Clause 6. — (Reduction of Purchase Tax on Certain Household Goods.)

Part of Orders of the Day — Finance Bill – in the House of Commons at 12:00 am on 28th May 1957.

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Photo of Mr Harold Wilson Mr Harold Wilson , Huyton 12:00 am, 28th May 1957

The hon. Member is obsessed by this idea. I hope he will follow me when I sit down and give the Committee the benefit of his views, because we should like to hear them in a considered and orderly manner. I must refer also to the various speeches made about the particular items which enter into Clause 6 made by the then Economic Secretary, now Parliamentary Secretary to the Ministry of Education. He had a most sophisticated form of argument. The Lord Privy Seal said, "I must do it because the £ is in danger and if I do not put up the tax on pot scourers, coal sifters and the like, the little gnomes of Zurich will start speculating against the £. Once I do that confidence will be restored and the £ will be saved." That was his argument. Then we heard from the Financial Secretary, now the Minister of Housing and Local Government, who kept telling us that there would be a yawning gap in the system of taxation if the Government did not tax this, that and the other item.

As I have said, the Economic Secretary was much more sophisticated. I think that it was his enunciation of a new economic principle which caused me to christen it "Boyle's law" about which we have not heard quite so much from the Chancellor recently. I want to quote something that we heard from the Economic Secretary. He said: I want to say some words about the effect of Purchase Tax on demand and the effect of Purchase Tax in combating inflation, because these are points which have been frequently raised …First of all …I do not think that many hon. Members will seriously dispute that there are certain goads in the higher ranges of Purchase Tax where increased tax will result in some falling off of demand"— He thought that it might deter the demand a little and that it would expand our exports and hold back our imports. At the same time, he did not dispute that it covered a very wide range of goods, mainly items in the class we are discussing— for which the demand will not be greatly affected either way. He did not expect that there would be any reduction in the demand for these household essential goods because people would have to buy them. If one has a baby one has to buy a baby's bath; and, in relation to households, that applies to brooms, brushes and saucepans and all the other things that I have mentioned. What he said—I will not quote all his speech, but the Committee will remember the burden of his argument—was this: that if these people have to buy these essentials and pay a little more for them by reason of an increase in Purchase Tax the result will be the siphoning off of a certain amount of purchasing power which would in itself be disinflationary. We heard that argument at least a hundred times during that time in the Finance Bill debates.

We did riot agree with him. We said, "On this argument you should tax bread". It was a dangerous thing to say. The next Chancellor—the one between the Lord Privy Seal and the present Chancellor—took us at our word and removed the bread subsidy. That was, of course, the full implementation of "Boyle's law", namely, that if one taxes an essential or removes the subsidy on an essential that will somehow cream off money from the people who have too much money to spend, namely the working class, which was the basis of his argument. That having been done, they will have less money to spend on things such as shirts and that, in the first place, will reduce our import bill for cotton and, secondly, increase our export of shirts, notwithstanding the fact that we could not export shirts anyway and that our textile exports are lower than at any time since 1840.

That was the sort of argument which was put up at that time. The Economic Secretary said: I should like to say a word about our balance of payments and to point out to hon. Members that one must not only think in terms of exports when considering that balance. Not only will the curtailment of consumer demand help our exports—and that is obvious—hut it will also mean that our imports bill will not be so great; and let us remember that the imports bill is one of the most important problems facing our economy at present."— [OFFICIAL REPORT, 15th November. 1955; Vol. 546, c. 351–2.] Are these not still enormous problems facing the economy? I am not saying that the Chancellor was wrong by any means to reduce this tax. I never accepted the argument—none of us did—of the present Lord Privy Seal and the then Economic Secretary.

We said that if prices were forced up and Purchase Tax increased one of the first results would be more demands for increased wages which would, of course, increase the inflationary pressure. The whole of last year we had this schizophrenic policy of the Government, with half the Ministers saying, "Let us have Boyle's law' and put up prices" in order to siphon off money, and the other half talking about the plateau and the stabilisation of prices, and saying that we must not put up railways rates or the prices of coal, gas and electricity. Then we had the then Chancellor, in alternative speeches, enunciating first the one and then the other. I will not go further into that, although I am tempted to do so.

One result of this policy of forcing up prices by removing subsidies and increasing Purchase Tax on essential goods was the unanimous decision by the T.U.C. last September to end wage restraint, which was a most serious thing for any Government to have to contemplate. The responsibility, however, lay with successive Chancellors in their cost of living policy.

I could—but I will not—quote at length the remarks of the then Economic Secretary bearing on this point, but to hon. Members opposite, who have shown such great interest in these debates on Purchase Tax this evening, I commend the speech of the then Economic Secretary on this question on 15th November, 1955. It would be right also to quote what he said in a subsequent debate on 23rd November. The hon. Gentleman was quite consistent—I will say that for him. He said: This Budget is an honest attempt by the Government to deal with the question of inflation, because we want to secure our position in world markets. If we fail to deal with it, then it will be precisely the poorest people who will suffer first. I do not deny that it is not easy to establish a direct connection between the tax on these particular items and our export trade. I do not dispute that at all, but the Amendment which we arc now discussing is related to the general Government policy of retraining demand over the whole field. We believe that restraint of demand is essential if we are to have a secure surplus in our balance of payments."—[OFFICIAL REPORT, 23rd November, 1955; Vol. 546, c. 1499] That was the then Economic Secretary to the Treasury, who was still in Her Majesty's Government. He was out for a short time later, but he is back again with the full confidence of the Prime Minister. Those were the views that he was expressing at that time.

Does the Chancellor believe that the Government were then wrong, or does he believe that circumstances have improved so much that those arguments no longer apply? Does he believe, for example, that our balance of payments problem is now, if not solved, so far on the road to solution that he does not need to reinforce our attack on the balance of payments problem by the kind of methods used by the Lord Privy Seal in that autumn Budget? The Chancellor obviously cannot be very happy about our gold and dollar reserves, which fell by one-quarter in 1955, as the Prime Minister reminded us, and then fell by one-third in 1956, as the Chancellor has not reminded us, under his predecessor.

Obviously, the balance of payments situation is still serious. I think that the Government's borrowing this year has been sufficient to avoid a serious balance of payments crisis this year, but surely the Government will agree—indeed, the Chancellor spoke in these terms in the Budget debat—that the situation is still such that we cannot afford to relax in any measures that are needed to strengthen our balance of payments surplus.

I think that the Chancellor was right to reduce this Purchase Tax. I wish he had gone further. I think that the Lord Privy Seal was wrong both to increase the rate of Purchase Tax on the lowest group and also wrong to widen the coverage of Purchase Tax by bringing in those items from which Purchase Tax had been taken off by my right hon. Friends in their Budgets between 1947 and 1951. If, however, the Chancellor is—as I say, rightly—reversing the policy of the Lord Privy Seal, I hope that on some subsequent occasion—he could not do it tonight, because it would be out of order—he will tell us what is his policy for countering inflation.

The day after the Budget, I described it as an assignment with inflation. I still believe that that warning will prove to have been right. Earlier this year, there was a certain element of disinflation in the system due to a whole number of factors—partly the effects of Suez and certainly the effects of the credit squeeze. There were many who said that a measure of reflation was needed in the Budget.

The Clause is a partially reflationary measure, but just before the Budget, of course, we had the new trend of affairs in the industrial field, with the wages claims. Since the Budget, we have had all the figures showing that investment, which we thought was being rather restricted and reduced, is booming ahead as fast as ever. Of course, the real reason why the Budget is inflationary and why the Clause is relevant to all this is that the more prices rise, the greater the continuance of inflation, the greater will be the right hon. Gentleman's Budget surplus.

9.15 p.m.

I am prepared to accept from the right hon. Gentleman that this Clause is an honest attempt to bring down the cost of living. If so, he ought to have gone a lot further. He ought to have accepted the Amendments moved with so much eloquence today. This half measure, I am afraid, does not make a substantial cut in the cost of living. What is the effect on the cost of living index? One-third or one-quarter of a point at most. At the same time, it gives the whole country the idea, if it did not have it already, that the Government just do not know what they are doing in the matter of their disinflationary policy, for first, we were told that the present Lord Privy Seal's measures were necessary; then they were continued by the present Prime Minister; and now the present Chancellor begins to reverse them, without substituting any new anti-inflationary ones in their place.

The last thing I want to say upon this matter relates to something touched upon by a number of hon. Members, not least by the Chancellor himself. It has been pointed out that we now have seven rates of Purchase Tax. We seem to be as far from simplification, certainly unification, as we have ever been, if not further. I do not think there is any doubt that the Lord Privy Seal, if he had lasted long enough as Chancellor, would have introduced a sales tax, a single tax covering the whole range of the Purchase Tax, and probably on a much wider basis even than the one which he bequeathed to his successor. I think that he would probably have extended it to consumer services, and possibly to soft drinks and commodities of that kind.

We warned him against that kind of policy. We warned him against a sales tax; but he did say this: I make bold to suggest that tax critics and tax experts in the future will not be ungrateful to me for the singularly disagreeable task I have undertaken in broadening the scope of this tax."—[OFFICIAL REPORT. 28th November, 1955; Vol. 546, c. 2062] He went on to hint at further simplification, which the whole country took to mean a unified sales tax.

I do not know whether the Chancellor is grateful to the Lord Privy Seal or not. I do not know whether he has thrown him over, or what the explanation is, but he has certainly not moved towards a sales tax. He has moved further away from it than any Chancellor who has preceded him. I hope that this means that the Government have now resolutely decided that we shall not have a single sales tax put equally upon the essentials of life such as household articles, on the one hand, and upon purely luxury articles, on the other. I hope that the right hon. Gentleman is not even considering it.

While we all regret that he has complicated his tax schedules so greatly by the system of seven rates of Purchase Tax, nevertheless if this means that he has finally rejected, for as long as he is Chancellor, the dangerous proposal with which the Lord Privy Seal was flirting, we congratulate him once again on that, and we say to him that at the earliest opportunity he must—he can do this by Order—complete the job which he has started with this Clause, and remove from the range of Purchase Tax the household essentials which were the victims of the autumn Budget of 1955.