Orders of the Day — Clause 15. — (Continuation of Powers Under S. 9 of Finance Act 1961.)

– in the House of Commons at 12:00 am on 16th June 1966.

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Question proposed, That the Clause stand part of the Bill.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

I do not think that it can be disputed that the Clause which we are now being asked to approve is one of very great importance. Its object is to renew the power which the Chancellor of the Exchequer has, to alter the main Customs and Excise duties by up to 10 per cent., by Order subject to the approval of this House within 21 days. He is allowed to do this provided we approve this Clause, if it appears to the Treasury that it is expedient to do so, with a view to regulating the balance between demand and resources in the United Kingdom.

The importance of the Clause is illustrated if we consider the relevant duties which are covered. These can be divided into five blocks. Their estimated yield between 1966 and 1967 on alcohol is about £646 million, on tobacco £1,030 million, on oil—including petrol—£830 million, on Purchase Tax £670 million, and on other duties about £20 million, making a grand total of £3,200 million.

The Chancellor is being given power to vary these duties up or down by 10 per cent. This is clearly a very considerable power indeed. In fact, the Prime Minister, in speaking in a similar debate on a previous Finance Bill, said that it was one of the most important powers which had ever been given to a Chancellor of the Exchequer in peacetime.

In this context it is very important that before the Committee approves the Clause it should look at the question in the light of what the economic situation is likely to be, because we should grant this power only if we consider it justified in the light of what is likely to happen both to the level of demand and resources in the United Kingdom. The Committee, as the hour of midnight approaches and the passions aroused earlier in connection with Clauses on gaming and gambling dwindles, should consider the question as far as possible in an analytical manner.

I am delighted that the Chancellor is to reply to the debate. We should be glad if this gives him an opportunity to expand on the Budget judgment which he made and the explanation of it that he gave, to some extent, in the Second Reading debate of this Bill. This is particularly so because the National Institute of Economic and Social Research, in its quarterly review, said, in commenting on the Chancellor's Budget: We welcome the demotion of the Budget itself from its pride of place. What is unfortunate is the simultaneous demotion of the Budget speech. I hope, therefore, that in considering this Clause this evening we shall have an opportunity of examining the context in which these broad and important powers may be exercised.

The Chancellor is asking us to renew these powers to control demand in relation to resources, but what will he do to achieve a balance? The original Act states in terms the balance between demand and resources, but it is possible to interpret this expression in a number of different ways—in particular what balance is to be sought between the level of unemployment on the one hand and the degree of price stability on the other? It is relevant to ask the Chancellor to spell out whether he intends to use these powers to achieve a high level of employment combined with price stability, or whether his intention is that which was spelt out in the Second Reading debate, when it appeared to us that he was coming much closer to the definition of "full employment" originally given by Lord Beveridge, to the effect that there should be more jobs than men to fill them.

We should ask whether this is not a definition of over-full employment, and whether the statement which the Chancellor made in his Budget speech did not imply that in relation to the objectives which had been pursued by successive Chancellors since the war the achievement of full employment, price stability and a rapid rate of economic growth, the emphasis had not been changing. The Chancellor appears to be placing far less emphasis than before on the need to control the rise in the cost of living and inflation. Indeed, in the words he used there was no explicit emphasis on this at all.

We should not agree to this Clause unless we are clear that it will be used to achieve the original set of objectives or the other set—which the Chancellor referred to in his Budget speech—with this considerable difference in emphasis. In the Second Reading debate the Chancellor said: We are constantly trying to secure improving trade balance against a background of full employment. Full employment is the most difficult economic policy to follow, yet we are following it, adjusting our measures in order to maintain it ". And he went on to say: There is also the consequence that demands for increased wages are readily conceded in conditions of full employment."—[OFFICIAL REPORT, 25th May, 1966; Vol. 729, c. 644.] It seems to me that he meant increased wages which are not justified by productivity. He is using the expression "full employment" when he means "over-full employment."

The first question is: will the Chancellor give us a clear statement of his intention in this matter? Has he deliberately placed less emphasis on the need to restrain inflation, and how does he regard the powers that he is asking for within this context? As my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said earlier in the Session, there is a real need to redefine what we mean by full employment. Until this is done, we want to be assured that these powers will in no way be misused to achieve objectives which the Opposition would perhaps feel are not the right objectives for the country.

A question which immediately follows from the point that I have just made is whether the Chancellor is intending to use the regulator as a means of implementing the incomes policy. Is the regulator a means whereby the incomes policy may be more readily enforced? Again, it is relevant to ask the Chancellor what his objectives are. Is he hoping to secure achievement of the norm of 3 to 3½ per cent. which the First Secretary has pronounced as the increase which should take place in average earnings? If so, the time has come when we should ask him whether the norm ought to be adjusted in a downward direction.

The norm was originally formulated on a basis of the figures set out in the National Plan, and it was suggested that a 3 to 3½ per cent. norm might be reasonable on the basis of a 3·8 per cent. per year increase in production over the five-year period. But in view of what has actually happened to output over the last eighteen months, and of the forecast which the National Institute is making of what is likely to happen in output over the next year, should we not ask the Chancellor whether he should revise his objective, and, if he is to use the regulator, use it to achieve a norm of 1½ to 2½ per cent. rather than the one which, according to present Government policy, has in mind? This is particularly important in the context of a seamen's strike, where we find ourselves in a situation where it is being suggested that a 3 to 3½ per cent. norm would not be inflationary.

The next matter that we ought to consider is that the need for the regulator is fundamentally dependent on what the Chancellor's expectations are. It is because there is an element of uncertainty in economic prediction that the Chancellor is asking for these extra powers. If there were no uncertainty he would not need to have the additional powers which he is asking the House to approve. This brings us to the question of his Budget judgment. Speaking in a similar debate last year, my hon. Friend the Member for Eastleigh (Mr. David Price) stressed the fact that the regulator might be needed because we had in controlling the economy very inadequate information on actual statistics.

It may be recalled that the former right hon. Member for Bromley, Mr. Harold Macmillan, expressed much the same view when he once said that we were constantly looking up figures in last year's Bradshaw. The time has come for us to ask whether the Chancellor should not make a far more explicit statement of what his expectations are about the economy in the forthcoming year or 18 months than he does at present. The First Secretary has no hesitation in doing this kind of thing for five years ahead. While we appreciate that it is very difficult for the Chancellor to make an explicit statement of, for example, what is likely to happen to wage rates, because corresponding claims will automatically take place, there is surely a case for spelling out in greater detail the Budget judgment which he outlined in his speech on Budget day.

This brings us to the vitally important question of timing. It is not merely a question of not using last year's Bradshaw, but of having next year's timetable. In this context it is very important that we should consider the implications of the regulator, because it is concerned with adjusting the timing during the year when fluctuations in activity take place in successive months. As I say, it is very important that we should try to pin down the Chancellor's expectations on timing.

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In this regard, we had a quite remarkable statement during the right hon. Gentleman's Budget speech. Having said that there were a number of alternative ways in which he might raise revenue, the Chancellor said: The Purchase Tax has been left untouched for some time. A rise in the 25 per cent. rate to 33+ per cent. would bring in about £110 million, and I can get nearly another £100 million from increasing the 10 per cent. rate to 15 per cent. Likewise, an increase of 6d. on the standard rate of Income Tax would bring in over £120 million in a full year. These are considerable sums…. My judgment is that any two of the three possibilities I have mentioned would be necessary."—[OFFICIAL REPORT, 3rd May, 1966; Vol. 728, c. 1452.] The right hon. Gentleman's judgment was that he would need to raise between £210 million and £230 million to fulfil his objectives as set out in the Budget speech, but the extraordinary thing is that he went on to say that he would introduce a Selective Employment Tax instead of either of the two measures which he might otherwise have selected. It is true that in a full year the Selective Employment Tax may yield much the same revenue as the two alternatives which the Chancellor has rejected, but the fact of the matter is that the timing of these measures would have been quite different. If the Chancellor selected either of the alternative combinations which he suggested in his Budget speech he deemed necessary, they would have begun to bring in revenue immediately, whereas the Selective Employment Tax will not begin to bring in revenue until the autumn.

Thus, the real equivalent to the measures which the Chancellor said he considered necessary, if we look at the question of timing as well as at the question of yield, would have been to put the regulator on to bring in the same amount of revenue between now and the autumn; then impose the Selective Employment Tax, and then presumably to use the regulator again in the spring of next year to compensate for the fact that a certain amount of the Selective Employment Tax was being reimbursed. This would have been the real equivalent of the measures he rejected, and in view of this I hope that the Chancellor will tell us how he sees the timing of the various changes in the variables in the economy over the next year or so.

The Chancellor could, alternatively, turn round and say quite simply that the timing of the Selective Employment Tax is preferable to either of the two other alternatives which he suggested might be considered. If he does this, before we approve the Clause dealing with the regulator, we have to consider how the economy is likely to develop over the next few months, and in what way we are going to find the demand on the resources of the economy developing during that time. I should like to touch briefly on this because we can only consider the need for these regulatory powers if we consider also what changes are likely to take place in the forthcoming months.

The Chancellor, in his Budget speech, gave us a very good indication of the situation between January and March of this year. He said that consumer expenditure had gone up somewhat in anticipation of the Budget, particularly with regard to consumer durables, and so on. He laid rather less stress, indeed none at all, on the fact which the National Institute mentions, that there had been a significant increase in personal money incomes.

With regard to investment, the right hon. Gentleman said that industrial investment had been somewhat up, other investment down, and on balance it had probably gone up very slightly over that quarterly period, and that as far as the Government expenditure was concerned the July deferment had had some effect, but not yet the full effect.

The result was that we had a situation where the level of demand, on balance, was very high. Indeed, as I have suggested, there was over-full employment, but in the first quarter of this year there was probably going to be some slight rise. We also had a situation, I suggest, where there was some squeeze on profits, which did not favour investment, but employers were still hanging on to the labour they had and were not economising in it or to resist wage claims.

In the next quarter, between April and June of this year, it appears that the Chancellor anticipates a lull in consumer expenditure because of the aftereffects of the Budget anticipation. This is confirmed by other authorities. Investment will be pretty steady and Government expenditure will fall somewhat because of the full effects of the July deferment measures.

This is a stable sort of situation and the Chancellor's taxation changes will have very little immediate impact—probably about £60 million, which might offset the likely fall in the surplus expected anyway in this period.

From July to September, the Chancellor expects private consumption to pick up again, private investment to be steady and current spending by the Government to be rising in real terms but at the reduced rate, which is reflected in the year's Estimates. On balance, everything seems to be going along steadily: again the change in taxation does not seem to be very great.

At the moment the Chancellor has not given us a clear indication of what he expects will happen to consumption investment, Government spending and all the usual Keynesian variables between October and December. But suddenly, in this period, for no apparent reason there are great changes in taxation proposed. I suggest to the Chancellor that this may mean that the regulator will have to be used arid that this is something which could be anticipated at this stage.

In the autumn the betting and gaming tax will take effect, yielding about £17 million in a full year. Against that, the surcharge will come off. The Chancellor has to date given us little indication of what he feels will be the effect of this, but a loss or revenue of about £70 million in this year seems likely. In addition to all this, there will suddenly be an enormous increase in taxation resulting from the Selective Employment Tax, despite the fact that the Chancellor does not appear to expect any marked change in the general level of demand.

What we need to clarify is, does the Chancellor agree that there will be a considerable deflation of demand because of the impact of the Selective Employment Tax which comes into operation on 5th September? There will be no disbursements from the amount which he will collect at that time, apparently, until February, when the payments for the four-monthly period up to December will be refunded. The next disbursements covering three months will not be due until the end of the next quarter in June.

My point is complicated, but, clearly, at this time of night those who are here must be enthusiasts. It is that we have a forecast, as far as we can ascertain the Chancellor's intentions, of a gradual and steady rise in the level of aggregate demand, but superimposed on this a sudden increase in taxation in the autumn and then a sudden relaxation of taxation when the Selective Employment Tax refunds take place in the spring.

We have had no explanation why this should be so. What we need to know from the Chancellor is whether he intends to impose the regulator to smooth out this otherwise sudden bump in the curve. We have almost reached a situation like that once portrayed in a diagram in the Economist, on which it was shown that the Government had stabilised the cost of living. The cost of living was plotted on a vertical axis, with a straight line across showing how the Government had stabilised the cost of living, but the horizontal axis was declining steadily. We are rather in this sort of situation. We have a slowly rising curve for demand and a sudden, big inexplicable bump in taxation in period September to February.

This question of timing was brought out clearly by the National Institute of Economic and Social Research, which said, in its recent quarterly review: The proposed measure of deflation is necessary because somehow the rise in wage-rates must be slowed down. It is true that from this point of view the timing of the deflation—to take effect when the economy will probably already be losing steam—looks odd. No doubt, for administrative reasons, the selective employment tax could not be brought into operation earlier than September. In any case it could be argued that if this accident of timing were to give a sharper knock to the economy than was desired, the Chancellor could always use the regulator in reverse, incidentally taking a further step towards improving the tax structure. It would, therefore, appear that, like myself, the National Institute of Economic and Social Research, in its quarterly review, suggests that the Chancellor may well have to use the regulator to smooth out the effects of his proposed changes in taxation. It is right and proper that before giving approval to the Clause we should ask ourselves whether the purpose of the regulator is to smooth out changes which can be anticipated at the time of the Budget, or whether, if this is to be so, some sort of measure should be built into the Budget to smooth out the changes which are the result of the other Budget measures.

It is very important that we should establish whether the regulator is merely to smooth out unforeseen changes, or is also to be used to smooth out in the course of the year changes which could and should be foreseen.

I should like to make one final qualification, because the analysis which I have been spelling out may have been inaccurate, and I hope that if it is the Chancellor will clear up the point. He has said that he will impose the Selective Employment Tax, which will create the sudden increases and decreases in taxation which I have described and which may require the use of the regulator. He also said in his Budget speech that he will make credit available for those who must pay Selective Employment Tax in the intervening period before disbursement begins. He said: I have not overlooked this, and, against the background of the general economic restraint which it is necessary to maintain, I shall be considering what steps may be needed to enable the banks to respond to temporary needs for credit in such cases."—[OFFICIAL REPORT, 3rd May, 1966; Vol. 728, c. 1457.] We need clarification of whether this proposal will do much to smooth out the bump in taxation of which I have spoken and whether this will mean that the regulator is not expected to be used either in the autumn or next spring. I understand that it will be possible for the Chancellor, not to provide finance for the industries that will not receive a refund, but to provide additional finance so that the industries that will pay the tax and then have it refunded will be able to borrow from the banks.

I am not clear how he might do this. I suppose that it might be done by not issuing so many Treasury bills or by changing the banks' liquidity ratio, or something of that kind. If the Chancellor does this, the deflationary measures which he is imposing in the Autumn will be very considerably modified, because, while he pulls in the money with one hand, he will immediately create the money which will enable people to pay the tax. He will be pumping back purchasing power into the economy.

Therefore, I hope that before we approve the Clause, which gives the Chancellor the very wide powers that I have described, we shall receive from him some elaboration on his Budget statement, and that we shall have some indication of how he sees the pattern of the economy in the next year or 18 months.

12.15 a.m.

Photo of Mr John Biffen Mr John Biffen , Oswestry

My hon. Friend the Member for Worthing (Mr. Higgins) has suggested that all of us who have remained until this time of the morning could be described as enthusiasts. This I regard as a somewhat esoteric description, but there is one description which is probably even more esoteric and improbable. It is that we are members of that rapidly declining group, the Prime Minister's fan club.

There is a very good reason for arguing this case, because when the original Clause in the 1961 Finance Bill was discussed, the Clause the repeat of which is contained in this Clause, the Prime Minister, then speaking of the regulator, said this: In terms of surrendering this House's control over the taxing power in the interests of economic planning, the way in which the Chancellor is doing it is going too far. I do not suggest that any John Hampden will rise in protest against what the Chancellor is doing, or that it is on a par with ship money, or anything of that kind. But it over-steps the margins of the relation between the Government and the House in the matter of taxing power."—[OFFICIAL REPORT, 4th May, 1961; Vol. 639, c. 1641.] Those were very brave words. They are now lost in the mists of time, except for those who are uncharitable enough to disinter them from this Clause which now appears annually in Finance Bills. I think that the Prime Minister had a point. Although I would not include myself in his fan club, I think it at least justifies exactly the kind of searching examination which was conducted by my hon. Friend the Member for Worthing in asking that the Chancellor should give us some idea of his own assessment of the aggregate balance of supply and demand on which he may hope or expect to operate the provisions granted to him in the Clause.

We are undoubtedly at some disadvantage in trying to make our own assessments, because of the very inadequacy of Government statistics. When a similar Clause was debated last year—it was then Clause 4 of last year's Finance Bill—the Chancellor of the Exchequer was reasonably eloquent on this point. He said that the absence of statistics caused him a great deal of concern. He added: This is a problem to which I have started to pay attention, in conjunction with my colleagues in the Government … I shall certainly hope to make further progress on it."—[OFFICIAL REPORT, 19th May, 1965; Vol. 712, cc. 1487–8.] The right hon. Gentleman may have been making further progress. He may in fact have achieved success, but we know that he has not communicated any news of success to his friends in the Department of Economic Affairs. As recently as 5th May we were told by the Minister of State, Department of Economic Affairs that It is not customary for the Government to five short-term forecasts of the likely movment of the economy."—[OFFICIAL REPORT, 5th May 1966; Vol. 727, c. 1846.] What my hon. Friend the Member for Worthing has asked this evening is the very minimum we can request of the Government, because they are being given enormous potential taxing powers in the Clause, specifically to operate upon the short-term movements of the economy. In these circumstances, answers of the nature of that given by the Minister of state, Department of Economic Affairs on 5th May simply will not wash. We very much hope that the Chancellor will be able to answer in the spirit with which he dealt with the problem of statistics when a similar debate was conducted last year.

I would like to dwell for a moment on what seems to be the main characteristic of the powers the Government are seeking under Clause 15. The major characteristic is that the Chancellor seeks further powers of potential taxation which can operate directly upon consumption. They are, as we all know, the regulator taxes to increase Excise and Purchase Tax duties which have a considerable potential, because—and I believe the Chancellor will confirm this—they can operate to the magnitude of £320 million if applied in full.

The reason why the regulator incorporated these kinds of taxes was because it can operate directly and quickly and, on the whole, pervasively upon consumption. We are entitled to look at the present level of consumption and to invite the Chancellor to join with us in this exercise and to ask him to give us the benefit of his judgment about the present and likely trends of consumption over the period for which he seeks powers under Clause 15.

At the moment the evidence is that consumption is holding up remarkably well. From the Government figures published for April, 1966, I noticed that the retail sales volume is up by 3 per cent. and by value 5 per cent. The figure of 3 per cent. is probably the more important, and on the available evidence provided by the Government suggests that retail consumption is rising more rapidly than the general level of economic activity as a whole. That this should be so is-hardly surprising because, as my hon. Friend the Member for Worthing has pointed out, we are seeing a very considerable increase in wage rates.

The Ministry of Labour's last published figures of a detailed analysis of earnings is for October 1965—not much sign here of the improved statistical surveys we were promised by the Chancellor last year. If we take advantage of the figures, we see that earnings were up by 9 per cent. for wages. We cannot quote any comparable figure for salaries because the Ministry does not offer this facility.

We know that many outside organisations conduct their own surveys, and my hon. Friend the Member for Tavistock (Mr. Michael Heseltine) is associated with a company which probably has as fine a knowledge as any commercial institute of the movement in salaries. I was discussing this with him earlier and he assures me that in his judgment the movement in salaries is certainly no less as dynamic as the movement in wages. It is hardly surprising that this is reflected in the high level of consumption On the other hand, it seems that one of the other major components in demand upon the economy is investment. Here the picture is not quite the same. There are already signs that the levels of investment are under very considerable pressure. Again this should hardly surprise those of us who have followed the recherché activity of watching the successes and failures of the First Secretary. Undoubtedly his success with prices has not matched his success with industrial costs. The Treasury figures published of gross trading profits, adjusted seasonally, show that they are falling.

The latest evidence, which is available only this evening, from the Confederation of British Industry shows that the signs are that investment over the coming 12 months could well take a downward turn. I quote from the 26th Industrial Trend Survey released at 10 o'clock this evening. Under the heading "Capacity and Investment", it tells us that the previous position is reversed; an upward balance of 5 per cent. has changed to a downward balance of 4 per cent. That is a reference to plant and machinery. At the same time, the downward balance of expenditure on buildings has further increased. The analysis"— this is the vital sentence— of earlier cycles suggests that these figures imply an absolute decline in investment in manufacturing industry over the next 12/18 months". It is this set of circumstances which so much underlines the point made by my hon. Friend the Member for Worthing about the Selective Employment Tax when it operates later this year. The calculations, as best as I can make them—and they can but be confirmed or corrected from the Treasury Bench—are that the Selective Employment Tax will provide a pressure of between £200 million and £225 million upon the liquidity of manufacturing industry in the initial period of its collection before any repayments are made.

It is perfectly legitimate to argue that, ultimately, there will be repayments, but there will come a period of four months or so when industry will be under severe liquidity restraint which could easily exacerbate an already incipient downturn in manufacturing investment; and the factors which will affect this will include the interpretation which is placed on the Chancellor's words to the effect that the banks should be able to make credit available to cope with the demands of financing the Selective Employment Tax. There is, in a sense, an added regulator implicit in those words. But we have had very little explanation of how the Chancellor hopes the banks will interpret his words, and we are entitled to such an explanation now in the context of Clause 15, which embodies the other regulating power explicitly sought by the Government.

There is no doubt that the nightmare of any Chancellor is to get the worst of "stop" and the worst of "go", still to have inflation yet to have declining investment. It seems to me that this could well be the right hon. Gentleman's unhappy fate.

As I see it, it is a commentary on a tired and uncertain management of the economy that, after 18 months or so of high Bank Rate, of credit restraint, of Income Tax increases, of Excise Duty increases, we still find ourselves, when discussing Clause 15, quite seriously and solemnly contemplating the upward use of the regulator. We must all in honesty agree that we cannot renew this regulating power without envisaging the possibility of its being used upwards. On the analysis at which I have hinted—I can do no more than hint, with the figures available to me—I would expect the regulator probably to be used upwards rather than downwards.

If we are confronted with that awful dilemma, although I am in the verbal sense seeking to put the Chancellor in the dock as he is to answer this debate, my own judgment would be that the person really guilty of this woeful mismanagement is the First Secretary of State rather than anyone else.

12.30 a.m.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

I feel in no particularly masochistic mood at half-past midnight, but I want to make one point. We had a delightful display of Keynesian macro economics from the hon. Member for Worthing (Mr. Higgins). This was altogether desirable, but I cannot understand why everybody is so opposed to the regulator. One would almost think that this potential tax had horns of one kind or another.

Photo of Mr John Biffen Mr John Biffen , Oswestry

I listened with great attention to my hon. Friend the Member for Worthing (Mr. Higgins). Neither do I think that I was so incoherent. We both made the point that we accepted the Regulator. The only damaging quotation which I made was from the words of the Prime Minister when the regulator was originally introduced.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

The impression which I got was that there was a fear about it. I would have thought that our experience indicated that fiscal policy must bear basically upon consumption. We have had evidence that this is likely to be the most difficult aspect of the problem. What the Chancellor should do is not leave the Regulator on one side and not bring it into operation unless to do so is absolutely necessary, but think much more in terms of the regulator in terms of fiscal flexibility.

Photo of Mr Michael Alison Mr Michael Alison , Barkston Ash

When compared with Clause 42, by which the Selective Employment Tax is introduced, and with the acres and pages and lines of print which have appeared a bout the Selective Employment Tax, the Clause dealing with the regulator strikes one as a very modest and moderate and brief set of words, but we should remind ourselves that the significance of this Clause is akin to that of the rudder of a ship and that although it may be submerged in the rest of the Bill it is of enormous significance and importance.

I draw attention to the fact that at 10 per cent. the regulator is capable of regulating the volume of returns from Customs and Excise, about £3,440 million a year, and represents a power of regulation of resources and demand of about £340 million per annum, substantially more than the total amount of the Selective Employment Tax can raise even in the exceptional circumstances of this year. The Chancellor estimates that this year he will get £315 million from it and in a normal year £240 million. So we are putting into the hands of the Chancellor an instrument of taxation of a great deal more than the full Selective Employment Tax and it is not a small item which we are considering.

Looking at the course of events even since the Budget judgment, it seems that we are likely to have to make use of the regulator. The basis upon which I suggest that is the very disturbing signs which have come into the economy since the Budget judgment. It must have been depressing for the Chancellor—it certainly was depressing for the whole country-to see the latest figures for the visible trade returns for last month's, even the three months' comparison, which gives a slightly more balanced view. The visible trade gap widened from £16 million in December 1965 to February 1966 to £24 million in the March-to-May quarter of this year, a substantial increase. If this is the trend of the gap, even in the circumstances before the surcharge is removed, that is to say, while overseas exporters and our importers are holding back in anticipation, the implications are very serious.

I want to consider whether, in the light of the surcharge coming off and the trade gap widening uncomfortably, the Chancellor has his judgment right in terms of the amount that he expects to take out of the economy, especially in respect of the Selective Employment Tax. I wish to refer to a figure which the Chancellor gave at the end of his Budget. He said that he expected the yield on the Selective Employment Tax to be £315 million in the first year of operation in which part would be refunded late, and that it would be £240 million in a normal year. The Chancellor may have registered the point already that Professor Paish pointed out in a paper which was circulated not long ago that the outstanding refunds which will not come back straight away will remain part of the assets of employers which they are entitled to finance by borrowing; so the Chancellor is not taking out nearly as much as he suspects, particularly if he makes concessions in respect of credit restraint later on.

The net withdrawal in respect of the Selective Employment Tax at the rate of £240 million a year for a period of seven months, assuming that the balance which will come back can be considered as assets which employers are entitled to finance by borrowing, will be as little as £140 million, as distinct from the £315 million which he suggests. If businesses consider the refunds which they will ultimately get as assets which they can finance by borrowing, the addition to the right hon. Gentleman's Budget surplus is less than £315 million.

May I look for a moment at the way in which the millions which will fall upon the service industries will filter through to consumption, because that is obviously of great interest. The estimate which has been made is that the service industries will have to foot a bill of some £240 million altogether. The three trades which one might call the consumer trades—the distributive trades, catering and services of various kinds—will almost certainly pass on the extra impost put upon them by the Selective Employment Tax. That will take money out of consumption, and it will raise the cost of living and prices generally. But it should be borne in mind that certain services will not have an effect on consumption, but on investment and saving.

As my hon. Friend the Member for Oswestry (Mr. Biffen) pointed out, it will be an attack on investment and saving to some extent. It will affect banking, professional services and insurance, which will put up the cost of saving, and it will certainly reduce the incentive to invest. Part of the effect of the Selective Employment Tax will undoubtedly be an attack on investment and saving, whereas the total amount which will be taken out of consumption will be much less than the Chancellor suspects.

The Selective Employment Tax will raise less than the Chancellor thinks. It may well have the effect partially of not reducing consumption so much as reducing investment and saving. It will certainly not tackle the redistribution of labour, as Ministers have been trying to suggest to us. If it is really going to have the effect of redeploying labour, the buoyancy available to the revenue will be less than the figures which I have suggested. It will not do anything at all towards encouraging the more economic use of manpower.

I fear that we shall have to use the regulator, and it is worth reflecting that, despite all their ballyhoo and propaganda, in this year of economic crisis to the nation, the Government will have to fall back on the highly intelligent instrument that was introduced by my right hon. Friend the Member for Wirral (Mr. Selwyn Lloyd). It has a far greater potential for withdrawing money from the economy than the Selective Employment Tax, which is easier to discuss in legislative terms than to operate.

Photo of Mr David Howell Mr David Howell , Guildford

Like my hon. Friend the Member for Oswestry (Mr. Biffen), I am hesitant about being identified as being enthusiastic. The real reason why I am here is that I am a pessimist about the Chancellor's capacity to understand the critical nature of the present economic situation and about his capacity and that of other politicians to understand the real policy and the real approach which is necessary for the economy if we are to jack ourselves up into the high-growth league where alone we will find stability and escape from the recurrent economic crises with which we have been faced in recent years.

The Clause raises two questions which are related to that point and which I would like to put forward. The first, which has to some extent been covered in the discussion, is whether the Chancellor will be forced to use the powers in the Clause in the coming months. The second is whether he ought to use those powers in the coming months. As to whether he will be forced to do so, I have little doubt. I think that he will. He has left himself little choice in the matter.

As has been suggested, the Chancellor or somebody else will have to compensate for the erratic impact of the Selective Employment Tax upon the economy, and there is no doubt that if we are to move towards a more sensitive control of the level of demand, some compensation for this very erratic impact will be needed. That is one reason why the Chancellor has very little choice in using it.

Another reason is that the Chancellor's arm will, I have no doubt, be twisted, if it is not already being twisted, by foreign creditors on the undeniable ground that the prices and incomes policy is not "delivering the goods" and is not working and that something must be done. For these two reasons, I think that we will see the Chancellor forced into the position that he has little choice but to use the economic regulator and the powers contained in the Clause.

The second question is one to which the Committee should give much closer attention, because it goes much closer to the heart of the problem of whether the Chancellor's method and approach in the management of the economy and his use of the powers of the Clause are right and whether he should use the regulator to reduce the level of demand in the coming months.

The National Institute of Economic and Social Research has called the Chancellor's policy a counsel of despair. My belief is that if in the coming months we see more cuts in the level of demand, that charge will be still more deserved. 'The figures which we have heard from he survey of industrial trend by the Confederation of British Industry on the possibilities of a downward turn in investment, in new plant and equipment, which is the key to our economic efficiency and future exports, reinforce that trend and reinforce the view, which is gaining widespread assumption and belief outside the House of Commons, that he golden day when expansion can be resumed, about which we hear so much, is receding further and further into the distance until it seems that it will never come.

In asking about the powers of the Clause, what I am really saying is something which has been said many times before by hon. Members on both sides, particularly by hon. Members opposite in the days when they were campaigning before the return to power of a Labour Government in 1964, that these methods, this power and other methods for cutting back internal demand are only a substitute, and a very poor and self-defeating one, for a concerted economic programme to raise efficiency, inspire confidence and put us back into the high productivity situation in which alone we will achieve price stability and less vulnerability to international crises.

I accept, with my hon. Friends, that we cannot run the modern economy in an overheated stage; that is common sense. The answer, I believe—and I may not have agreement in this from either my own side or the other side of the Committee—is not to go back to the primitive reaction of slashing demand either by this power or by other powers. That never has been, and never will be, the answer. The answer, if we are seeking a higher labour reserve, is to look at the economy and see that far from there being a shortage of manpower, there is a vast surplus of manpower. If we can devise a means of overcoming the problem of over- manning and really shape our manpower resources, we can get away from the old arguments about the shortage of labour. We must try to attack the level of demand to convince people that something really constructive is being done, possibly to control inflation and certainly to please our creditors overseas by demontrating that something is being done.

12.45 a.m.

If we recognise that the problem is over-manning and not just a shortage of manpower, it should be possible to combine a rapid increase in output and growth. This is the secret of price stability, leading to a fall in unemployment, and thus by-passing the whole overheating problem and producing all the labour that is needed.

However, the proviso and crux of the matter is this. To launch this expansionist policy—to get out of the dreary situation in which we see miserable rates of growth and productivity—we need an economic and social policy which is concerted. It is hopeless to attempt to follow an expansionist policy if the Government of the day are not prepared to attack the manpower problem by going to the heart of it, which is restrictive practices. It is equally hopeless to try to follow an expansionist policy if the Government are not prepared to make the tax changes necessary to provide the right incentives to put us into the high productivity league.

As to the Clause and the regulator, as long as the Government refuse to tackle the problems I have described on a concerted basis so long are we condemned as a country to these primitive weapons of cutting back internal demand—not only primitive weapons but self-defeating ones. I say that because in the long run any Government who use only such primitive weapons will merely be leading us from one crisis into another, will discourage investment in the plant and equipment—not forgetting brain power and imagination—which will produce the exports which sell tomorrow and which alone will solve our export problem. Only the sort of expansionist policy I have described will prevent us from being held back and will postpone the day when we can achieve the very high productivity and stability which goes with it and is inseparable from it.

Photo of Mr Iain Macleod Mr Iain Macleod , Enfield West

I thought that the Chancellor intended to speak at this point. However, if he would rather I spoke first I will do so, and no doubt he will address the Committee then. I hope that after the right hon. Gentleman has spoken we can give him the Clause and go to bed. I will not speak for more than a few minutes, and I assure the hon. Member for Stoke-on-Trent, Central (Mr. Cant) that we want the right hon. Gentleman to have these powers, that we realise that it may be necessary for him to have them, and that there is no question of my hon. Friends opposing them or voting against the Clause.

I congratulate my hon. Friend the Member for Worthing (Mr. Higgins) on the way in which he initiated this discussion and requested the Chancellor to bring us up to date on his Budget judgment and present thinking. I am sure the right hon. Gentleman will agree that we have had some excellent speeches in this short debate on the Clause. Speaking as an old Parliamentary hand, I admire the skill with which hon. Members have kept in order, which is a difficult thing to do when discussing this subject of the powers under the Clause and the regulator.

What interests me about the economy today—and I was recently looking at graphs going back over the last 10 years—is that although one can parallel any single incident, stagnant production, or whatever it might be, one cannot find a time when everything was happening at once, as it is now. This is why the present situation concerns us very much indeed, and why we have to look at this Clause, and the possible use of a regulator that can bring in £320 million, in the light of the fact—as I think my honourable Friend the Member for Oswestry (Mr. Biffen) said in a splendid speech—that we have at the moment the worst of both worlds. We have all the bad effects of "Stop", without the occasional advantages that that can bring to our economy.

My hon. Friend quoted—he was splendidly up to date—a Press release issued at 10 o'clock last night, three hours ago, from the and the sentence he quoted— The analysis of earlier cycles suggests that these figures imply an absolute decline in investment in manufacturing industry over the next 12–18 months". —is the one which worries us. In this C.B.I. release there are a number of good features, particularly on the export procedures, but I think that my honourable Friend the Member for Oswestry put his finger on our present dilemma when he said, in effect, that the trouble was the First Secretary of State.

I do not wish to attack the First Secretary of State in his absence tonight, but almost since October, 1964, the Chancellor of the Exchequer has been trying to bale water out of the boat but has not been able to do it as fast as the First Secretary has succeeded in pouring it in. As a result the ship has never been anything other than waterlogged, and it is because of this that the questions raised by my hon. Friend the Member for Barkston Ash (Mr. Alison) and my hon. Friend the Member for Guildford (Mr. Howell) are so important now.

I will just summarise the anxiety which I have, which was put very well by my hon. Friend the Member for Barkston Ash, in considering the Budget judgment. When I spoke in the Budget debate I used the hawk and dove anology and said that what worried me about whether enough was being done was that if one took the hawk view of the economy the Chancellor was waiting dangerously long, and if one took the dove view it was strange to hit an economy, which was presumably then on the down-turn, as fiercely as at first sight the S.E.T. proposals seemed to do. I say "at first sight" because I agree very much with what has been said following Professor Paish, and, indeed, the National Institute's Economic Review, and I doubt very much whether the measures are going to be as deflationary as at first sight would appear.

We would very much like the Chancellor of the Exchequer, when he replies in a minute from now, to tell us, particularly on the question of bank advances, how his thought has advanced in the weeks since he made his Budget speech. Lastly, there was a really splendid little cameo of a speech from my hon. Friend the Member for Guildford. I am sure he is right when he concentrates on the erratic impact of the S.E.T., which leads him to the gloomy conclusion, which I fear I share, that we will probably use the regulator and, I would think, use it in an upward direction. All this comes back to the problem that he emphasised, that there is not really a basic shortage of manpower in this country. There is a vast surplus of manpower, because our productivity is hopelessly uncompetitive.

I will not strain your patience further, Sir Eric. I have been conscious in the last few minutes that I have been straying a little out of order, but it is difficult on the Committee stage of a Finance Bill to find opportunities for what might be called a general economic discussion. Therefore, I make no apology for taking this opportunity on Clause 15 of inviting the Chancellor—and, if I may say so, it is very good of him to stay to reply to this debate at this time of night—to bring us up to date with his thinking, and sifter that I am sure that we would agree to give him the Clause.

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

I did not realise that the right hon. Member for Enfield, West (Mr. Iain Macleod) wanted me to speak before he did, but I do not suppose it makes any difference.

I thought this would be a useful debate, with your tolerance, Sir Eric, and I think it has been. I am always appreciative of the advice that I get from hon. Members on both sides of the House. I never lack advice. Indeed, one cannot have too much of it in this field. I find that one of the most useful things to me is to know what people are thinking and saying.

I come immediately to the hon. Member for Oswestry (Mr. Biffen), who reflected very adversely on the quality, nature and volume of our statistics. I agreed with him a year ago, and I still do now. But this job is a long haul. It involves many Government Departments. It involves recruiting people who are scarce. We are making improvements in statistical appraisals, though not as fast as I would like. This is not the time of night to make party points, but I now know what Mr. Harold Macmillan meant when he said that he felt that he was always looking up last year's Bradshaw to find out where he was now.

Until we can get much better statistical appraisals than we have got at the moment, I have to act as a mixture of Old Moore and Captain Coe. For that reason, I am not going to give many forecasts tonight about the future, because when you are a mixture of Old Moore and Captain Coe, if I may carry the metaphor a bit further, you have to fly by the seat of your pants.

I would only say to the hon. Member for Worthing (Mr. Higgins), who clearly is an enthusiast in this field, that I would be the last person to try to temper his enthusiasm in any way. But I would make this suggestion to him. As everybody knows, I am neither an economist nor a statistician; I do not have a trained mind. I merely dance to an old Hungarian tune. But I have been in politics for 21 years, and have survived. The lesson that I would offer to the hon. Member, if I may in all humility, is always to pay a proper respect to arithmetic and a proper disrespect to forecasts. So far I have managed to survive—just—by doing that. But, on the kind of forecast that we get now, I would not dream of building the mountain of speculation that the hon. Member for Worthing built. This is why I have been unrepentantly an advocate of the principle that one must keep taking the temperature, one must constantly be ready to use all the battery of economic instruments that lie at one's disposal, because I do not have the secret—and I do not think any previous Chancellor has either—of being able to say on 6th April what the economic climate will be in six months' time, let alone in 12 months' time.

So I shall go on in this way, and I believe that there is a growing acceptance of this need, though I would much prefer to go the way of the hon. Member for Oswestry and be able to feed all the various alternatives into a computer and know what the answers were, so that I could take rather longer-range decisions than it is possible to take at the present time.

For this reason, as everybody has acknowledged, the regulator powers are very valuable. I am sure the Committee would be right to renew them tonight. I think hon. Gentlemen have rather overestimated the yield of using the regulator. I would put it at rather more than £100 million less than they do. I would have thought it was something under £200 million. I have not got the figure, but I think they are putting it a little high.

It has got this value, that as a result of a combination of the right hon. Member for Barnet (Mr. Maudling) and the then Opposition, we have got much more flexibility into the regulator than existed in 1961. It is an astonishing thing that this has hung over us since 1961 but has been used only once—by the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd). I take the point. I am not sure whether I quite understood the hon. Member for Barkston Ash (Mr. Alison). It seemed to me that he indicated that I might have used it in a downward direction.

1.0 a.m.

Photo of Mr Michael Alison Mr Michael Alison , Barkston Ash

Mr. Alison indicated dissent.

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

He did not. Well, I would not be dogmatic. I would not care to forecast which way it would need to be used in the autumn. I cannot look as far ahead as that. For that reason I cannot give an answer to the right hon. Member for Enfield, West, as to how bank advances will go in the autumn. It is not in our power at the moment to look as far ahead as that. That is why I decline to go into a number of interesting questions that I have been asked, and about which I speculate from day to day. I simply cannot give reliable information about them this evening.

Photo of Mr John Biffen Mr John Biffen , Oswestry

I hope that I am not anticipating a point that the Chancellor is about to make—but are we to understand that at this point of time the Chancellor is not prepared to reveal how he hopes banks will interpret any demand made upon them for credit to finance payments under the Selective Employment Tax, but that such directives will be issued in the autumn and the credit then required may be the subject of a regulatory influence which will be decided upon not until the autumn?

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

Broadly speaking, I do not dissent from that. At present there is a limit on advances of 5 per cent. over 1965. I would certainly want to see how advances moved, and what the pressure on the ceiling was. The banks are right up against the ceiling at the moment. We shall have to watch this situation from month to month as the returns come in and take our decision both in the light of the credit situation at the time and the need of industry for liquidity. This is not a decision which can be taken in June.

I am not being discourteous to the right hon. Gentleman or to any other hon. Member who has spoken, because I regard their contributions as valuable; but I have nothing more to say than I said in the Second Reading debate and in my Budget speech. Although these circumstances change rapidly they do not change as rapidly as that, and one month's trade figures, while interesting, are not always significant. The longer look we can take at these matters the better. I am trying to get nearer and nearer to the hon. Member for Oswestry, but I have nothing new to say. My objectives are as set out in the Budget.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

I am grateful to the Chancellor, but I want to take up one point which he made. He says that he is not sure what will happen in the autumn, but he must have formed some judgment of what will happen, otherwise he is simply taking this purchasing power out of the economy with no clear view of what his intentions are. Could not we have some view whether he feels that that general level is going up? Can he explain the extraordinary hiccough which appears to exist in the incidence of taxation?

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

Yes, but neither my predecessors nor I have thought that our forecasts were of sufficient reliability to do any more than indicate their general nature through the measures we proposed. I took the view that we were going to have a dip in consumer demand in the second quarter—we shall have to wait and see whether this turns out to be the case—as a result of pre-Budget buying. We could ride the summer and—assuming that we could get the Selective Employment Tax in operation—there should be some new measure in the third or fourth quarter. That is the basis on which I was operating.

I took the view that we could ride the summer months, if necessary, because I did not want to give the too-violent downward push to the economy that the right hon. Gentleman was speaking about. He will remember that in February and March there was a great deal of uncertainty whether the economy was on the turn. I must not get on to the Selective Employment Tax. I see that you are shaking; your head at me, Sir Eric, and so I quickly look away. But the reason why this was resurrected out of the pigeonholes was precisely to achieve this.

If I am asked what effect I expect there lo be, I expect the tax to have a disinflationary effect in the autumn, for a number of reasons. I shall then be able to use the regulator, if I am conceded these powers, either way. This is why I thought there was a certain amount of prescience in what I first thought the hon. Member for Barkston Ash said, namely, that it might go downwards. It would be possible to use the regulator either way.

We ought to have all these possibilities in mind in relation to the situation that may develop in the third and fourth quarters of this year, but I expect the Selective Employment Tax to have a disinflationary effect. I ask for the use of the regulator now so that I may be able to use it either way, but the hon. Member for Worthing would not expect me to indicate to him if or when I intend to use it. I agree with my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant). He made the point perfectly that I should be right to use it, his speech was much more succinct than mine.

What I want to see, in a way that will help the economy very much indeed, is a much slower growth in incomes during the course of the current year. This is the secret. But it is no secret really. My predecessor the right hon. Member for Barnet used to make this plea regularly. Indeed, it was he who coined the phrase originally about his own policy in 1964—he is always a very honest person—of getting both inflation and stagnation at the same time when the production index had been stationary for several months. He has used the joke about me since, but it was his joke about the consequences of his own policy. But we must, I agree entirely, get incomes under control to a much greater extent than we have done over the last 18 months.

My views and the views of the Government are well known, and I will not spend time developing them again tonight. I regard this as an essential condition. When I listened to the earlier parts of the speech of the hon. Member for Guildford (Mr. David Howell) I had hopes that he was going to tell me how I was to achieve all these magic things. I promise him that there is a crock of gold waiting for him if he will only turn his generalisations into specific proposals for action. It is the easiest thing in the world—I do it so much myself—to preach about what ought to be done, but it is jolly difficult to translate into reality general remarks about getting management to shake out surplus labour. However, we go on seeking the means to do this. I agree with him that there is a surplus of labour available today if it were properly used. Indeed, rather cynically it might be said that one of our major assets is the poor quality of a great deal of British management, because the capacity for improvement is so vast that once we really get going there will be nothing to stop us. I think that the quality of management is improving in several ways. There is a changing atmosphere. But we need many more considerable changes in management than we have at the present time. Frankly, this is where the lead must come from in shaking out surplus manpower.

Restrictive practices by trade unions too are completely out-dated provided that we intend to maintain a full employment economy. I thought I noticed a certain divergence of opinion on this between two of the speeches from below the Gangway. Restrictive practices are out-dated. I hope that the Royal Commission on the Trade Unions will have something to say about this when it reports. Meantime there is a great deal of slow, steady but good work going on in this field, particularly between management and unions, but it needs to be greatly accelerated.

I would say to the hon. Member for Guildford that much of what he is asking for is being carried out by the Government now. It is very slow work, and it takes time to show results. The Department of Economic Affairs, which I regret is so constantly attacked, having been separated from the Treasury, is, in my view, doing a job which the Treasury would not have done. It did not do it in the past. Because of the great volume of work that falls on the Treasury, it is difficult for that Department to handle the kind of problems and relationships with industry that are being handled by the Department of Economic Affairs. I hope that the hon. Gentleman will not underrate the great work that is going on quietly, work that is not seen, through the Department of Economic Affairs, through the "Little Neddies", and through the various councils which have been set up. I see a lot of it, and I believe that it is in this, rather than in the more spectacular things that are being done, that the secret for the future lies.

I am grateful to the Committee for saying that it is willing to concede the power of the regulator. I would have been surprised if it had not. I have been very interested in the debate. I assure the Committee that I thought it was well worthwhile waiting to listen to. I approach these matters with, I hope, a due sense of humility. One does not have to be long in this job before one learns how fallible man is in trying to forecast the future, and in trying to foresee what can be done.

The other lesson which I have learned is that one can propose all one likes, but Governments do not settle things in the end. Whatever economic policy the Government try to follow, it is the people who decide in the end according to their own sense of priorities in relation to price stability—which I place very high on my list of priorities—increases in incomes, high productivity, or whatever it may be. This is a fact of life. It is the nature of life in this country.

I think that everybody wants to change a great deal. We may differ on how we want to change it, but I think we all want to change it, and I think that the change is coming about. Speaking for myself, if I may, at ten minutes past One, I am not pessimistic about the long-term future, whatever short-term difficulties we have. I do not think that anybody who was not of a sanguine temperament could stay in my job for very long.

Question put and agreed to.

Clause ordered to stand part of the Bill.

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

It is my privilege to move,

That the Chairman do report Progress and ask leave to sit again.

We have made some progress again today. In fact, I think that we have made quite a lot of progress and that this would be an appropriate time to draw our deliberations to an end.

Question put and agreed to.

Committee report Progress; to sit again this day.