Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 16 April 1964.

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Photo of Dr Jeremy Bray Dr Jeremy Bray , Middlesbrough West 12:00, 16 April 1964

My hon. Friend the Member for Blyth (Mr. Milne) has referred to one great disappointment in the Budget which I share, coming from a neighbouring constituency in the North-East, and that is the failure of the Budget to do anything constructive about bringing into use the under-employed resources of this country, mainly in the areas of high unemployment.

I propose to talk about the other great disappointment, and that is the failure of the Chancellor to bring the country any nearer to the creation of a satisfactory incomes policy. The basis of an incomes policy must be a sense of reasonableness in the settlement of wages, prices and profits. We have not got this reasonableness today, thanks to the kind of action which the Government themselves took in the pay pause. The spectacle of an Attorney-General arguing in court that the word of the Treasury on a cost of living escalation clause is not binding because it is not a contract and could, therefore, be broken by a Tory Chancellor of the Exchequer, has, plainly, undermined the faith of wage-earners in any incomes policy devised by this Government.

But we shall need more than just an atmosphere of good will and reasonableness. We shall need the regulators of profits, prices and incomes to which the Chancellor could have referred if not in actual proposals in his Budget at least in suggestions of subjects for study which he was so profuse in rejecting in his speech. We need these regulators, first, because accidents will happen. There will be times when demand is likely to exceed supply and £100 million will have to be taken out of the economy, as the Chancellor has had to do this year, or, in other circumstances, will have to be put on. Also, if there is a visible check on the development of prices, profits and incomes, people are likely to be more reasonable in the voluntary settlements which they reach during the ordinary course of negotiation and business.

As the Federation of British Industries pointed out in its Press statement in reply to the Chancellor's proposals to the N.E.D.C., it is no use having regulators unless one has some idea what one is aiming at, some idea of the kind of income distribution or wealth distribution which one is seeking. In its statement, the F.B.I. rejected any idea of a profits regulator because, of course, it wants to see higher profits, and that is fair enough.

We on this side of the Committee would like to raise earnings as a whole, particularly the earnings of lower-paid workers and people who are living on small fixed income, often in retirement on a pension. But it is not entirely clear what the Government want to do. Do they want to raise the higher incomes more, or do they want to raise the lower incomes more? Do they want to skew the distribution of wealth so that there is an even greater concentration of wealth than there is today, or do they want a more even distribution of wealth? It is not a all clear. They have never said what their broad objectives are in the distribution of incomes.

Naturally, therefore, the F.B.I. does not quite know what to expect from the Government, and it is extremely cagey about any question of a profits regulator. However, with the aims which we have on this side of the Committee which, I think, are quite clear—a greater evenness in the distribution of both incomes and wealth—the way in which we would use them and the kind of regulators we need is a great deal clearer.

What regulators are appropriate? Obviously, we have to start with the most privileged sector of the community, the richest people, so we need a profits regulator, a variable Profits Tax, or the income equalisation tax to which my hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) referred yesterday. The Financial Secretary is not here, but perhaps the Chancellor would like to explain why there is a difficulty about the effect of a variable Profits Tax on dividends going to people with small incomes. When people with small incomes get dividends from the few shares which they may own, they have to claim back from the Inland Revenue the Income Tax which has been paid by the companies from which they draw their dividends. Would it not be very easy and cause no administrative complications to arrange for them to draw back at the same time any increase in the Profits Tax levied in addition to the standard rate of Income Tax? Would the Chancellor of the Exchequer deal with this point now, or perhaps later? Since he does not do so, this seems to be no more than an excuse for the rejection, perhaps only for the time being, of a variable Profits Tax. But as the F.B.I. points out, profits are only one-eighth of national income and we cannot possibly construct an incomes policy solely on the regulation of profits. We must look at the rest.

Of the £25,000 million national income, the £3,000 million of rents, dividends and interests can be dealt with. There is another £2,000 million in National Insurance benefits and other payments from the State which must on no account be touched or involved in an incomes regulator applied by the Government. It would be utterly unjust to impose on the poorest sections of the community, who do not exercise any bargaining power at all, the brunt of an incomes policy.

Of the remaining £20,000 million, only £5,000 million goes to people earning less than £16 a week. Only a quarter of the earned income goes to people getting less than the average income and three-quarters goes to people getting more. This is a quite surprising fact, but hon. Members can check it for themselves. Thirteen million out of the 22 million people paying tax get less than £16 a week. It is, therefore, the remaining £15,000 million of earned income which must bear the brunt of that part of an incomes policy which must inevitably fall on earned income as distinct from profits. The three-fifths of national income which goes to the higher wage earners must grow, but it must not grow faster than the production out of which it is paid and on which it is spent.

How, then, is this to be done? How is the growth of the higher earned incomes to be kept in a reasonable balance? Indirect taxes act quickly. This is why the Chancellor of the Exchequer had to push up the tax on tobacco and alcohol. They are an unsatisfactory regulator because they raise the cost of living directly. It is interesting that when Mr. Heathcoat Amory wanted to give concessions which would have the biggest possible effect on the cost of living he knocked 2d. off a pint of beer. The Chancellor has put 1d. on a pint of beer, thus putting the greatest possible pressure on the cost of living, by the changes which he has made in indirect taxation.

In the end, increases of indirect taxation also increase costs, by forcing up the wages spiral. We should, therefore, look elsewhere. The enormous benefit which we would gain from a sound incomes policy should encourage us to think in a radical way about the reorganisation of the taxation system, a reorganisation which could well be as fundamental as that at the time of the introduction of P.A.Y.E. If total incomes rise too much, we must find a way of reducing them by the appropriate very small amount.

Variable employees' contributions to National Insurance have been suggested as one method, but this idea seems to be unacceptable because, inevitably, it will fall most heavily on the lowest-paid worker. Even if it is on the variable element of National Insurance, and this would be administratively complicated, it would still work only on the lower incomes up to the £25 or £40 a week limit, whichever is set under the super-annuation scheme. Variable employers' contributions would have no immediate effect on incomes. The only immediate effect they have is to raise costs and force up the inflationary spiral, which is the last thing one wants to do.

One seems to be driven back on a method of finding a quick adjustment in the higher rates of Income Tax, leaving incomes less than £16 a week or thereabouts entirely unaffected, by tackling the £15,000 million of higher earned income.

The Chancellor's £100 million nip on the economy would be met by an average increase of 4s. a week in the tax payments of those in the higher earning income bracket. It is not a great deal. At present, it is spread over the pensioners, the lower incomes as well as the higher ones in a most unjust way. The immediate reaction to this is that it is administratively complicated to have short-term variations in the P.A.Y.E. rate. To suggest this is to be entirely behind the times. One could produce a P.A.Y.E. table in 10 minutes on a computer. One could publish the month's P.A.Y.E. table in the news- papers and thereby get it out to all tax offices and employers overnight. There would not be any administrative difficulties in having a highly flexible, even month by month, variation if necessary in the P.A.Y.E. rates for higher incomes.

This would, of course, affect only the monthly and weekly assessments, but annual assessments would in any case pay the same total rate in the end as the weekly and monthly ones. Their effect on the economy is cushioned by the savings of the higher income groups. I agree that one would not achieve much by short-term arrangements at the highest rates of tax. It is the medium rates of P.A.Y.E. which are important in this connection.

This seems to me the only logical way of arriving at an incomes policy. But if incomes are forced up, the costs of industry generally are forced up and there must be found some way of reducing these in turn. In this connection, we are grateful for the work done by the Richardson Committee. It produced an interesting Report on the value-added tax. It is a pity that its terms of reference did not enable it to consider the usefulness of such a tax not only in relation to exports, or as a replacement for Profits Tax or Purchase Tax, but its usefulness as an instrument in incomes policy. The Richardson Committee, reporting the opinion of all its witnesses, stated that Liability to a value-added tax would be regarded as a charge or tax and businesses would aim to recover this cost in prices. That was a very good reason for not having a value-added tax from many points of view.

Taking the converse of that argument, presumably a reduction in a value-added tax, if it would not reduce prices, would at least offset increases in other costs and, if nothing else, would keep prices stable. If it did not, and if there was a reduction in a value-added tax and manufacturers took advantage of it to make increased profits, then an incomes policy would take off that increase in the variable Profits Tax.

This would, therefore, seem to be not only an effective but quick acting method of influencing prices right across the whole of industry. This shows that three types of regulators are needed; on profits by a variable Profits Tax, on higher incomes by a new approach to P.A.Y.E., and some kind of movement towards having a direct influence on prices. We need this kind of thinking in the Treasury. Obviously one cannot, from the figures available outside Government circles, say whether or not these are completely sensible proposals. For this reason, I would like the Chancellor to have said whether thought is being directed to proposals of this kind.

Whether the Chancellor was inhibited by tactical reasons in relation to an incomes policy, not having the right atmosphere in which to put such proposals, or whether he had run out of ideas, it is because the country has got the feeling that he has reached the end of the road that his Budget proposals have been met with no more enthusiasm in the country as a whole than they have been on this side of the Committee.