Budget Proposals and Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 20th April 1955.

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Photo of Mr Hugh Gaitskell Mr Hugh Gaitskell , Leeds South 12:00 am, 20th April 1955

I am sorry. I beg the right hon. Gentleman's pardon. They have to be brought into the picture, and they are not exactly encouraging. I concede to the Chancellor his dilemma. As production expands we need to import more raw materials, and the whole question is whether, in the free economy in which he believes, we are going to be able to increase our exports sufficiently to pay for those additional imports. It may be that we can, but there is certainly no certainty about it. I would go so far as to say that in the free economy in which the right hon. Gentleman believes there is a very natural tendency for consumption to increase at the cost of investment and exports, as production rises.

Let us suppose that the Chancellor does not get his increase in exports, or does not get any of the advantages of further favourable terms of trade. What will his policy be then? We know what his policy is. It is under no circumstances to reimpose import controls, but to rely entirely upon what he calls a flexible monetary policy, and what other people call a fierce tug on the reins from time to time. But what does this mean? When one thinks it out, it means that if we get into the position where production is expanding, and we are not exporting enough, the Chancellor, by his Bank Rate policy, deliberately slows down that expansion.

The whole purpose of raising the interest rates is to discourage borrowing—but to discourage borrowing is to discourage firms from placing orders, and the effect of their not placing orders is to damp down production. The sole object of this policy is, ultimately, to reduce imports and perhaps make room for exports. That is a very serious situation. If it develops—as I, personally, think it will quite soon—we shall be faced not only with the danger of a fall in production, but with the danger of unemployment.

There is something else. Suppose that, in these circumstances, productivity continues to increase, as we want it to because our future depends upon it. Suppose that the Chancellor, because of the balance of payments situation, cannot allow any increase in the imports of raw materials. What is the conclusion one must draw? It is that we shall get technological unemployment. That is a very grave danger, because if it developed it would wholly undermine the work of the Productivity Council—excellent work—and the faith that is being built up that people need not worry about unemployment resulting from higher productivity. That is, I am afraid, the logic of the Bank Rate policy.

There are other disadvantages. There is the increase in the interest charge on the Budget, which goes up by £30 million next year. I note, in passing, that whereas the interest charge on the National Debt was £515 million in 1951–52 when we left office, next year it will be £600 million, an increase of £85 million. I will not hesitate to mention what we all know is the very unsatisfactory consequence for local authorities, and I have already mentioned another very awkward circumstance, the increased burden on our own balance of payments, because we have to pay higher interest abroad.

All this places the Chancellor in a very difficult position. He may hope that good fortune will once again come to his assistance. He may hope that the terms of trade will move in our favour. He may believe that by a slight and temporary reduction in stocks he can scrape through. But it is a hope. The situation is dangerous. The Bank Rate may be sufficiently high at the moment to attract funds from overseas and hold the exchange position. I do not doubt that it is doing that, but it will not continue to do that if those who own this money and these funds believe that there are risks about the fundamental situation, and if they are pessimistic about our balance of payments. If that happens, then the new moves to convertibility will make for a far greater rush on the £ than we have ever had before.

The Chancellor is in a dilemma. If he turns the credit screw hard enough to slow down the demand for imports, he damps down production and creates unemployment. If he keeps full employment he risks a balance of payments crisis. If he imposes direct control on the less essential imports he eats a whole mouthful of words. So, in this situation, he asks his right hon. Friend the Prime Minister to have an early General Election.

What else does he do? He comes to the Committee and tells us that he has decided to give away £140 million in tax reliefs. It is very difficult for outsiders who have no access to the detailed estimates of the Treasury to pass a fair judgment on whether or not this or that surplus or deficit is exactly right in any one year. The Chancellor has given us very little help in arriving at any judgment ourselves. He seems every year to give us less and less information in his Budget statement.

He spoke yesterday of the economists' argument being clear, but it seems to me that it was only clear to him because no figures were involved. It is impossible from what he told us to know why he settled on this particular amount or on any give-away at this stage. He did not explain why he had assumed that demand would be slacker and production greater, and there is precious little evidence that these statements are right. He has not told us what kind of export surplus he has in mind.

Is the right hon Gentleman really saying that the state of the country is less inflationary today than it was a year ago when he decided on a "No change" Budget? Above all, how exactly does he reconcile his decision to give away £140 million with his statement in February which preceded the announcement of the rise in the Bank Rate? I can only say that I have my doubts, and I hope that the right hon. Gentleman will forgive my saying that the suspicion crossed my mind that he had lemembered that there would shortly be a General Election. If he wishes to dispel that impression he will be able to do so when he speaks later in the debate.

Suppose that the Chancellor is right. The further question arises how exactly money of this kind and degree, £140 million, is to be used. How should the benefits be distributed? Perhaps, for the moment, we can all agree that the aims must be higher production and fair distribution. We can certainly all agree about the first, but I am not so sure about the second. I propose to examine in the light of those two tests the measures which the Chancellor announced. First, therefore, a word or two about the reduction of Purchase Tax.

I make only one comment. After all the pressure from the cotton industry—natural pressure, because the industry is very anxious about the situation in Lancashire—this concession seems miserably inadequate to meet the situation. I understand that the President of the Board of Trade will be speaking tomorrow and will announce the Government's policy for the cotton industry, and that my right hon. Friend the Member for Huyton (Mr. H. Wilson) will develop our views on this matter further, after the President of the Board of Trade has spoken.

The rest of the concessions are all in the field of Income Tax. We have no objection to, indeed we welcome strongly, the increases in the allowances for single persons, married persons and children, and the otner minor changes which the Chancellor has made. I only wish he had been able to adopt some of the more modest and not expensive proposals which the Royal Commission suggested in its second Report. If we are in order, we shall certainly seek to obtain further concessions in that direction during the passage of the Finance Bill.

There are less favourable things to be said about the change in the standard rate of Income Tax. I thought it rather a mean gesture to confine the reduction in the lower rate of tax to 3d. instead of 6d. The concessions are, of course, set out in the tables in the Financial Statement, and they are clear, but I must make three points about them. There is not the slightest doubt that companies are once again the favourite children of the Chancellor. On his own admission, they receive £40 million—I am told that the actual figure is £45 million—out of the £100 million which these changes in the standard rate and the other rates will cost, if we exclude the allowances.

I believe that this sum of between £40 million and £45 million will go to just over 200,000 companies, of which £21 million, or about half of it, goes to only 300 companies, each of them making £1 million a year profit or more. I am indebted for this information to my hon. Friend the Member for Sowerby (Mr. Houghton). Perhaps the Financial Secretary will correct me if I am wrong, but I understand that this figure of £40 million or £45 million does not include the tax concessions on distributed profits, on dividends, and on interest. Indeed, according to my calculations, that will involve another £20 million, so that between £60 million and £65 million—nearly two-thirds of the total—will go to companies and property owners.

The right hon. Gentleman may claim that all this will help investment. He claimed that in 1953. There never has been any evidence whatever that it did anything of the kind. I have already mentioned the very poor showing of the private sector in investment. We were prepared to endorse and support what the Chancellor did last year in investment allowances to the companies—that was specifically directed to stimulating invest- ment—but merely giving away money to companies in this way brings no security whatever that it will be invested.

The second comment that I would make on these proposals is, of course, that if one looks at the tables it will be seen at a glance that the man who gets his income from investment does better than the man who gets his income from the sweat of his brow. That is true all the way along the line, whether one takes the very low incomes or the very high incomes. Take, for instance, a married man with two children and an income of £600 a year. If his income is all earned he gains £7 16s. 8d. in the year. If his income is all from investment his gain is £12 a year. It is the same throughout, and I shall not weary the Committee with the figures; hon. Members can read them for themselves.

The third comment I have to make is that the larger the income the greater—far greater—the benefits obtained. Once again, the tables show this perfectly clearly. The married man with two children earning £600 a year—and I take only earned income now—benefits by £7 16s. 8d. a year, roughly 3s. a week. The man with £1,000 a year benefits by just over £16—an increase of about 6s. a week. The man with £1,500 a year benefits by £28 a year—10s. a week or just over. If one takes a man with £5,000 a year the benefit is £112 a year. That is well over £2 a week. A man with £10,000 a year receives a benefit of £237—a clear gain of nearly £5 a week.

I know that hon. Gentleman opposite think that that is perfectly natural. They say, "After all, you are reducing taxation. The rich pay more in taxes; they should get greater benefits." This is the difference between them and us. The whole assumption on which a Budget of this kind is produced is to get back to the palmy days when the rich were taxed much less heavily, whereas we in that situation would ask ourselves, "If we have money to give away where can we best relieve hardship?"

This matter cannot be judged, however, without taking into account the background of the last few years. It must be looked at in the light of the changes in the way in which wealth and income have been shared out over the last three years. We have heard a good deal about higher consumption. Where has it gone? We know where the big increases have gone so far as commodities are concerned. The figures are in the Economic Survey. By far the largest increase this year has again been in motor cars; an increase of 19 per cent. It was 27 per cent. last year. The second big increase is in household goods; 10 per cent. as compared with the average of 4 per cent.

But, if I may say so, last year's figures of the incomes of different sections of the community tell the story even more clearly. It was a period of rising prices. I think I am right in saying that there was a rise in the cost of living of 4 or 5 per cent. during the year.