I should like to endorse some of the words of my hon. Friend the Member for Manchester, Ardwick (Mr. Kaufman) and ask the Minister of State to give serious consideration to the important questions which were put to him arising out of what the Chancellor said.
That is about all I am prepared to say by way of welcome to this Budget. I found the Budget devoid of any coherent strategy for the economy. On taxation I believe there is a deliberate and carefully hidden strategy to change the direction of our tax system to benefit those who now have the most capital and income. Then the Chancellor has the audacity to sham surprise that the trade union movement is not prepared to accept his form of incomes policy.
On the question of the economy, with reference to industrial policy—I hope hon. Members will forgive me for describing it as a policy—my right hon. Friend the Member for Bristol, South-East (Mr. Benn) has already exposed the shambles of the Government's industrial policy, and so I will leave it at that.
The monetary policy of this Government is equally in utter confusion. Last year the Chancellor of the Exchequer, to put it mildly, was not at all clear about what the Government's monetary policy was. The Minister of State then proceeded to explain it to us. He explained the difference between a neutral monetary policy and a passive monetary policy. He did not tell us whether the Government were pursuing either a neutral monetary policy or a passive one. He did say it would be a mistake were we to assume that the Government were going to allow a 12 per cent. annual growth of money supply.
Of course, he was perfectly right to tell us that we should not assume that there would be a 12 per cent. growth in money supply. According to paragraph 7 of the Financial Statement, in the calendar year there was a 13 per cent. growth in money supply. As we know, in recent months the growth has been rather higher than that. This year we have had a further clarification by the Chancellor of his money supply policy. Of course, he has always told us that what he will not do with his money supply policy is simply to finance inflation. We must now expect further clarification from the Minister of State.
If the money supply is not to finance inflation, no doubt the Minister of State will tell us precisely what the Government's money supply policy has been doing during the past year and what the Chancellor has in mind for it during the course of the next year. The Chancellor tells us that his main objective is to get a much faster rate of growth and that he will not be deterred by an exchange rate problem.
Perhaps it might well have been best, if the Chancellor will not be deterred by an exchange rate problem and if he would prefer, as I am sure he would, not to have had a consumer-led boom which is what he has produced in the Budget, to have reduced the exchange rate to 2·40 dollars now and brought about what we really need, an export-led boom, or at least a move in that direction. But the Chancellor has also told us that another of his objectives in addition to a sustained rate of growth is that it should be combined with full employment, although I have never actually heard him use the words "full employment". It would be interesting if the Chancellor would tell us whether that is his policy. As far as I can ascertain he has never actually said that his and the Government's policy is one of attaining and sustaining full employment.
The Chancellor said in his Budget speech only that the present high level of unemployment was unacceptable. He has constantly told us that it is unacceptable and intolerable—he has said it throughout the period when unemployment has been rising—but he has never told us that the Government's policy is full employment. I would be very happy to hear him say it.
I certainly think that a much faster rate of sustainable growth is absolutely
vital. It is equally important that it should not grind to a halt. I recall saying precisely this in last year's Budget debates and that I thought the 3 per cent. level of growth was totally inadequate. I have said that over many years in the House. The Minister of State, in referring to my speech last year, said:
If we attempt to expand at a significantly higher rate than we are planning"—
that was at the rate of 3 per cent.—
what we shall do will be to revert very quickly to stop-go economic policies."—[OFFICIAL REPORT, 1st April, 1971; Vol. 814, c. 1810.]
We now apparently have a 5 per cent. level of economic growth and I am happy to see that we are going for it. But this is consumer-led economic growth, directly opposed to everything that the Minister of State said and everything that the Chancellor has said over the years.
Mr Anthony Barber (Altrincham and Sale)
The hon. Member is saying two things. He is saying that we should have altered the exchange rate to 2·40 dollars, and secondly, he thinks it wrong to go for what he calls a consumer-led boom. Is he saying on behalf of the Labour Party that we should devalue the pound and not cut taxation so much? That is the logic of his argument.
Mr Joel Barnett (Heywood and Royton)
I am not saying that at all. I am saying that rather than have a wholly consumer-led boom, which apparently the Chancellor concedes is what he is going for, we could have had in addition some assistance to manufacturing industry by reducing the exchange rate to 2·40 dollars. If the Chancellor disagrees with that, I shall be interested to hear him say so. He has done nothing in the Budget to help manufacturing costs.
As my hon. Friend the Member for Dewsbury (Mr. Ginsburg) said, the Chancellor has increased manufacturing costs to a greater extent than usual by the increased national insurance contributions to be paid by employers. If he wanted to do something about manufacturing costs, he could have changed the proportion or even removed completely the proportion which is to be paid by the employer. But he did not, so there is very little in 1972–73 to help manufacturing costs. Indeed, there is nothing that will make industry more competitive.
There is nothing that gives us confidence about the underlying position about which the Chancellor is constantly speaking. There is nothing that makes us convinced that unemployment three years after the Government came to office will be less than 800,000 or 850,000, regrettably. It is quite a reputation for a Chancellor to have. The right hon. Gentleman boasts a great deal about all the other things he has done, but he cannot deny that three years after he took office that is the sad situation we are likely to be in.
I fear that the reflation in the Budget is nothing like so big as it at first appears, as my hon. Friend the Member for Dewsbury said. We may well have underestimated once again the amount of inflation or, to use the new jargon, the fiscal drag. It may well be that even £1,200 million is not sufficient. Unfortunately, because of the lengthy delay before the Government decided that they were wrong 18 months ago, any reflationary effect of the industrial incentives we heard about yesterday will not take effect during the next 12 months. It does not need the Chancellor to be very far wrong in his calculations—and he has not exactly been right in them up to now—for even the level of 800,000 to 850,000 unemployed to be exceeded 12 months from today. If output rises at the rate of 4 per cent., and growth does not quite achieve the Chancellor's 5 per cent. target—if it achieves only 4 per cent.—unemployment will still be 1 million next year. Even if he gets nearer to his 5 per cent. target there will not be very much of a reduction in that level of unemployment. So when the Chancellor and the Prime Minister get so terribly annoyed when they are accused of creating unemployment, what exactly are they complaining about?
The Chancellor cannot deny that what he has done in the Budget is to ensure that there will be a level of unemployment three years after his taking office of 800,000 to 850,000. I should be delighted if he could tell us that that is not to be the case, that his plan is that it will be rather lower, but we all know that is not so. We all know that that is the best we can hope for in 1973.
So much for the Government's economic policy. I turn briefly to their taxa- tion policy. I believe they have deliberately created a false impression of fairness. We must see this Budget in the context of all their other measures. My hon. Friend the Member for Swansea, East (Mr. McBride) spoke about how the Housing Finance Bill will affect thousands of people in Wales. We must bear in mind the cuts in public expenditure. How miserly the museum charges and abolition of school milk now look in the face of £1,200 million of tax relief! We must also see the Budget in the context of those who have not been helped by it, those who do not pay any tax. What sort of society did the Chancellor think he was creating when he can boast about giving £1 a week to every man and woman at work and 75p for a pensioner, and nothing for those paying no tax at all? This is not to mention those 1 million who cannot find work because of his policies and those of his right hon. Friends.
The main reason why a false impression has been created is the long-term trend of the Chancellor's policies, taking last year's Budget and particularly next year's Budget. Last year I accused the Chancellor of using the unified tax system, which I had been recommending for a number of years, as a cloak with which to hide a move towards a much more unfair tax system. They would not tell us last year what, for example, was to be the slice of investment income to be exempt or what the new scale was to be. Now we have it and now we see how true were our accusations.
The £300 million of tax relief in 1973–74 will go wholly to those earning above £5,000 a year or those with investment income. Those below will pay the 30 per cent. as they pay now. This is where the Chancellor is moving.
Mr Patrick Jenkin (Wanstead and Woodford)
It may surprise the hon. Member to know that although the individual sums are not very big the reduction in the effective rate of earned income from 30·14 per cent. to 30 per cent. represents between £45 million and £50 million. Although the individual benefit is not big, it is quite wrong to say that the whole lot is going to those to whom he has referred.
Mr Joel Barnett (Heywood and Royton)
I do not know why the Financial Secretary should deny that he is moving towards a more regressive income tax. This is precisely what the Government have always said they want to do. Now he tells us it is ·14 per cent. He needs to look at the Financial Statement and observe that the top end of the scale is not ·14 per cent. but £500 a year, give in to the taxpayer. I do not know why Ministers seek to deny their moving in this direction. They have always boasted that this is what they want to do.
This year they want to try to give the impression to the trade union movement that they are being fair and that they have changed; they no longer want to move to an unfair tax system. The figures are there and it will surprise no one that the trade union movement can see through them.
That is the general trend. There is another trend, a trend whereby the Government are reverting to the worst type of Conservative policy, a policy of allowing, indeed encouraging, the tax avoidance industry. I can give one guarantee about unemployment—there will be more people employed this time next year in that industry than there are today because he has given it a great deal of increased scope. There are several examples and my hon. Friend the Member for Islington, South-West (Mr. George Cunningham), referred to one of them—loan interest.
This was referred to by the Secretary of State for the Environment who said, among other things, that this would mean a shift away from old-fashioned management. I am sure the Chancellor does not really believe that is what he has done. He and I and anyone else who knows anything about this knows that the bulk of the £7 million relief given under this heading will go to those who will seek to gain from reverting to those schemes with which I will not bore the House but which have been referred to, the types of insurance policy whereby one can make substantial gains.
Then there is the new corporation tax. Last night the Financial Secretary explained this new tax. I pay my tribute to the great reforming Chancellor we have, but I hope no one is under any illusion that this is a simplification.
Last night my right hon. Friend the Member for Coventry, East (Mr. Crossman) whom I have never thought of as being stupid was here. We had what I am sure the Financial Secretary assumed to be a most lucid explanation of the new corporation tax, but it escaped my right hon. Friend; he could not follow a word of it. I am not surprised, because it is by no means a simplification. Much more important, it will do nothing for the small trading companies for which so many hon. and right hon. Members profess to speak.
The Government have given a great concession to these small companies. Under the new system they will pay corporation tax of 40 per cent. instead of 50 per cent.; in other words, they will pay precisely what they are paying now under the existing tax system.
Mr Joel Barnett (Heywood and Royton)
The Financial Secretary must not be too clever in talking about the four-fifths. He knows that a large number of these small companies pay no tax at all and never did. Whatever profits they have, if any, are allocated as directors' fees. Let the Financial Secretary not come to me with these percentages. These special preferences for small companies mean that they will be in exactly the same position as they are now, and those with profits in excess of £15,000 will be worse off. They will pay the 50 per cent. rather than the existing 40 per cent.
The Financial Secretary may say that they can set off the tax on the dividends against corporation tax, but how many close companies want to pay dividends to their shareholders? They want to plough back their profits for future growth. This is what we are always being told about close companies. The companies with the biggest profits will pay 50 per cent. corporation tax instead of 40 per cent. I am utterly opposed to this change, and not only for this reason. There are many more reasons which we shall come to in our later debates.
It is constantly being said that the Select Committee preferred the imputation system. This was only because the Select Committee was refused the opportunity to consider the existing system. They considered only two bad systems. I would not accept that the Select Committee preferred the new system to the existing one. There is much more about this new corporation tax—this great reform—that can be condemned. There is the idea that distribution encourages growth, whereas all the evidence is the reverse. What about the serious economic consequences to savings and consumption? We all know that dividends much more than capital gains will be consumed.
The Chancellor has reduced the cost of dying provided one lives beyond Budget day. The full relief is £143 million—an enormous amount of relief from what would otherwise in 1972–73 have been a total revenue of £480 million. Some of this will go to the lower end of the scale, and I welcome it, but £68 million will go to people other than those who are exempt for the first £30,000.
I should be surprised if the Chancellor assumes that the bulk of the capital gains exemptions through unit trusts and investment trusts will go to the old widow and the little old man with a few pounds. This will cost £30 million. Some will go to the small saver, but a large share will stick to a small number of sticky fingers that will be waiting just to get hold of these lucrative gains handed to them by the Chancellor.
A brief word about value-added tax. The Chancellor has sacrificed fairness for simplicity. It is true that the yield will not be as big as I personally feared, but one 10 per cent. rate, while eliminating anomalies, creates a much less fair system. For example, there is to be a 10 per cent. V.A.T. rate on clothing. I hope that nobody is under any illusion that that is the same as a 10 per cent. purchase tax rate because it is nothing of the sort. It is very much higher.
Under the new 10 per cent. rate, children's clothing will be taxed at the same rate as a mink coat. Therefore, though we may not have any anomalies, we shall move to a much less fair system. I believe that nobody is under any illusion that it is a simple tax; it is only that it is less complicated.
One has only to think of the problems of a farmer—who is not normally the sort of person who keeps a full double-entry set of books—having to make a repayment claim because of his zero rating. I cannot imagine the Customs and Excise being very keen to make repayments without seeing full records.
Mr Joel Barnett (Heywood and Royton)
Reclaiming S.E.T. was very much easier than reclaiming V.A.T. will be. Equally, one can imagine the problems for a Chinese restaurant owner in making repayment claims and setting off rebate against tax due. Equally, one can imagine the situation with regard to the part exchange of second-hand cars. There are also many items which have not been exempted, and my hon. Friend the Member for Putney (Mr. Hugh Jenkins) referred to the theatre. No doubt there will be many other matters to which we shall be referring when we discuss the Finance Bill.
I hope that the Minister of State will give some clarification on stocks. I would accept that sale or return is a reasonable method, but the short tax holiday either will be so short as to be meaningless, or will be so large a period as to provide not a tax holiday but a tax bonanza for the sort of people who will get their shovels into that sort of period for the relief from purchase tax or any other form of taxation. This will have some serious economic consequences. If stockists are left with the impression that they will be holding large amounts of stock which have been subject to purchase tax, I hope that the Minister of State, before we reach the Finance Bill, will say how those stocks will be handled.
It will have become clear from what I have said that the Budget is to be condemned on economic grounds, if only because the major problem of unemployment will still be very much with us in 12 months' time. It is to be condemned on social grounds because of its misplaced purpose involving the payment of £1,000 million in direct tax relief and nothing for the lower paid. It is to be condemned for pursuing a deliberate tax policy against the interests of the vast majority of the people of this country.
Mr Terence Higgins (Worthing)
From time to time it is the privilege of those speaking from this Dispatch Box to congratulate hon. Members on making their maiden speeches. It is much rarer and much sadder to express appreciation to an hon. Member making his final speech. But I know that the whole House will join the hon. Member for Heywood and Royton (Mr. Joel Barnett), as I do, in expressing regret at the impending departure of my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter). We shall miss his contributions to our debates as much as we enjoyed his final contribution today. His tribute to my right hon. Friend the Chancellor of the Exchequer will be greatly valued, I know.
My right hon. Friend the Member for Kingston-upon-Thames has been a distinguished Financial Secretary, Chief Secretary, Paymaster-General, Minister of Transport, Minister of Pensions and Chairman of our Public Accounts Committee. The House and the country have benefited greatly from his counsels. [Hon. Members: "Hear, hear."] Given the broad scope of my right hon. Friend s Budget Statement, it is not surprising that the debate so far has ranged widely. Some interesting suggestions have been made, for example, by the hon. Member for Dewsbury (Mr. Ginsburg), and the hon. Member for Manchester, Ardwick (Mr. Kaufman) has asked some specific questions. I hope that I shall be excused if I do not provide the answers tonight. I shall certainly bring the hon. Gentleman's points to the attention of my right hon. Friend primarily concerned.
In the time available to me this evening I should like to do two things: first to spell out in more detail our proposals for a value-added tax, and secondly to place the Budget within the overall economic context.
As my right hon. Friend said on Tuesday, our objective has been to design not merely a value-added tax but the best possible form of value-added tax, and I think it is true to say that the reaction since the Budget suggests that we have succeeded in that objective.
There can be no doubt that the publication of the Green Paper and subsequent consultations have been a tremendous help. I should like to pay tribute to the enthusiastic work of the staff in Customs and Excise. They have received more than 700 representations about V.A.T. and have discussed it with more than 300 groups, in some cases on a number of occasions. As a result, we have been able to meet many of the points made.
It may be that it is not in the power of any Chancellor of the Exchequer or any Government to devise a popular tax, although Treasury Ministers naturally regard their offspring with more affection than the public at large. The House will recall that the Chief Secretary in the previous Government—now Lord Diamond—always maintained that S.E.T. would eventually become accepted. He was mistaken. None the less, V.A.T. should prove less unpopular than the S.E.T. and purchase tax which it replaces because of the way in which it is designed; that is, to be simple, to reduce discrimination and to be fair. There is no reason to suppose it will be regressive.
My right hon. Friend stressed in his Budget speech that there will be only one positive rate of V.A.T. In reaching this decision he was conscious of the need both in the interests of the taxpayer and of the Revenue authorities to keep the structure of the tax as simple as possible.
Before the Budget we heard some gloomy forebodings about the intolerable burdens it would place on businesses to have to analyse both their outputs and their inputs between perhaps three or four different rates of V.A.T. Those fears at least have been removed. There will indeed be new records to be kept and new or adapted accounting procedures to be introduced, and we fully realise that that will not be an entirely painless process. But the consultations that have already taken place since last March have suggested many ways in which the administrative inconveniences can be minimised, and Customs and Excise will be continuing to study those problems to keep the requirements as simple as possible.
Much has been said in the Press and elsewhere about the length of time firms will need to adapt computer programming to the requirements of V.A.T. The estimates have varied considerably, but the Confederation of British Industry recently provided us with a consensus of its members about the items of information they would need by the end of this month. I am glad to say that we have been able to provide substantially the whole of that information in the White Paper. The White Paper also points out that Customs and Excise is ready to continue its consultations with trade bodies and to give advice and guidance on any problems. Later in the year Customs and Excise will be making comprehensive literature available explaining what has to be done.
Customs and Excise will need about 6,000 extra staff to administer V.A.T. The precise number is still difficult to give because we do not know until registration takes place exactly how many taxpayers there will be. The price in increased staff is worth paying for a system of indirect taxation that is free from the discriminations and inequities of the structure we have now.
The whole basis of value-added tax is that it is far less discriminatory than selective employment tax or purchase tax. For too long the pattern of consumers' choice and the use of economic resources has been distorted by fiscal discrimination between goods and services based implicitly and often not very consistently on the concept that the man in Whitehall knows best, and that he should say in detail which things should be regarded as luxuries and which should not.
Of course, we will no doubt receive a number of pleas for special treatment. The hon. Member for Putney (Mr. Hugh Jenkins) this afternoon advanced the case of the theatre. The hon. Member for Farnworth (Mr. Roper) suggested a number of possible changes. I will not at this moment anticipate the debates which I imagine we shall have in Committee.
If, as I believe it will, the House accepts the principle of the new tax, there is one fundamental point which acceptance implies. That was recognised by my hon. Friend the Member for Basingstoke (Mr. David Mitchell) in his speech. It is that, with the exception of the main items which my right hon. Friend the Chancellor has decided to relieve of the tax, for reasons which he has given and from which the House will not, I think, dissent, value-added tax is a comprehensive tax. This means that we cannot, having accepted the principle, reasonably at later stages begin to accept this or that Amendment to include or exclude this or that detailed item.
If we were to do so, two things would happen. First, the basic rate of tax would have to be raised above the level suggested by my right hon. Friend, and, secondly, we should soon find ourselves in that wilderness of anomalies and lunatic line-drawing exercises which in purchase tax, largely by accident, and, as far as S.E.T. is concerned, partly by design, have bedevilled our indirect taxation system for so long.
Of course, I would not pretend that V.A.T. will be perfect and entirely free from anomalies. The only way to have avoided that would have been to have made it completely comprehensive with nothing exempt or zero rated. That is not a solution which the House would welcome. Trivialities apart, I think that we can say we will avoid the kind of irritating difficulties in indirect taxation of which my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) has complained for so long.
Mr Hugh Jenkins (Wandsworth Putney)
Does the hon. Gentleman agree that, some exceptions and exemptions having been conceded, this must necessarily mean that such a thing is not excluded in principle and that it is possible, if one puts forward a sufficiently persuasive argument, to persuade him that the exemption should be extended in a particular area? It is also possible that at some stage he might decide to reduce the exemption. Therefore, in principle does he agree that this is not necessarily something which is fixed and done for all time?
Mr Terence Higgins (Worthing)
I have put forward the Government's decision. We believe that we have gone as far as we can. However, it would not be right for me to anticipate debates which may take place in Committee.
Before the details were announced, a great deal of opposition to V.A.T. was expressed on the grounds—
Mr Terence Higgins (Worthing)
If it is on the same point, I have already answered it. I hope that the hon. Gentleman will allow me to continue.
Before the details were announced a great deal of opposition to V.A.T. was expressed on the grounds that it would have an inflationary effect and be harshly regressive.
The present Leader of the Opposition, speaking in the Budget debate last year—I stress last year—expressed these fears with his usual moderation in those words:
Everyone knows—we have seen it recently on the Continent with the enormous price increases following the introduction of the value-added tax—that to introduce it here in 1972 or any other year will mean an inordinaate rise in the cost of living for ordinary families, even with the omission of newspapers and food.
He then went on:
The Chancellor did not say whether value-added tax would apply to rail fares and fuel. If it does, it will increase the cost of living still further. If it does not, it will mean that the amount of revenue which he has to raise to replace the S.E.T. and purchase tax on the narrow coverage of value-added tax will be at totally intolerable and unacceptable rates for the average family."—[Official Report, 30th March, 1971; Vol. 814, c. 1405–6.]
Mr Terence Higgins (Worthing)
I will not give way yet. I want to finish this point.
Following the list of items my right hon. Friend has said will be exempt or zero-rated and the fact that the standard rate will now be 10 per cent., the extent to which the Leader of the Opposition's fears about regressivity were unjustified will now be apparent to the House, as my hon. Friend the Member for Dartford (Mr. Trew) made clear earlier.
Mr Robert Sheldon (Ashton-under-Lyne)
The hon. Gentleman seemed to suggest that there would be no possibility of concessions being made in Committee on the V.A.T. list of exemptions and zero ratings. Did I understand him aright?
Mr Terence Higgins (Worthing)
I made that position perfectly clear. [Hon. Members: "Answer."] I do not wish to detract from what I said. The hon. Gentleman will be able to see from the Official Report of my remarks that I answered the question. I said that we could not anticipate the Committee stage.
Continental experience on prices varies from country to country, contrary to what the Leader of the Opposition said. In Germany there was no problem of price increases. In Denmark prices went up for the simple reason that tax rates were increased. The right hon. Gentleman cannot therefore say that price increases are inevitable. As my right hon. Friend said, the overall effect of the Government's reform of indirect taxation is estimated to reduce prices.
The hon. Member for Heywood and Royton described the tax as unfair. I am not entirely clear what he meant. However, as I say, it is not our view that the tax is regressive. I will elaborate the point by referring to the Budget representations of the Child Poverty Action Group. It asked for adjustment of the coverage of the tax to minimise regressiveness, and this is precisely what has been done. The Group asked us to zero-rate food. Apart from items subject to purchase tax, which is a qualification we have always made, this has been done. It asked that rents should be exempted and the supply of new houses zero-rated. This has been done. It called my right hon. Friend's attention to the fact that fuel was a relatively important item in the expenditure patterns of the less well-off, especially pensioners. Before its memorandum was received he had already appreciated the case for zero-rating fuel. Thus, items of expenditure which constitute a substantial proportion of the expenditure of low income families will be relieved. There are, therefore, no grounds for supposing that the change over to V.A.T. from purchase tax and S.E.T. will be regressive.
Nevertheless, the Leader of the Opposition remains committed to "total and unremitting opposition" to V.A.T. I was interested to hear my hon. Friend the Member for Dartford suggest that the right hon. Gentleman intended to send his hon. Friends into unarmed combat, but I will not comment on that.
The right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) was more cautious yesterday. Only two short paragraphs of his speech referred to V.A.T. I do not believe that any of the criticisms he made are valid, but we shall be happy to pursue these in the Finance Bill debates.
Perhaps I should say a word about tax paid stocks, for having topped and tailed about 1,000 letters to hon. Members about this, I know that the House is interested in the problem. We gave a great deal of thought to all the many suggestions we received over the past year on how best to deal with this problem. I think it is generally accepted that a perfect solution is unattainable. It is not really practicable to require every retailer or unregistered wholesaler to make an accurate assessment of the element of purchase tax in their stocks at close of business on 31st March, 1973. Some may be able to do so but many retailers would simply not know what it was, for example, because they had bought at purchase-tax-inclusive prices.
It has also been suggested to us that if traders were not able to do the calculations required, they would not be able to claim relief, but I think this could reasonably be regarded as unfair. Even if all traders were able to work out the necessary details and do a physical stock-taking, it would certainly be impossible for the Customs and Excise to check all the repayment claims and I doubt very much whether the accountancy profession, though it might be encouraged by the hon. Member for Heywood and Royton, could shoulder the burden either. We therefore discarded any relief schemes based on the levels of actual stocks on 31st March, 1973, because they could not have been controlled adequately.
We therefore came to the conclusion that what was wanted was a simple scheme which could be applied to all traders and one which involved as little additional work as possible at a time when everybody would be occupied with preparing for V.A.T. This is why we decided to adopt the administratively simple solution of a tax-free period, to allow traders an opportunity to dispose of stocks on which purchase tax had been charged and to build up a supply of purchase tax-free stocks for sale after 1st April, 1973. Under this arrangement purchase tax will be removed by order under existing legal powers a short time before V.A.T. comes in. We envisage that sales of taxed stocks in the tax-free period should continue to be at a tax-inclusive price so as to ease the transition. This of course means that the tax-free period cannot be too long lest significant quantities of goods enter consumption tax-free to the detriment of the revenue. We have to hit the right balance in these matters.
Mr David Mitchell (Basingstoke)
Can my hon. Friend indicate whether any limitation will be placed on the drawing of stock during that period or any permitted volume which the retailer is able to move during that period?
Mr Terence Higgins (Worthing)
We shall have to take certain powers but the basic principle is that we should hit a balance so far as the actual length of the period is concerned. The tax-free period will not, however, be suitable for all goods, particularly those with a high unit value and liable to the new top rate of purchase tax. For these categories of goods, which are listed in the White Paper—
Mr Joel Barnett (Heywood and Royton)
The hon. Gentleman will accept that if it is a very short period retailers will be left with substantial stocks and, there will be unavailable duplication of both purchase tax and value-added tax on stocks. Would it not be preferable to take either the average of the last three years stocks or a stock figure based on a number of weeks turn over?
Mr Terence Higgins (Worthing)
I should stress that we have looked at all possible suggestions in tremendous depth and we believe that the solution we have selected is the right one.
As I was saying, the tax-free period will not be suitable for all goods, particularly those with a high unit value and liable to the new top rate of purchase tax. For these we think that traders should be able to use sale or return arrangements so that stocks of these, if unsold when purchase tax ends, will then be liable only to V.A.T.
There is one important advantage of V.A.T. and the 20 per cent. regulator power which has not yet been fully recognised and to which I should like to refer. The coverage of purchase tax is limited. Consequently changes in the rates of purchase tax intended to stimulate or restrict demand in the economy as a whole are concentrated upon a relatively small slice of consumer expenditure. The introduction of V.A.T. will reduce the scale of this problem. The V.A.T. base is almost double that of purchase tax and the combined yield of purchase tax and S.E.T. is being replaced by a V.A.T. rate of only 10 per cent. This is one great advantage of a broadly-based consumption tax: the tax load is spread much more evenly and much more equitably.
Consequently, with the exception of the motor industry, those industries producing goods liable until this Budget at the purchase tax rates of 30 per cent. and 45 per cent. of wholesale value will in future be subject to much lower rates. Furthermore, the percentage change in the V.A.T. rate required for any given change inrevenue is much less than the corresponding change that would have been needed in purchase tax rates. Firms will therefore be able, under V.A.T., to make their future investment plans with far less uncertainty about the future level of tax on their output, and therefore on the level of demand, than was ever possible under purchase tax.
The motor car manufacturers will share to a considerable extent in these advantages. Since purchase tax was introduced in 1940 the rate of tax on cars has varied between 66⅔ per cent. and 25 per cent. of the wholesale value. In addition, until last year, variations in hire-purchase controls were a significant factor in determining the overall level of demand for cars. These, like the tax rates, were changed overnight. This was stop-go with a vengeance.
The Government have taken several steps to improve the situation. The overall effect of the change to value-added tax and the new car tax will be a small further fall in total tax on cars from the reduced level just announced. The value-added tax on cars will, of course, be subject to the regulator power, but it has been decided that the new car tax will not be subject to a regulator power.
No Government can, of course, bind their successors—I think this answers the point raised by the hon. Member for Heywood and Royton—but this decision may be taken as an earnest of this Government's desire to make it easier for the car industry to plan ahead than has been the case in the past. In our view, taken overall, the value-added tax will provide a means of economic management which greatly reduces the risk of dislocating the output of the industries subject to the tax. We believe that it will contribute to bringing about the sustained rate of economic growth that we all wish to see in the years ahead.
This brings me to the overall economic context within which the Budget is framed. One of the interesting features of the debate has been the absence of any widespread criticism of my right hon. Friend's Budget judgment. We have heard very few voices—except, perhaps, that of the hon. Member for Farnworth—expressing the view that the Chancellor should have aimed for growth much greater than 5 per cent. Nor has there been much criticism that he has stimulated the economy too much. This is all the more surprising since, in the period immediately before the Budget, the range of spontaneous advice extended from that of those who wanted tax cuts of £350 million to that of the National Institute, which wanted £2,500 million. This leads me to the conclusion—and the debate has reflected the fact—that my right hon. Friend has, overall, correctly judged the requirements of the situation.
Nevertheless, there have been suggestions, first, that, with the growth path we have set ourselves, we may precipitate the "stop" which has been a feature of previous attempts to get the economy moving at comparable rates, and, secondly, that, by, stimulating demand to the extent that we have, we shall add demand-pull inflation to the cost-push inflation which has bedevilled us over the last two and a half years. I want to deal with both of these suggestions.
The first is the outlook for growth. My right hon. Friend has given as his forecast an estimate that output will grow by about 5 per cent. per annum between the second half of 1971—the latest half year for which we have reliable figures—and the first half of 1973. Without making any long-range predictions of what the economy is capable of, I believe that there are a number of reasons, which my right hon. Friend set out, why the potential for growth extends beyond the immediate 12 months ahead.
Yesterday the right hon. Member for Stechford accused us on this side of the House of intellectual confusion. No doubt after his recent studies of Keynes he is now expert in the intellectual confusions of the past. I had the good fortune to be taught by the late Denis Robertson, who was, of course, Keynes's immediate and indeed, foremost critic. Perhaps I may remind the House of the
final passage in Keynes's General Theory, which I have quoted to the House in a previous Budget debate. It refers, of course, to the effect which "academic scribblers" and their ideas have on those in authority
…not immediately but after a time.
The fact is, of course, that the academic scribbers, be they Keynesians, Friedmanites or Hayekians, are now lagging somewhat behind the ball game. But this does not necessarily imply that there is intellectual confusion on this side of the House.
What is clear, as I suggested in the Budget debate of 1970, is that the old relationship between unemployment and prices has broken down. The hon. Member for Heywood and Royton will recall that occasion. The so-called "Phillips relationship" has altered. That is why it is absurd as well as completely wrong for the right hon. Member for Stechford to accuse us, as he did again yesterday by implication, of deliberately creating unemployment to try to curtail inflation.
This is not and has not been our policy, though it was apparently the policy followed by the last Government, with tax increase after tax increase. But the change in the relationship between unemployment and wages and prices has been asymmetrical. Higher unemployment is not the answer to cast inflation but there is of course still a danger that if one creates excessive demand, one can add demand inflation to cost inflation with disastrous results.
After the Budget statement, in the Press and in this House, the view was expressed by some commentators that we were taking a risk with inflation. Looking at the likely downturn in aggregate demand which my right hon. Friend analysed in his speech, I do not believe that this is so. The measures which my right hon. Friend has taken are designed to achieve sustainable economic growth and not a return to stop-go or go-stop. Moreover they are designed to help in the battle against inflation, which is of paramount importance.
But the right hon. Member for Stechford was, of course, being rather old hat in criticising our demand management. Throughout, we have recognised that in the explosive inflationary situation we inherited, demand manage- ment was not enough and that a freeze or statutory prices and incomes policy of the kind introduced by his Government would have been worse than useless.
What we have done is to combine prudent demand management with a policy of de-escalation of wages and prices. Unemployment has risen not because we have curtailed demand but because of the difficulties of forecasting in a situation where wage claims and settlements have been at an unprecedented level. We under-estimated perhaps, the extent to which inflationary wage claims would shake out labour.
Perhaps at this point I might say that it seems to me the figures quoted by the hon. Member for Birmingham, All Saints (Mr. Brian Walden) last night about inflation were completely misleading. Anyone would think that he thought there was no time lag whatsoever between inflationary wage settlements and price increases, whereas we all know that it was the inflationary trend in wage settlements before the 1970 General Election which led to the subsequent acceleration in price increases. But our policy of encouraging de-escalation in both the public and private sectors has now succeeded in halving the rate of inflation. But we are not complacent. We intend to continue that policy, because it has worked.
In this respect, the pattern of demand is of great importance and this Budget, like my right hon. Friend's previous measures, is specifically designed to assist the process of de-escalation. What we have to do now is to close the gap between increases in productivity and increases in money incomes, both by improving productivity and by reducing inflationary wage settlements. The Budget helps in both these respects.
First, by increasing demand we shall build upon the recent increase in productivity, which has taken place at an unusual stage in the cycle. Productivity now, as expansion accelerates, is likely to go up still more, and this will help to close the gap between productivity and money income increases which is essential.
Second, the massive increase in the income tax threshold will raise take-home pay for income tax payers by £1 a week. We have repeatedly been told it is take-home pay which is relevant as far as wage claims are concerned. Claims ought therefore to be moderated.
Third, the reduction in indirect taxation, particularly purchase tax, will directly affect prices and in time wage increases. It really is nonsense for the right hon. Member for Stechford to assert on television last night that the purchase tax cuts will not help the man in the street. How out of touch can one get? Does he really believe—
Mr Terence Higgins (Worthing)
If I have, I apologise. Perhaps I might make the point that I was going to make, which is still relevant. The cuts in purchase tax will have a considerable effect on the man in the street. It is not only the rich who buy television sets or washing machines, electric or paraffin space heaters, electric irons, light bulbs, radio sets, mirrors, soaps, shampoos, proprietary drugs and medicines. All were previously charged at 33 per cent. and that rate will now be reduced.
Of course, gramophones, records and cosmetics, which are not the prerogative of the rich, will also be substantially reduced. So the purchase tax cuts will, I believe, have an effect on prices. My right hon. Friend's Budget shows prudence and imagination. Combined with our policy of de-escalation it takes a major step forward in our battle against the upward spiral of inflation and in my—