Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 20th April 1970.

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Photo of Mr Selwyn Lloyd Mr Selwyn Lloyd , Wirral 12:00 am, 20th April 1970

If the hon. Member will allow me to make my speech in my own way I shall come towards the end to what I suggest should be done.

Leaving aside now the redeployment of labour argument, the second argument is that services are undertaxed. On this fiscal imbalance point, the Reddaway Report, on page 17, has this to say: there is a kernel of truth in the idea that services supplied to the consumer as such were under-taxed; but the case is very much weaker than it was represented to be when the Chancellor of the Exchequer introduced the tax and S.E.T. covers many types of service to which his arguments are not applicable at all. I weigh this against what the Chancellor said the other day. What was his phrase? The tax ' has a basis whose soundness had been tested and substantiated by objective and empirical inquiry."—[OFFICIAL REPORT, 14th April, 1970; Vol. 799, c. 1243.] I wonder.

Professor Reddaway shows his mind further upon this point in Appendix A of his report, pages 212–where he reprints an article written by him just after the tax was introduced. He says this: Taxes on services such as accountancy "— the Chief Secretary will be interested in this— which are essentially supplied to businesses of all kinds, are not justified. That is a very sound argument. Surely it must also apply to services which are rendered to business by banks, merchant banks, insurance companies, architects, surveyors, and, even perhaps to the popular and necessary profession of the law. If it is wrong that it should be applied to accountancy, it seems to me that it is wrong that the tax should be upon other services essentially supplied to businesses of all types.

A little later, again on this theme of fiscal imbalance, the Reddaway Report says: There is no good argument on this score for taxing industrial and commercial building, not to mention all types of building and civil engineering for public authorities. I think that that proposition is becoming increasingly accepted. This fiscal imbalance argument must seem very strange to the hotel industry, because in addition to all ordinary rates and taxes, and creating a lot of revenue on alcohol and tobacco, they pay purchase tax on many of their raw materials, furniture, linen, crockery, and so on. This fiscal imbalance point really cannot be sustained.

I want now to develop a complementary point which is emphasised in Study No. 5 of the Industrial Policy Group and which has been published this month. This group is a group of distinguished businessmen, leaders of industry. The first few names will illustrate the point—Sir Peter Allen, Mr. D. H. Barran, the chairman, Mr. R. M. Bateman, Lord Cole, and others. There are 18 or 19 of them, people who are leaders in industry. In the summary of their conclusions they say this: The experience of our members is largely in the manufacturing industries (which it was thought would benefit from the tax in a number of ways). Our members believe that the tax has made no significant contribution to the recruitment of labour for manufacturing; nor has it encouraged exports. On the other hand, costs have been increased by the time taken in the refunding to manufacturers of the tax paid. And since manufacturing industries are major customers of the service industries, the tax upon the latter inevitably falls in some degree upon the former. The treatment of the building and construction industries under this tax seems to us particularly unfortunate. This is the view of a group of business people mostly concerned with manufacturing, but the passage which interested me most in their report is in paragraph 17, on page 5, where they look at conditions in other countries and say this: Among the ten most economically advanced countries in the world, the United Kingdom was very low down in the proportion of all workers employed in services and in commerce. Correspondingly, the United Kingdom already had one of the highest proportions of all workers employed in manufacturing. The highest proportion of workers in services and commerce is, in fact, found in those countries with the better industrial performances in the past ten to fifteen years. In recent years, the United Kingdom has shown by far the lowest annual increase in the number of persons engaged in the service industries. Once again, the best industrial performers among other countries have shown the highest rates of growth in employment in the service industries. They supply statistical evidence and say that the growth of service industries is not a form of national prodigality or a deterrent to economic growth, but has been customarily associated with rapid advance and the growing power and maturity of the economic system as a whole. That is profoundly true, and it is the failure to recognise this basic fact, which affects the strength of our economy, which has led the Government to develop this unfortunate tax.

I think that the judgment of that group is a very wise judgment indeed, and profoundly true. This tax has been a brake upon our economic growth—if I may use that word; at all events, it is weakening our economic strength.

I should perhaps add that the group recommended that the tax should be reduced in stages, and finally removed at the end of three or four years.

I come to the final argument, which is that the tax brings in a lot of money. This was the Chief Secretary's argument last year. And, of course, there is the question: what do we put in its place? If the tax is a bad tax, if it is unfair, if it is full of anomalies, if it retards growth, the more it brings in the worse a tax it is. But does it bring in such a lot of money? I do not think that the yield is anything like as much as it is made out to be, because it must reduce taxable products. It is chargeable against profits. It must lessen the amount which is available to be subject to corporation tax and the amount available for distribution and so subject to income tax and, perhaps, surtax.

It is chargeable against the earnings of partnerships, firms and individuals in business, and it means that there is less money upon which to pay income tax and surtax. A solicitor to whom I was talking over the weekend said that the amount that his firm had had to pay in S.E.T. and increased pension contributions was the exact amount by which the earnings of the senior partners had diminished. That may be a good or a bad thing, but the amount of money on which income tax and surtax is payable will be lessened.

I do not believe that the yield of the tax is anything like the £600 million it is made out to be. The cost of so much that is necessary for business is put up—building, hotel accommodation, banking, insurance—the interest-free loan of £1,300 million has to be found throughout the year. In many cases the cash flow position is such that the money has to be borrowed at substantial rates of interest, which again reduces taxable profits. At a guess —and it is very difficult to work out—I believe that the net yield of S.E.T. is between one-half and two-thirds of what it is alleged to be—not £600 million. Therefore, I think that the Chancellor should have followed the advice of the Industrial Policy Group and begun to dismantle the facts.

Before I develop that point, may I answer the interruption of the hon. Member for Southall (Mr. Bidwell). It may be that a tax upon employment is defensible. When I was Chancellor of the Exchequer I took power to put 4s. a week increase on the stamp, as a contribution to the Exchequer, to be used as a regulator. This was viewed with horror by both sides of the House, and I had the greatest difficulty in obtaining the power to do this for one year. My experience of the way this modest tax on employment was received slightly diminished my enthusiasm for that general proposition—there may be better ways of doing it.

I think that the Chancellor of the Exchequer should have begun to dismantle the tax. What would the consequences be if he had cut it by half? The building industry, whose costs are rising all the time, would have been helped to hold its costs. It would help the hotel industry to improve its services and attract more foreign exchange. Invisibles have suddenly become respectable. If help had been given over their costs, more money might be earned for the country. Above all, it would have, to some extent, a holding effect upon prices and the cost of living.

In this particular situation, about which many of us are worried, it would have had a substantial psychological effect in making people diminish their claims for the time being. Those are all thoroughly sound objectives for a Chancellor of the Exchequer in the present situation, and I believe that the cost would be much less than the gross amount.

It may then be asked where the money would come from, and what tax would be put in its place. This year, the answer is very simple, and it bears out what has been said by the hon. Member for Ashton-under-Lyne. I do not think that this year any other tax would be needed; the money is already there. The Chancellor of the Exchequer is budgeting for a surplus of £619 million. In view of inflation, I think that is an underestimate. Last year, he budgeted for a surplus of £807 million and the resulting surplus was £1,130 million, so the gross amount needed to do what I am suggesting would be less than the difference between the outturn and the estimate last year.

This would not be just a give-away. I am inclined to agree with the view that it would be wrong to have general giveaway. This suggestion would be to use a part of the surplus for a perfectly sound economic purpose, to do something to halt inflation. This would do as much as any other single measure to achieve the Chancellor of the Exchequer's main purpose.

The traditional methods of halting inflation have failed and we must accept that. The squeezes and freezes, whether they have been for balance of payments reasons or otherwise, have failed to halt inflation, and the Chancellor should, therefore, try something else. This be could do within the framework which he has already laid down for himself. I hope that the Chancellor will have second thoughts about this, for even if it redounds to his personal credit I will endure that if something is done about a very bad tax, if injustices are in part removed and the national interest served.