I shall devote most of my time to looking at some of the tax proposals, both the longer-term and the more immediate changes, which my right hon. Friend announced on Tuesday, and I shall have a few comments to make on the speech we heard yesterday from the right hon. Gentleman the Member for Birmingham, Stechford (Mr. Roy Jenkins), but I think that the House will expect me first to make a brief reference to the announcement about Bank Rate made earlier today. My hon. Friend the Minister of State will deal with monetary policy generally later this evening.
The reduction in Bank Rate from 7 per cent. to 6 per cent. has been made following further falls in overseas rates just recently. The main reason why a reduction in Bank Rate is appropriate at this moment is the international situation and the fact that if we had maintained our rate unchanged, following the cut in the West German bank rate in particular, the inflow of funds might well have increased embarrassingly.
The Bank of England has, of course, kept in touch with other central banks on these matters recently, and my right hon. Friend the Chancellor, before making his Budget Statement, took account of the prospect of a reduction in Bank Rate in harmony with reductions in other countries. The cut announced today is entirely consistent with the measures he announced in his Budget Statement.
I come now to some of the details in the Budget Statement. My right hon. Friend told the House that the Government were proposing to introduce measures to counter the loss of tax due to the growth of individual sub-contracting in the building industry. I say at once that it has for long been a feature of the construction industry for much specialised work to be sub-contracted. Indeed, there are great virtues in that system. Furthermore, the overwhelming majority of such specialist sub-contractors are perfectly respectable and responsible business men who pay their taxes fully and promptly.
In recent years, however, due, I may say, as much to the selective employment tax as to any other reason, a practice has grown up whereby people who would normally be employees have called themselves sub-contractors.
In view of the hon. Gentleman's great knowledge of the industry, I accept that from him. But he will know that in addition to the self-employed bricklayers and self-employed plasterers, with whom we have been familiar, we now find ourselves having to cope with self-employed barrow pushers and self-employed hod carriers, and this is ridiculous. By becoming self-employed they have taken themselves outside the ambit of P.A.Y.E., and they draw their money without deduction of tax. In theory, they are liable to Schedule D tax. In practice, there are tens of thousands with whom the Inland Revenue never succeed in catching up. They change their jobs, they change their addresses, and they even change their names; they disappear.
If the Revenue ever succeed in catching up with them, the so-called subcontractor is without means and the tax is lost for ever. We estimate the annual loss at about £10 million. The consequences of this bogus self-employment, as I am sure the hon. Gentleman will agree, go much wider than the loss of income tax. We have all heard of the "lump" and the great harm done to industrial relations. There are gaps in the insurance cover for accidents on site. Because national insurance contributions, if paid at all, are paid at the Class II rate, the man ceases to be eligible for unemployment benefit, earnings related sickness benefit, graduated retirement benefit and industrial injury benefit.
The House will remember that in 1968 the Phelps Brown Committee recommended a comprehensive register of genuine sub-contractors with everybody else to be treated as employees. Our pre- decessors recognised that this was not really practicable in that form, and they proposed their own remedy. This involved not only a register of genuine subcontractors, but also, if a main contractor engaged an unregistered sub-contractor, the payment of a levy. This was intended to cover such things as S.E.T., National Insurance and so on. In addition, income tax would be deducted and accounted for to the tax collector.
We have come to the conclusion that this was an unnecessarily cumbersome procedure and that the main objectives can be achieved if effective steps are taken to prevent the income tax evasion. What we propose is that, subject to exceptions—and the exceptions are very important—any building contractor who makes a payment to an individual for sub-contracted work must deduct from that payment on account of income tax a sum equal to 30 per cent. of the payment and must pay that sum to the collector of taxes. If the recipient then makes a proper tax return, the tax deducted will be credited to his liability and any excess will be repaid. In order to protect the Revenue, the rate of 30 per cent. is designedly somewhat in excess of the ultimate liability.
The most important exception is that a sub-contractor who satisfies his tax inspector that he has an established business and a satisfactory record as a taxpayer will be able to continue exactly as at present. He will be able to obtain a certificate of exemption from the inspector, which will entitle him to be paid his contract moneys gross. Further, the deduction procedure will not apply to companies—that is to say, where the sub-contractor is a company—nor will it apply to payments made for building materials supplied by the sub-contractor.
In other words, instead of a comprehensive register, which the previous Government proposed should be compiled and maintained by the then Minister of Public Building and Works, all we believe to be necessary is the certificate of exemption provided by the tax inspector to respectable and responsible sub-contractors.
The administrative burden on the main contractor will be minimal; indeed, any main contractor who wishes to eliminate the burden altogether only needs to engage sub-contractors who can produce a certificate. If he engages a non-certificated sub-contractor, the tax deductions to be made will be very much simpler than P.A.Y.E., and they will be at a flat rate. There will be no code numbers, no cumulation, no repayments and no tax tables—except that we may provide him with a simple 30 per cent. ready reckoner. The new arrangements will apply to payments made on or after 6th April, 1972.
Inevitably, time is needed, not only to pass the legislation but to make the regulations and provide exemption certificates. Though some additional staff will be needed, these will, in part, be offset by reductions in the staff at present engaged in trying to collect Schedule D tax from those elusive, peripatetic, self-employed hod carriers. We believe that in time this system will not only largely prevent tax loss but will also solve a problem which I know has been causing a great deal of concern throughout the industry.
Why is my hon. Friend straining at the gnat and swallowing the elephant? I congratulate him on ending the particular abuse in this industry, but why not tackle the whole problem and amalgamate Schedule D with Schedule E, so that everybody has the same allowances, provisions and conditions, which would be fair to all employed persons, instead of dealing with the building industry alone?
I am sure that my hon. Friend recognises that we are dealing primarily with the evasion of tax, and it is the escape from the P.A.Y.E. system which has given rise to the particular problem against which we are intending to legislate. It would be quite impracticable for Schedule D taxpayers to be taxed with anything like the P.A.Y.E. system, which is why we think our proposals are right for this industry. I thought that my hon. Friend would refer to other industries. All we can say is that the loss of tax from this cause is overwhelmingly confined to the construction industry. We are always pursuing the evasion elsewhere, where it happens.
I congratulate my hon. Friend on these proposals. They are the lines which we took when we opposed the ridiculous Measure introduced by the previous Government. Would my hon. Friend bear in mind that in certain villages there are probably one-man maintenance contractors who are sometimes called sub-contractors or ordinary contractors, and ensure that the same provisions apply in those cases?
I would have little doubt that the persons to whom my hon. Friend refers would certainly be able to satisfy the tax inspector and obtain a certificate of exemption. In those cases, no change is made in the manner in which they are paid.
Another matter which has been engaging my attention is the new proposals which my right hon. Friend intends for occupational pension schemes. The House will remember that last year Mr. Iain Macleod gave a firm undertaking that the pension Clauses in last year's Finance Bill would be reviewed should we find ourselves in Government. This we have done. Apart from consultations by the Inland Revenue during last summer and autumn, I have seen a number of the organisations representing occupational pension interests. Our predecessors had, in our view quite rightly, decided to introduce a single, new tax code of reliefs for occupational pension schemes to replace the mixture of different reliefs—many of them depending on no more than historical accident—which have existed hitherto. The introduction of the new code was originally intended to coincide with the start of the reconstructed State superannuation scheme associated with the name of the right hon. Gentleman the Member for Coventry, East (Mr. Crossman, and, as originally drawn, the tax provisions imposed limitations on occupational pensions which that scheme would necessarily have implied. The Crossman Bill fell with the General Election, and, mercifully, it has vanished into limbo.
As the House knows, my right hon. Friend the Secretary of State for Social Services is currently working on a much simpler reconstruction of National Insurance. Our philosophy is based firmly on the view that it is to the occupational pension schemes that increasingly people should look for their earnings-related pension provision. Accordingly, it has been our firm resolve, that the proposed new tax code should demonstrate clearly and unequivocally our determination that occupational pension schemes shall be given every possible encouragement to spread their net very widely and to provide adequate benefits, not only for employees but also for their dependants.
We have taken the view that, desirable though the rationalisation of the pre-1970 codes may be, it could prejudice this wider objective if we were to insist on all schemes having to conform without a longish transitional period. Although the 1970 code gave full protection for accrued rights, we have taken the view that this does not go far enough. Accordingly, as my right hon. Friend announced, we do not propose that it should be compulsory to conform to the new code until 1980. This longer transitional period has been widely welcomed by the pensions interests and represents a significant move to meet the representations which were made to us.
I did not imply anything like that. The problem of preservation will be dealt with eventually in the Bill to be introduced by my right hon. Friend the Secretary of State for Social Services. It is not covered in the Finance Bill legislation.
The second point was that the limits on the capital sums payable on death in service imposed by the 1970 Act were unacceptable. A lump sum equal to two years' salary may be totally inadequate in certain unfortunate circumstances. We therefore propose that the limit should be four years' salary. This will be exclusive not only of pensions paid to widows or dependants but of any return of contributions paid by the deceased employee.
I shall come to the F.S.S.U. in a moment, but I can say that it will apply to existing members after the date for conformity.
With the longer transitional period, it is very important that nothing should discourage firms which wish to take advantage of the new code, which in some respects is more beneficial than the old, from doing so. For that reason we considered it important that the water on both sides of the dam should be approximately level; there should be no inherent disincentives to change from the old to the new. I am sure that the House will think that that is sensible. Accordingly, provisions for taxing the refunds of contributions have been modified. Instead of the tax being increased from a quarter to half the standard rate, as proposed by our predecessors, the rate of tax on refunded contributions will from 6th April this year be 10 per cent. of the gross refund. whether the scheme has been approved under the old or the new code.
We have taken the point that some schemes will have difficulties of adjustment to the new code because of their cumbrous amendment procedure. The Finance Bill will provide for applications to be made to the Chief Registrar of Friendly Societies to approve amendments to existing schemes. That is why there is the Money Resolution dealing with the fees to be charged by the Registrar in respect of this function.
I recognise—here I come to the point raised by the hon. Member for Farnworth (Mr. Roper)—that nothing we did in this field could please everyone. It became clear in our consultations that no proposals which involved, however far ahead, the compulsory application of a single code would satisfy, for instance, the F.S.S.U. scheme and a few others like it. No doubt we can explore this matter more fully when the Bill comes before the House, but I would say at this stage that I think that when existing members of the F.S.S.U. scheme appreciate not only how far their accrued existing rights are fully protected but also the substantial alleviation afforded by the 10-year transitional period, from 1970, they will recognise that we have gone a very long way to meet their arguments.
I have three short points on the capital gains tax changes. The abolition of the short-term tax is a welcome simplification, achieved at negligible cost. In future the long-term tax will apply to all chargeable gains of individuals. However, I should like to make it clear that short-term losses which have arisen up to 5th April this year, and which it has not been possible to allow by that date, will be available for carrying forward against capital gains in subsequent years.
The £500 disposals exemption is another change which will save a great deal of time and effort on the part of the Inland Revenue and taxpayers and their advisers, again at small cost. I must make it clear that it is based on total disposals of under £500 in the year, not, as I think one or two hon. Members suggested yesterday, gains of less than £500. There was some misunderstanding about this. The exemption will include a marginal provision under which in cases where the disposal proceeds exceed £500 the capital gains tax will not exceed one half of the excess.
Now a word about the ending of the deemed disposal rule on death. I recognise that, as the right hon. Member for Stechford suggested, in theory there could be a possible tendency towards what he called "locking in" for securities. But there are many other factors which affect the investment decisions of elderly people. We do not expect that the tendency will have any serious effect on markets generally.
We have been pressed over the past few months to provide a taper for capital gains tax, to prevent it being a tax on inflation. I do not think that it has been generally appreciated that ending the deemed disposal on death goes part of the way to meet that case, for when an asset which has increased in value forms part of the estate of a man who dies estate duty will be paid on the current market value of the asset, including the gain. Accordingly, the executors will take the asset at that current market value, and any subsequent appreciation for capital gains tax purposes will run from the date of the death. In that way we can claim to have met at least in part the criticism of the tax which has been widely voiced.
I come now to two of our three major reforms, the personal tax reform and corporation tax. My hon. Friend the Minister of State will deal with V.A.T. when he winds up.
As my right hon. Friend the Chancellor has announced, this year's Finance Bill will contain the legislation to implement his proposals to replace income tax and surtax with a new graduated system of personal taxation. We shall have ample opportunity to debate the details of this momentous reform during the passage of the Bill. I do not need to say much this afternoon in amplification of my right hon. Friend's Budget Statement, but perhaps a few comments would not be out of place.
First, although the reform will not come into force until 1973 it is important that we legislate this year. The details of the reform must be settled so that planning for unification can start early next year. Further, we expect the legislation for corporation tax reform to be in next year's Finance Bill. Many hon. Members will agree that experience has shown that it is unwise to try to include two major reforms in one single Finance Bill. Much of the difficulty occasioned by the 1965 Bill came about because the Labour Government were determined to push through both capital gains tax and corporation tax in the same Bill.
Unification will bring significant benefits to both taxpayers and the Inland Revenue. It is a major simplification, with one tax instead of two. The merging of the income tax and surtax rules into a single code will involve a great deal of detailed legislation, and we must wait for the Bill and the White Paper which will accompany it. However, I can say that for the most part the substance of the existing rules will be retained. For instance, personal and charitable covenants will attract tax relief at the basic rate, but not at the higher rates. Building society interest will continue to be paid free of tax, but will be grossed up to determine liability to the higher rates. Life assurance relief will be simplified. Instead of relief being at two-fifths the standard rate on qualifying premiums, relief will be given at half the basic rate—15 per cent., if we take the provisional 30 per cent. as the basic rate.
In some cases, however, the income tax rules will run the whole way up the scale. For example, interest on National Savings Bank and Trustee Savings Bank ordinary accounts is now free of income tax up to the new figure of £21 a year. After unification, this relief will run for the higher rates as well, providing a small extra attraction for savings. Claw-back, too, will run all the way up the scale in the new system. This will reduce the level at which it will pay people not to take the family allowance.
As well as simplification and simpler graduation, unified tax will have the great advantage that the nominal rate of tax that taxpayers pay will be the true rate they bear. I do not know how many times in the past six years I have heard hon. Members from both sides of the House complain of the widespread misunderstanding about the marginal rate of tax on wages and salaries. Unlike our predecessors, we have not been content to bewail the absurdity of the existing system. We shall put it right.
This brings me to a point which has been warmly welcomed, at least from this side of the House.
Does the hon. Gentleman agree that it was under the previous Administration that the first studies were initiated into amalgamating income tax and surtax, which make this change possible?
I was delighted to find that the Inland Revenue was well aware of the proposals that we had and the changes we were going to make. But I must say that the right hon. Member for Stechford was pretty discouraging about the administrative problems of the change-over in his Budget Statement last year.
Will the hon. Gentleman please correct this? He is suggesting that my right hon. Friend was discouraging about something he made possible—namely the amalgamation of income tax and surtax. Will he not be more magnanimous rather than petty and party political and agree that the study for the amalgamation of income tax and surtax was started under the last Government?
The right hon. Gentleman is taking his prize now, and we acknowledge that. I am coming to him in a moment.
I was trying to deal with the proposal that the first slice of investment income will not be liable to the investment income surcharge, but will be taxed on the same basis as earned income. This represents perhaps the most important single new incentive to savings that any Government have introduced for decades. Until now, with only minor exceptions, savings income, however small, if subject to tax has been taxed at the standard rate—which is 41¼ per cent. this year and will be 38¾ per cent. next year. But from 1973–74, the first slice of taxable savings income will normally bear tax at the basic rate fixed provisionally at 30 per cent. In addition to encouraging savings, it will help the retired living on savings and such small but disadvantaged groups as divorced and separated wives whose maintenance payments are classed as investment income now.
My right hon. Friend made it clear that we could not even decide the starting point for investment income surcharge or higher rates until 1973. I must ask the hon. Gentleman to contain himself with patience. No decisions have been or could have been taken on these matters yet.
I would not like to let this occasion pass without expressing the gratitude of many women living on alimony who, for many years, failed to understand why they were taxed on their alimony as unearned income when their separated husbands had earned the money.
I take the point. That is why we are dealing with it.
As I was saying, unification is a momentous reform of the structure of taxation. The greater simplification and greater intelligibility have been commented on by almost every spokesman. The right hon. Member for Stechford was astonished that we should put forward our proposals less than nine months after taking office. That we could do it is a tribute not only to the intensive work done by the Inland Revenue —and there is no question of the Government having to force this on unwilling officials because, on the contrary, we have had the greatest possible support and co-operation from officials in the Inland Revenue and in the Treasury—but also to the years of careful planning that we undertook in opposition. It is tempting to say that tax reforms of this breadth and significance can only be undertaken if the necessary preparation and commitment are made in opposition. I hope the House will feel that it is not only worth waiting until 1973 to enjoy the fruits but that the time, trouble and effort which have been and; will be necessary to bring the reform to fruition will have been well spent.
The second major reform concerns corporation tax. We believe that the economic double taxation of distributed profits is, and can be shown to be, harmful, and that for this reason the existing structure of the tax must be changed. I expect that this will not receive the same universal welcome as the personal tax reform has received. The theory underlying the 1965 reform was that, by discriminating against distributions, the tax system would lead to an increase in retained profits and so to more investment. We on this side always had the gravest doubts not only whether the reform would achieve the objective but, even if it did, whether it was necessarily the most effective way of promoting economic growth.
Unhappily, our fears and doubts have proved well founded. I ask the House to look at what has happened since the Finance Act, 1965, and compare it with what one would expect to find had happened had the Labour Party's aspirations been realised. One might have expected that dividends would have fallen and retentions would have increased. Increased retentions should, on their arguments, have led to higher pre-tax profits, rising investment and faster growth. But what do the figures show? They show that dividends have remained more or less constant. Indeed, expressed as a proportion of profits, so far from falling they have if anything tended to rise. As taxation has risen steeply, even allowing for investment grants, profits after tax have fallen. As a consequence of all this, there has been no increase whatever in the proportion of profits retained. In fact, the tendency has been the other way.
The truth is that the last Government never recognised the one cardinal factor in this equation—that companies, except in extremity, will always aim at the very least to maintain their dividends in order to keep the confidence of the market. All that happened, therefore, was that the 1965 tax change made it very much more expensive in terms of pre-tax profits to do this, and with profits stagnant or declining, it was inevitably done at the expense of retentions. Nor is that all. The high cost of servicing dividends, high taxation, low growth and deteriorating business confidence combined to produce depressed conditions in the market for new issues, whether of equity or of loan stock.
It is, therefore, quite evident that in the economic conditions which the last Government brought about—low economic growth, weakening business confidence and stagnant company profits—the effect of the 1965 tax change was by any standard disastrous. The only effect was to increase not retentions, let alone investment, but the total burden of taxation on companies. But even supposing that the system had worked or would have worked in conditions of rising demand—what then? Supposing that retentions had increased significantly. Would that have necessarily been a good thing? Here again, our answer is, "No".
Retentions do not necessarily lead to profitable investment. In so far as they do encourage investment, they encourage mere quantity, not quality. By divorcing investment decision from the market, by tempting directors to regard retained profits as merely a cheap form of finance, by absolving them from applying the same stringent tests to their investment decisions as they would if they had to go to the market, the emphasis on retentions can actually lead to lower growth. Too great an emphasise on retained profits can produce, and, indeed, in many cases, has produced, profitless operations by established companies while new, expanding companies have found it increasingly difficult to raise the funds they need.
I am grateful to have the assent of the hon. Member for Dudley (Dr. Gilbert). No doubt he would have been on our side for some at least of our arguments in 1965.
Perhaps this result was expected by right hon. Members opposite, because it was logical and inevitable that where the market was prevented from working properly, the State should have to step in with subsidies. That is what we have had, through massive investment grants. Thus, the distortions of the grant system were added to the discrimination of the tax system. Grants, paid without regard to profitability, were another expression of the foolish philosophy that all investment, profitable or otherwise, is good.
So we have had the worst of all worlds —high levels of company taxation with a bias against distributions, wasteful subsidies which discriminated between industries, both leading to the distortion of market forces and the misallocation of resources and so contributing to low growth; a vicious circle indeed.
The stark truth is and has always been that while Labour Governments have acknowledged that they were responsible for managing a mixed economy with a private sector operating a private enterprise capitalist system, they have never been prepared to create the conditions in which that system could work. So far from providing encouragement to successful enterprise, they have often seemed suspicious and even hostile. If that is not in fact what they said, it was the impression inevitably given by what they did.
We are determined to change all this, and one of the central messages of the Budget is that the Government's attitude to savings, profits and successful, profitable investment is very different from that of our predecessors. We are ready to see the capital market working as it should work and as it is capable of working, and may I say how splendidly it has responded to my right hon. Friend's Budget! We aim to transform the business climate, to rebuild confidence so that we can climb out of this slough of despond which is the result of six years of Socialism. The reform of the structure of corporation tax is one of the keys which will unlock this door. The reform is based on the concept of neutrality between distributions and retentions.
As my right hon. Friend said, there are various methods of achieving this, and on domestic grounds we would prefer the two-rate system. My hon. Friend the Member for Oswestry (Mr. Biffen) in the course of an intervention asked yesterday whether our proposals envisaged in the treatment of income from overseas a return to the system prevailing up to 1965.
Under both the systems described in the Green Paper, two-rate or imputation, relief will be given for tax paid overseas on a particular source of income up to the amount of corporation tax due on that income. Where a company has more than one source, it will be able to assume so far as possible that its distributions have been made out of profits which have not borne foreign tax, or which have borne foreign tax at a low rate—the so-called Sterling Trust system after the case of that name. By marshalling its distributions in the way described in paragraph 36 of the Green Paper, the company will thus be able to make the fullest use of the reliefs available to it inside the structure of the tax. In many cases more double taxation relief will be due than under the existing system.
The hon. Member for Heywood and Royton (Mr. Barnett) and his hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon)—I am always inclined to call them the hon. Members for Sheldon and Barnett—suggested yesterday that we were out of step with the Common Market because the Van den Tempel report had recommended the so-called classical system which we have at present. We are accused, as I understand it, of abandoning the classical system just when, so it is said, the Community is on the point of adopting it. It is a strange accusation coming from a party which abandoned the credit system just when everybody else in Europe was adopting it.
I am content to wait and see. Indeed, this is one of the reasons why we are not legislating this year. Plainly, in the world of political realities the eventual choice for the Community will have to reflect the differing interests and views of the member countries. Van den Tempel's preference for the classical system was based on certain assumptions which, as Mr. John Chown has demonstrated in his very illuminating pamphlet, are not necessarily relevant in this country, and I pay tribute to the Institute of Fiscal Studies under which auspices that admirable pamphlet has been published.
I can see that I shall agree with some of the hon. Gentleman's output, but not necessarily all.
We have of course been in touch with those in the Community who are concerned with these matters. I am sure that the House will agree that at a time when we are making an application to become a member it is entirely right and proper that we, as applicants for membership, should make our views and preferences known, and this is what we are doing. I believe that for Europe as for us the real choice will turn out to be between the two-rate and the imputation systems. It is right, therefore, that these should be the two systems which we spell out as alternatives in the Green Paper which we have put before the House. Indeed, apart from unforeseen circumstances, we intend to legislate for one of them next year.
I may add that this is all in stark contrast to what happened in 1965. No one who took part in those debates—and the hon. Member for Heywood and Royton and I were certainly two of them —will ever forget the frantic, frenetic weeks during which the House struggled at all hours of the day and night to keep abreast of the torrent of Amendments, new Clauses and Schedules which poured on to the Order Paper. If it is only to avoid this chaos, it is better that our reform should wait a year so that we make sure we get it right. In my view, it will be a year well spent.
I have the utmost confidence in my hon. Friend so long as he gets it right for posterity and ends all the uncertainty for industry, trade and commerce which arises from an incomprehensible fiscal Statute.
I take note of my hon. Friend's representations.
At the end, we shall have a company tax system which, together with our new encouragement to savings, our simplification of capital gains tax and our reformed personal tax structure, will provide the framework and the incentives for profitable investment and so for the soundly-based and faster economic growth which all of us, on both sides of the House, want to see.
I must now comment on the remarks of the right hon. Member for Stechford. It was, I suppose, inevitable that he should seek to fan the prejudices of his supporters by claiming that this was a rich man's Budget. I congratulate him on making a much better job of that than did his right hon. Friend the Leader of the Opposition.
No, but the right hon. Gentleman did it quite well. As he knows, that claim was utter nonsense, as I shall now demonstrate.
The truth of the matter was accurately and succinctly stated by my hon. Friend the Member for Brighouse and Spenborough (Mr. Proudfoot) who, in the first back-bench speech of the debate, within minutes of the Leader of the Opposition sitting down, said that this was:
…the best Budget since the war…for the whole community."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1408.]
It announced higher pensions for the elderly—
I will come to the Budgets before the General Election in a minute.
The Budget announced higher pensions for the elderly, payable in September, two months earlier than they were due. There were also the higher age exemption for old people and the higher age relief for elderly married couples. When these are coupled with the family income supplement up-rating for poor families announced on 24th March and the new and improved benefits for the very old and chronic sick announced yesterday, the Government have shown more practical and effective concern for the very poor than the Labour Party could ever achieve. We may not talk as much about compassion, but we manage to do rather more about it. So that was not the mark of a rich man's Budget.
S.E.T. has been halved, and already some food price reductions have been made and more will follow. The Budget gave massive new help for families. The increased child allowances will help every taxpayer with children. The new allowances will take more than 200,000 families with more than half a million children out of tax altogether and benefit a total of some 6¾ million families. That is not a rich man's Budget. The halving of S.E.T. and the increase in child allowances by themselves account for £453 million out of the total of £546 million of tax reliefs given in the Budget for 1971–72, more than four-fifths of the total.
Of the remaining £93 million, £55 million goes in the corporation tax cut, widely recognised as desirable to help investment. Where is his rich man's Budget? The right hon. Gentleman referred to the 15 per cent. earned income relief above £4,005. But the Chancellor of the Exchequer reduced Labour Members to an embarrassed silence when he pointed out that that would cost this year only £16 million, less than 3 per cent. of the total Budget reliefs.
The right hon. Member for Stechford asked yesterday how many people would benefit from this change. The answer is: getting on for half a million—the precise estimate is about 415,000. They include the rising managers and professional men, whom presumably we all want to encourage to stay in this country and give of their best.
I must say I was a little surprised to hear the right hon. Gentleman criticise this proposal so fiercely. After all, he it was who time and again referred in tones of what we assumed to be real
regret to the fact that he could not move in this direction. In his 1968 Budget, when, as the House will remember, he increased taxation by £923 million in a full year, he had this to say about direct taxation:
…further substantial increases in taxation on earned incomes could well have a stultifying effect upon the development of the economy…I cannot ignore the experience of our more successful competitor economies abroad…our direct taxation, on earned incomes is comparatively high. It may, indeed, be too high…"—[OFFICIAL REPORT, 19th March, 1968; Vol. 761, c. 276.]
and went on to say that he could not contemplate a reduction in that year.
In 1969 the right hon. Gentleman went significantly further, when the election was beginning to loom ahead. In that year he raised taxation by a further £340 million. He took credit again for avoiding increases in direct taxation, but went on to comment:
…I have carefully considered whether, even in a year as difficult as this, it would be justifiable for incentive reasons, and for the encouragement of savings, to mitigate slightly the rates of tax on high earned incomes.
Again he said he had other priorities, but went on, and no doubt he intended the words to be read outside this House:
I would emphasise, however, that I regard an increase in one of the earned income allowances as a high priority for a later Budget."—[OFFICIAL REPORT, 15th April, 1969; Vol. 751, c. 1031–2.]
Notice "one of the earned income allowances" following "high earned incomes". I am bound to say that could mean only one thing; namely, that he wished to increase the 1/9th earned income allowance—precisely the change that my right hon. Friend has made. It ill befits him to have criticised the Chancellor so fiercely when he had hinted before the General Election that this was the direction in which he would have liked to move. But we have become used in the last nine months to right hon. Members opposite saying one thing in office and quite the opposite in Opposition, so I suppose we should not have been surprised.
Then there is the disaggregation of wives' earnings. No one has campaigned more vigorously for this than the right hon. Member for Sowerby (Mr. Houghton) and others of his hon. Friends. There is the disaggregation of minors' income. But hon. Members must not run away with the idea that only the better-off benefit from that. Hon. Members on both sides of the House have sent me letters from people with quite modest incomes—wives with separation agreements and so on—complaining how the aggregation rule increases their tax burden most unfairly. Lifting the threshold for estate duty costing £10 million for 1971–72 takes almost a quarter of all estates out of the charge altogether. We are left with a mass of minor changes to close companies, capital gains tax, self-employed pensions, stamp duty and so on costing about £12 million altogether.
Of course, these changes will benefit some better-off people—but in most cases we are doing no more than repealing some of the foolish, niggling, stultifying provisions which characterised the Budgets of the Labour Party. They were the sops thrown to the Left wing. They were costly to administer, they raised little revenue, they were the product of the politics of envy.
But what have we done to benefit people with average or less than average earnings? I am content to take the man to whom the right hon. Gentleman for Stechford referred at the end of his speech yesterday—the married man with two children at £27 per week. As a result of the Budget—including the social security contribution—that man will be 51p per week better off. The right hon. Gentleman said, however, that:
…the man may just about break even as a result of the Budget and the mini-Budget combined."—[OFFICIAL REPORT, 31st March, 1971; Vol. 814, c. 1539.]
The right hon. Gentleman is quite mistaken. Taking both measures together, including the social service charges, that same man is about 34p per week better off, and he keeps more out of every extra £ he earns.
But what happened to the £27 a week man under the right hon. Gentleman and his predecessor? Even leaving out the social service changes, school meals and the prescription charges, which went up under Labour—my officials have told me it would take a week to work that out—his tax went up by 47p per week and his social security contribution by 65p per week.
After taking account of his family allowance increase of 50p he had a net loss, over the six years, of 62p per week. Under us, 34p per week better off: under Labour, 62p per week worse off. Yet the right hon. Gentleman has the effrontery to call this a rich man's Budget.
Bearing in mind the massive social security benefits, bearing in mind that over 4/5ths of the reliefs consist of the halving of S.E.T. and improved child allowances, bearing in mind that many of the smaller reliefs benefit families who are certainly not rich, this is a Budget which benefits the whole nation.
My right hon. Friend has set the country on a new road to prosperity. This is a Budget which will go down in history as one of the great reforming Budgets of the century, and I am proud to have played my part in it.
I hope that the Financial Secretary will forgive me if I do not say that he has done quite well, as he said of my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins). The Budget will not be judged either by his speech or the excellently-delivered speech of the Chancellor, nor by the way in which it is received—it would have ben churlish of the right hon. Gentleman's hon. Friends if they had not shown their appreciation. It will be judged in future by what it does for unemployment, investment, prices, cost inflation, for what it does to narrow the gap not just between the rich and the poor but between the middle group and the very top, and what it does for economic growth.
Let me deal first with unemployment. The late Iain Macleod always spoke movingly and sincerely on the question of unemployment and condemned levels considerably less than those we have today. The Secretary of State for Trade and Industry and the Chancellor have equally condemned the present levels of unemployment as being far too high. What will matter at the end of the day is what the Budget does to bring down those levels. It might appear at first sight that more than £500 million worth of tax reduction will do something to bring down that level. There is now a level of unemployment which includes not just the unskilled, but the skilled, the young and middle-aged executives, many who never dreamed that under this Government they would be unemployed.
They will be looking for the results of these tax concessions. Unfortunately the way these concessions have been made means that the demand effects are not likely to be much more than about £350 million and the net result of this might well be, thankfully, to prevent unemployment rising to one million next winter, but the Budget is likely to do very little to reduce the present terribly high level of 800,000, a level which is a double tragedy in that it is a tragedy for human and for national resources.
If the Chancellor really means what he says he should be ready to give an assurance today that if, in the summer, my figures prove all too tragically to be right, he will take further action to ensure that those figures come down and we do not have 800,000 unemployed next winter. If he is not prepared to give that assurance then the country will be left believing that it is not much more than words which he has to offer.
I turn now to industrial investment. The greatest criticism levelled at the last Government was to do with the low level of industrial investment which we had. It has been disastrously low for too long yet the Government have known for a considerable time, from their own survey, that it would fall in 1971 by 2 per cent.—for the first time ever there would be a fall in industrial investment. The Chancellor's estimate is that, as a result of the Budget, it will rise by 0·5 per cent. If hon. Members opposite think that a 0·5 per cent. increase in industrial investment is good enough, they are easily satisfied.
One can readily see why the level of industrial investment will be so small. Having removed the investment grant incentive, the right hon. Gentleman has not done enough for the cash flow to ensure that there will be sufficient funds available for the further industrial investment which is so vital to our economy. The effects of the further cut of 2½ per cent. in corporation tax will not be felt until January, 1972. With the previous cut announced, the total cut will be £145 million.
Selective employment tax is to be halved, but the benefit will not go to manufacturers except by way of the reduction of the forced loan. [HoN. MEMBERS: "Hear, hear."] Hon. Members say "Hear, hear ", but the only real asset which many concerns have against which they can borrow is the S.E.T. debt, and they have already borrowed against it. Therefore, there will not be all that much left for manufacturing companies. In any case, all of this has already been overtaken by the National Health Service contribution of the employing companies which, in 1971–72, will cost them £140 million and which will start in September before they reap the benefit of the corporation tax reduction next January.
But, as the Secretary of State for Trade and Industry said yesterday, the real reason why companies are not investing runs very much deeper. It has to do with the industrial climate. Anyone with contacts in industry will be aware that it has never been more depressed than perhaps since before the war. It has not been helped by the Government's industrial policy, which is in total disarray. Is the Government's policy interventionist? A partial interventionist policy was adopted towards the Mersey Docks and Harbour Board which resulted in the worst of all worlds, with some lending to that organisation and a refusal of other lending, forcing losses on thousands of small investors who invested, rightly or wrongly, in what they knew to be a trustee stock, with Government directors on the board. The effects on the price of investment for local government and for similar boards are incalculable.
I come to the question of Rolls-Royce. This is not a matter, as we have been led to believe, of a ruthless Government making a ruthless decision to allow a company to go bankrupt. It was a hasty acceptance of a piece of bad advice, as the Government have made clear. If the news from America that a deal has been done with Lockheed is correct, I am sure that the whole House will be delighted. But the net result will be that we are prepared to save Lockheed from bankruptcy and then use the nastiest commercial methods to bankrupt British sub-contractors, thereby doing the maximum damage to engineering prestige, combined with a loss for thousands of small shareholders, including worker shareholders.
The Government appear likely to accept an open-ended commitment to a 20-year deal on what are not likely to be economically viable terms. They may well be right to do so, but it makes a nonsense of their industrial policy. I am therefore not surprised that the Chancellor of the Exchequer did not have the nerve to add equities to the save-as-you-earn scheme.
It will take more than a Budget to change the industrial climate, for while the Government are busy blaming the past, as the Secretary of State for Industry did yesterday, it is important to recall that industrialists invest on the basis of what they expect from the future, and when they fail to invest they show, with every justification, their lack of confidence in the Government's policies.
That leads me to the other main scapegoat of the Government's failures—the cost and wage inflation. It is perhaps worth reminding the Government that other countries have cost and wage inflation, but they do not fight it with low growth and heavy unemployment. Countries which have done so, such as the United States, have failed and have had to change course. On the other hand, the T.U.C. has recognised that money increases above productivity increases are not helpful to its members, and its attitude has been very much more responsible than that of the Government. It has put forward serious proposals which could have formed the basis for negotiations which were, in effect a form of voluntary incomes policy. This is quite remarkable in the face of the provocation which it has had from the Government. The Budget has slammed the door in the face of those serious proposals.
I hope that the impression given is proved wrong, but I am led to the conclusion that the Government are hell-bent on a suicidal fight to the death with the trade union movement. One cannot come to any other conclusion. The Government have tried to be fair and to show that they are being fair, but their friends will not let their undue modesty prevail. The day after the Budget the Financial Times commented:
The abolition of short-term capital gains tax and of long-term gains at death, the 75 per cent. limit on surtax, together with the extension of earned income relief are the stuff that capitalist dreams are made of".
I shall come to the question whether the capitalist sector, as the hon. Gentleman calls it, should work. I do not know whether the hon. Gentleman is suggesting that people who have been paying a marginal tax rate above 75 per cent. were not working up to Tuesday but that since they have been beavering away. If so, he is somewhat insulting to them.
The Government's actions and what they are doing to the chance of co-operation with the trade union movement condemns the nation to a bitter fight, with the Government opting out of the fight on the prices front. It was interesting to note, incidentally, that the Minister of Agriculture said yesterday that the selective employment tax cut "should" result in a cut in prices. He did not say "would", and understandably so because he knows very well that the effect on prices will be minimal.
The hon. Gentleman has no justification for saying that the effect of the selective employment tax cut will be minimal. Within 24 hours of the announcement, Sainsbury, Tesco and Sketchley, all multiple chain stores, announced that there would be reductions as a result.
If the hon. Gentleman believes that price cuts in a few large supermarket stores are an indication that all prices will fall in the months ahead, he is entitled to his view. But if he wants a better view he should read Professor Reddaway's Report from which he would conclude that the effect on prices is likely to be minimal. The only effect on prices as a result of what the Government have done in this Budget, together with the October measures which, according to the Financial Statement, should be taken into account, will be to increase them. So the trade unions are left with no option but to get what they can, and from such a fight there can be only one loser, the nation. That is what the Budget is doing.
It is against this background that one turns to the Government's tax proposals. My right hon. Friend the Member for Stechford and others have spelled out why the Budget is grossly unfair, not just between the top and bottom ranges but between middle income ranges, as those people will learn all too soon. This cannot be refuted except by including all the tax reductions and the pension increases, whilst excluding the Health Service contributions and charges, and the increase in food prices, rents, rates, rail fares and bus fares none of which was caused by cost and wage inflation but by deliberate acts of Government policy.
It is against this background that one is entitled to look at the Chancellor's measures of tax reform. I say at once that the Government deserve congratulations for producing the Green Papers which give us a chance to study the proposals. The Government seem to be arguing, as do many commentators, that the tax reforms are a virtue of themselves. Whilst I welcome some, especially where a victory has been won over the massed ranks of the Inland Revenue, it would be a sour victory if the net result of the reforms were to create even greater unfairness. I do not welcome the reforms for their own sake.
To take the first reform, which amalgamates income tax and surtax and abolishes earned income relief, I naturally welcome this unreservedly, because my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) and I moved Amendments and new Clauses on exactly these lines consistently from 1964 onwards. This is a simplification which will make the system more readily understandable, but the surcharge on investment income will have considerable administrative problems.
Dividends are being paid to thousands of small shareholders, and it will be necessary to go to all those small shareholders for the surcharge on the investment income. I forecast that the saving in surtax staff will be more than taken up by additional staff which will be required in the Inland Revenue offices. That might be some consolation to those working on surtax at present. Additional staff will therefore be needed, unless the Chancellor intends to exempt almost all those who are liable to surcharge. The Financial Secretary would not say today what form of exemption there would be. He talked about "a first slice", which is a meaningless phrase unless one knows at what point he is taking the first slice. Much as I commend a good piece of reform if the intention is to introduce simplification and throw out unfairness, I reserve the right to condemn what the Government propose to do.
I further condemn any attempt to move away from a fair principle of taxing earned income at a lower level than investment income. Equally, if it is intended to adjust the allowances against the majority of taxpayers in the range between £1,000 and £5,000 a year, which may well happen, so that the lower wage earners pay more to help those at the higher end of the scale to pay less, I would want to see considerable changes—
It might help if I intervened here. My right hon. Friend made it perfectly clear that the allowances would simply be recalculated, rounded off, which means within £2 or £3, to preserve their existing value in the new structure. There is no intention of legislating for different allowances this year.
I am interested to hear that this is administratively possible, and I am grateful for the hon. Gentleman's reply.
The next reform which has been welcomed for no other reason than that it is a reform, is the reform of corporation tax. After reading the Green Paper, I do not think that anyone will be under the illusion that this will be a simplification, so it therefore has to be justified on its merits. The hon. Gentleman attempted to do so, but basically his argument is the same as the argument of John Chown in the pamphlet to which he referred: that more profitable investment is obtained through the equity market than from profits that are ploughed back. The pamphlet to which the Financial Secretary referred was more open about it. Mr. Chown conceded that no research had been done to prove what the Financial Secretary was attempting to prove today. There is no evidence that most of the increased distribution under the Government's proposals would not be consumed. Even if it were not, there is no evidence, as Mr. Chown showed in the pamphlet, that there would be a better return on investment through the equity market than through ploughed-back profits. One may have one's own feeling about it, but evidence there certainly is not.
We all know that the reason why the West Germans introduced this form of tax had nothing to do with economic efficiency but was concerned with an inadequate equity market. After the Financial Secretary had told us at great length what a wonderful new scheme it was, he then conceded that if the Common Market eventually accepts the recommendations of the van den Tempel Report—
If the Financial Secretary is now telling us that if we go into the Common Market, which accepts the van den Tempel Report, which is our present corporation tax system, we would not accept it, I shall be interested to hear this. I did not understand that he was saying that, or that the Chancellor of the Exchequer and the Green Paper were saying that. If eventually the Common Market comes down in favour of the van den Tempel Report, in spite of all his fine words today, he would be prepared to accept it. So much for his arguments.
Hon. Members on the Government side who in the last Parliament were grateful for what the corporation tax system did for close companies, are not perhaps aware that under the new system which is proposed the majority of close trading companies would pay more tax than they do under the present system. I am glad to see that the Financial Secretary does not deny that. This emerged in an answer to a Question which I put down recently to the Chancellor of the Exchequer, and it also emerges from the Green Paper. So for all the fine words about the life blood of the country being dependent upon close companies and small trading companies, a system which is being claimed as a great reform will result in the majority of the close trading companies paying more tax than they do now. The shortfall system, which the Chancellor said was a great concession, will apply to 7 per cent. of trading companies with profits above £100 a year.
The final major reform which the Chancellor referred to was the abolition of S.E.T. No serious case has ever been made against S.E.T.—[Horn. MEMBERS: "Oh."] All we have had has been a series of assertions. Had it been converted, as my right hon. Friend intended, to a percentage payroll tax, together with a purchase tax, that would have been better than reform for its own sake by the introduction of a value-added tax. The proposal of a value-added tax is a cloak under the name of reform for a massive switch to greater unfairness in our tax system. That is what the Chancellor really has in mind.
I make no apology for wanting to see Britain go into the Common Market, but I do not have to like a bad tax. The Richardson Committee in 1964 came out firmly against value-added tax, and this was equally firmly accepted at that time by the right hon. Member for Barnet (Mr. Maudling). One does not need to rehearse all the arguments which were then used, but what was sought to be done with the V.A.T. was to substitute a cumbersome, multi-stage tax for a simple, single-stage tax. Its advantages over purchase tax, as the Richardson Committee pointed out, are non-existent. This again was accepted by the right hon. Member for Barnet. It would be interesting to know whether he has now changed his mind.
The reforms overall are more complicated than the Government have led us to believe, and under the present Government they are likely to be more biased in favour of the wealthy. If there is any doubt about this, we need only look at what has been done so far. The average industrial worker to whom the Chancellor referred, the married man with two children on £28 a week, will benefit to the extent of £44 a year. Neither the right hon. Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) nor the Financial Secretary liked my right hon. Friend the Member for Stechford choosing an income of £50,000 for purposes of comparison. Indeed, the right hon. Gentleman chided my right hon. Friend for at one time wanting to do the same thing.
Does the hon. Gentleman not realise that at least his right hon. Friend is to be congratulated on an advance from the figure put forward by the late Mr. Gaitskell who instanced a bachelor with an unearned income of £100,000? I thought that progress in the Labour Party, though slow, was manifesting itself.
I will progress even further. A major debating point that was being made by the right hon. Member for Kingston-upon-Thames and by the Financial Secretary was that my right hon. Friend wanted to do something on these lines and did not. My right hon. Friend was working within a balanced Budget, whereas even the Chancellor's best friends would never accuse him of having produced this week a balanced Budget. [HON. MEMBERS: Oh."] Hon. Gentlemen opposite must be joking if they feel that the Chancellor has produced a balanced Budget. It has been described on the Conservative benches as a Conservative Budget. They probably regard it as a balanced Tory Budget, but it is certainly not balanced overall.
If we take the £28 a week man, as compared with the man earning £20,000 a year, the man in the latter category will be given £2,041 in relief. But the matter does not stop there. If we take both Budgets—the one last October and the present Budget—it will be seen from the Financial Statement that the average industrial worker will get nothing more but will pay more in National Insurance contributions. On the other hand, if the £20,000 a year man has some investment income he will be able to look forward to considerable help in that direction.
Furthermore, if £20,000 a year man can manage it—and the Budget certainly encourages initiative in this respect—he will find a way of hiving off some of his income to his wife. I predict that the Chancellor's estimate of £12 million as to the cost of separate incomes for husbands and wives will prove to be very low. He under-estimates the initiative of his friends elsewhere. They have not shown enormous initiative in industrial management, but I can assure him that, when it comes to taking advantage of tax concessions, that initiative will soon be shown.
The hon. Gentleman makes an extremely interesting suggestion. Would he explain how a husband will be able to create earned income for his wife other than by employing her? If he does not employ her bona fide, surely the Inland Revenue will disallow deductions for her income?
That is an interesting point. There are methods, but I feel that it would be unprofessional to go into them—unless those who read HANSARD are prepared to pay the appropriate fee. A similar situation applies to disaggregation where, again, I predict the Chancellor is in for a surprise at the number of beneficent grandparents who will be unearthed. The new free gift of an extra £750 annuity to the self-employed and close company directors will prove beneficial, particularly since they will be able to take part of it as a lump sum.
It may be satisfactory to the hon. Gentleman, but it is not satisfactory to the man earning £28 a week. Certainly that sort of initiative will be very much encouraged. It will be further encouraged by the amalgamation of long-and short-term capital gains, but it will be an initiative aimed at investing in speculation rather than towards any additional industrial investment.
Apart from the massive reliefs which are being given in tax cuts, to the man on £20,000 a year, all the other measures will put very large sums in the pockets of that type of individual. It is not my idea of a balanced Budget that that sort of individual, or even the hon. Member for Worcestershire, South (Sir G. Nabarro), much as we like him, should have that much more money in his pocket.
As far as the £28 a week man is concerned, and the vast majority of people in the middle income groups who want to be able to use their initiative, there will be no additional incentive. This is not to say that some of the concessions in the Budget are not in themselves worth while. Some are worth while, but they are appallingly unfair in the context in which they have been set. The average industrial worker, the young executive and the man in the middle income group will receive nothing or only a very small amount from this Budget, and will have to pay considerably more as a proportion of income. None of these concessions will offset their having to pay the higher Health Service charges, higher contributions and all the rest. The evidence is overwhelming that the gap has been widened between the two halves of the nation—between the small group at the top and the rest. And this also involves the middle income group.
In the economic sphere the failure of the Chancellor in this Budget is much worse. He has failed to grasp the great opportunity to go for growth on a much more imaginative scale than was necessary. Michael Shanks wrote an article in The Times on Monday which is very worth while quoting:
We are virtually free of overseas debt; our balance of payments surplus is the highest in our history and one of the strongest in the world; our economy is running well below capacity; unemployment is nearing its postwar peak and still rising. If the Government is not in a position to offer a commitment to growth in return for union restraint, one wonders when it ever will be. It would be a great tragedy if this unique opportunity—never open to the Labour Government—is not used.
I am sure that Mr. Michael Shanks would be interested to hear the hon. Gentleman's opinion about his view of the economy, and I am sure that he will have his own view about the hon. Gentleman's view of the economy. I agree with Mr. Shanks that the Chancellor of the Exchequer has missed a great opportunity. It is a tragedy because it stems from a failure to put growth first. It stems from an obsession with overseas debt. Why in the current healthy position, in which I am happy to see that the Chancellor has been able to confirm a reduction of 1 per cent. in Bank Rate, does he need to allow the borrowing of hot money at anything between 8 to 10 per cent. and then boast about the fact that he is now repaying, earlier than necessary, moneys borrowed at a much lower rate? That is strange financial management of our affairs, although we should not be so surprised, coming from a Government who have managed our industrial affairs with equal incompetence.
There are dangers from going for too high a rate of economic growth. There are dangers that deficits will build up again and we shall have a further increase in debt. But we have a very large surplus and massive foreign assets, so we would have an opportunity of funding those debts which were funded in worse circumstances. It would not be very difficult to do it today. The dangers of failing to go for a higher rate of economic growth are much worse, because they include continuing unemployment at an unacceptable level and too low a level of industrial investment with disastrous consequences not just for today, but for the future. These are the terrible consequences of going for too low a rate of industrial growth.
I conclude that not only has this Budget missed a great opportunity to use tax reform to make a fairer distribution of the national wealth, but it has combined that failure with failing to go for a higher priority in economic growth and, therefore, has wilfully cast away any chance of a meaningful dialogue with the trade union movement, thus further dividing the nation which right hon. and hon. Gentlemen opposite were elected to unite.
It is nice to follow the hon. Member for Heywood and Royton (Mr. Barnett). First, he is always pleasant; secondly, it is rewarding, because I generally agree with him; and, thirdly, we belong to the same trade union, the Institute of Chartered Accountants.
On this occasion I think that the hon. Gentleman's arithmetic was somewhat faulty. First, he talked about putting more money in people's pockets. What he really meant was taking less money out of people's pockets.
The hon. Gentleman said that S.E.T. was a reasonable tax. The whole country thinks that it was a lousy tax. He said that the unions, because of the Budget, will be determined to get all they can, because the Budget would make them do just that. I ask the hon. Gentleman to consider what happened between 1969 and 1970. At constant market prices we have a gross national product increase of 2 per cent. But what about wages? Before this Budget was introduced wages were up by 14 per cent.—seven times as much as the increase in g.n.p. If the hon. Gentleman is right, I tremble to think what will happen in 1971–72.
To summarise the hon. Gentleman's contribution to the debate in a friendly way, it is rather like the description in Baedeker warning people going to the European continent for the first time "to beware of the waiter, because his arithmetic is faulty and seldom in favour of the traveller." So it was in this case.
One matter with which the hon. Gentleman did not deal, which I think is most important, is cost inflation and the inflationary wage system. I intend to deal with that matter. But first I should like to congratulate my right hon. Friend the Chancellor of the Exchequer on his speech on Tuesday for three reasons. First, it was lucid and short, and I shall try to make mine short; secondly, he kept the pledges which the party made to the country; and, thirdly, he listed a number of future reforms which clearly he has on a catalogue and intends to carry out in future.
I was disappointed that my right hon. Friend did not bring in one reform which I think should be brought in at the earliest possible moment—namely, self-assessment of income tax in the United Kingdom as they have it in America. My right hon. Friend would find that he could make a tremendous saving if that was brought in. It could reduce staff by 19,000, at a most conservative estimate, and make a great deal of money for the taxpayer. We had a report on "Self-assessment" when in Opposition. We reported at the same time as we reported on the tax reforms which are to be introduced. We did our homework on tax and it has certainly paid dividends.
The Chancellor, in his speech, set out what he thought was wrong. My right hon. Friend said that of the immediate economic problems which the Government inherited the most serious was cost inflation, and he went on to say:
Cost inflation is a canker which is eating away at our whole economic and social health. It is causing an arbitrary and inequitable redistribution of income from those who can least afford it to those in strong bargaining positions. At the same time it is sapping our economic strength, because by squeezing profit margins it undermines the confidence of businessmen and causes them to cut back on investment.
That is why there has been a large cutback in investment.
Having said what was wrong, like a good Chancellor, my right hon. Friend then set out what his objective was, and I shall deal with that. My right hon. Friend's objective was:
If we can get the rate of increase of money earnings down to something much nearer the rate of increase of national productivity, there is every reason to believe that we shall break out into a new period of faster growth, higher investment, rising living standards and a renewed confidence in our future."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1361.]
I come then to the third point of my right hon. Friend, which is the method paragraph. It's splendid to have an objective. But it's useless if it can't be achieved. I must tell my right hon. Friend and his colleagues on the Front Bench that I do not think that the method being followed by the Government is likely to achieve that objective. I shall explain why. First, they think that if public sector wages are kept low, automatically the private sector will follow suit and keep low. That does not follow by any means.
When I was a member of the Cabinet we had a squeeze on nurses' pay, which I did not like. Then is was assumed that the rest of private industry would follow suit. It did not. It cannot do so, for two reasons.
In the public sector I instance the Post Office. People will lend money to the Post Office because they know that ultimately the Government of the day has the priceless advantage of being able to extract taxes compulsorily from taxpayers. Therefore, they know that the cash flow will continue because the cash flow is guaranteed. So the Post Office can and did borrow at the end of the strike.
But many private firms cannot do that Chrysler could not do it. It could not afford a strike so it had to give way quite meekly to the demands of its workers. It is simply no use saying that because the public sector does it the private sector will do it. It cannot. Ford is another example.
All parties have talked more nonsense to the square inch about norms or percentages than almost anything else. We hear about 8 per cent. as the norm or 9 per cent. On what basis? To somebody getting £50,000 a year 8 per cent. is one thing, but to somebody getting £500 it is another. It is useless and unrealistic to talk about percentage norms. Similarly with a wage freeze. Ultimately it means that a dam is building up. When it breaks, as it did when the Opposition were in power, the floodgates are opened and the situation is worse than before. These norms or these wage freezes are just short-term expedients. They are really not a policy at all.
The reason that my right hon. Friend will not get a correct comparison of increases in incomes with the increases of gross national product is fairly simple. The present wage system of settling claims in this country is about the most archaic and mediæval I have ever seen. I have here some of the wage claims made between July, 1969, and 1970. On average, five wage settlements were arrived at every working day of the year. Of those five, at least one applies to over 10,000 people. The increases vary between 2 per cent. and 33 per cent. There is no pattern, no logic, and no possible measurement of what they will cost.
As the hon. Member for Heywood and Royton knows from when he first became an accountant, anybody who wants to cheat an employer either does not keep any books at all, which is the best thing, or, if he does keep books, he fiddles them, which is the next best thing. That is true, I think that the hon. Gentleman will agree. It is what we used to call in my early days as an accountant a pig's breakfast. That is what this list of wage settlements really is. It provides fertile ground for leapfrogging by trade unions. If any bright trade union leader wants promotion, he has only to look at the list to find all the comparisons that he wants. Anyone can get an increase based on the facts and figures in it.
Hon. Gentlemen opposite do not need it. They have already got it. That is why they want to keep the present situation.
My point is that to make a fair comparison we must get an accurate measurement of the prospective increase in the gross national product, and at precisely the same date we must estimate increases in wages and salaries. To my mind, we should gain a tremendous advantage if that could be done, and I think that it can be done. If it were done, we should find that the country as a whole understood the nature of the problem, which it does not at present.
All this could be done if, in the month when the increase in the gross national product is normally calculated for the coming year, what people would be claiming in wages and salaries in the coming year were calculated. Then we compare like with like. If the increase in the gross national product was, say, £300 million and prospective increases in wages and salaries were £2,000 million, everyone would realise that it simply was not possible without, of course, grievously harming the national economy. In other words, we ought to have our two measurements—increase of wages and increase of G.N.P.—before we take the irrevocable step of fixing wages. To try to increase wages before we know the increase in G.N.P. is folly.
The system would have several advantages. It could be demonstrated so that any ordinary family knew what it meant. Also the whole country would know what it meant. I honestly think that, until we can explan our dilemma to the people, we shall never get their support. A recent National Opinion Poll reveals that 50 per cent. of the people do not know what inflation means. That certainly means they will never know what de-escalation means. I am sure that the Government could find a simpler word than de-escalation. Now most people do not know the relationship between wages and prices; and a third of the population do not understand why there is so much discussion about wage claims being so high.
I am listening intently to the right hon. Gentleman, and I have a great deal of sympathy with certain aspects of his argument. But surely he is putting only one side of the problem. Let us take, for example, the position of Ford in Britain and that of Ford in Germany. Ford in Germany, from the point of view of investment, capitalisation and the development of machinery, is in a position where it can make something like two-thirds more machinery available for the use of each of its workers and finds, as a result, that it is cheaper to produce there than in this country. The right hon. Gentleman is putting forward only one side of the problem.
There are many sides to the problem. I am concentrating on this particular one, because unless we get an accurate measure of the comparison between increased wage claims and increased G.N.P. we are not in business.
I have put these ideas forward in the past, but people have said to me that it is a good theory. But they say that in practice it can happen only in a small country like Luxembourg. That is not so. It happens in Japan, and Japan has twice our population. Under Japanese law, at the same time once a year there are talks between the Government and all businesses on pay claims. That means both Government and private industry. Now if the Japanese can do it, with twice our population, it is not beyond the wit of this country to do the same. The Japanese agree a basic salary. This is adjusted up or down according to the nature of the job. Then a percentage increase is also agreed at this annual assessment. In my view, we should adopt a similar procedure. At the same time as we add the percentage increase to wages we should add a similar increase to fixed pensions. Then everyone comes in on the increased cash racket at the same time.
But oddly enough, Japan does something else that we do not do, and that is produce growth in the economy. Unless we in the United Kingdom aim at and get growth, we shall never make the grade and achieve a higher standard of living. Between 1952 and 1968, the annual growth rate in Japan was 9·6 per cent. Ours was 3 per cent. In view of that, I urge my right hon. and hon. Friends to make at once a detailed study of what happens in Japan in the same way as, when we were in opposition, we made feasibility studies on tax simplification and self-assessment. At that time, we had no resources other than what we could scrounge. Today, my right hon. and hon. Friends have all the resources, and I should very much like them to have such a study made.
If there were an incomes policy based upon something like that, many other consequential policies would follow, such as prices and bargaining at plant level. But we shall never achieve what my right hon. Friend the Chancellor of the Exchequer hopes for unless and until, in his forward forecasts for a year, he can measure the increases in both wages and salaries in the same way as he measures the increase in the gross national product. Then he can compare the two and we know where we are going.
I conclude by reminding my right hon. and hon. Friends again of our time in opposition. In those days, whenever we did any research, we said that we should never reject the unthinkable alternative. I hope that my right hon. and hon. Friends still hold to that view.
I am not sure that the Government will find it so easy to copy the rather simple methods adopted in Japan—[Interruplion.] I say that because there are very many differences between the two countries, including the organisation of trade unions, the organisation of industry, the role of government, and the acceptance of laws in Japan which would not be accepted here.
However, I thought that the right hon. Member for Wallasey (Mr. Marples) spoke a good deal of sense, especially in the first part of his speech. He is right when he says that the Government cannot achieve their objective by discriminating against public employees. Apart from the reasons that he gave, such a policy will gradually make it impossible to keep up recruitment in those services. I agree, too, that here is too much talk about percentages when wage increases are considered. However, this conclusion makes nonsense of the Government's policy, which is based entirely on percentage terms.
The declared purpose of the Chancellor of the Exchequer is to encourage enterprise, initiative and effort. The method that he uses exemplifies the Conservative concept of incentives. It is really that the way to get a rich man to work is to give him more money and the way to get a poorer man to work is to give him less money. That was the basis of the Financial Secretary's argument. But I cannot understand how increases in income for the most highly rewarded people without any guarantee of increased productivity is regarded by the Conservatives as a sovereign tonic for the economy whereas the same thing for workers is regarded as a heinous crime. I cannot understand how the two arguments are put together. The Financial Secretary said that we on this side are guilty of politics of envy. In my view, he and his right hon. and hon. Friends are inspired by the politics of greed.
The Chancellor did very little to tackle the two great problems before us—massive unemployment and rapid inflation. The real reason is that this Government are inhibited by a number of doctrinal prejudices, of which the chief is the view that high wages are the chief cause of unemployment. This is repeated over and over again by the Prime Minister, without his ever giving any reason for believing this. He seems to think that reiteration is a kind of explanation.
There is of course an element of truth in this, but it is a gross over-simplification. Germany today has higher wages than we do and much lower unemployment. There cannot be this simple correlation which the Prime Minister preaches at us—
One cannot say, either, that the Germans get out of this problem because their workers work harder or longer. In fact, they have much more time off than British workers. The four weeks holiday is general in German industry, and they have four or five more bank holidays every year than we do. In this sense, more time is lost in Germany in a year than by all our unofficial strikes put together.
But the great advantage from the German point of view is that this lost time comes on predictable, known dates —[HON. MEMBERS: "Hear, hear."] I am glad that that is cheered. The conclusion surely is that it might be a way of reducing unofficial strikes in this country if we gave more regular, organised, predictable time off, on the German model.
It is just conceivable that one reason that the Germans do not have so many unofficial strikes is that they get more time off. We do not know, but certainly the increase of holidays has on the whole tended to reduce strikes.
If the Prime Minister looked at his doctrine of high wages with rather less prejudiced eyes, he would see that there is an important element of truth also in the converse of his proposition, because high wages are caused by inflation. Trade union wage claims inevitably include safeguards against future and assumed inflation. Every one does this in the country—every one who can—and it is natural that trade unions do it. So the attack on inflation must include, if not start with, an attack on prices.
If the Chancellor had really wanted to lower prices, he would, as my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) said, have cut purchase tax instead of S.E.T. We had an argument about whether the S.E.T. cut will reduce prices. I am dubious about it, but what is certain is that an equivalent cut in purchase tax would have reduced prices much more effectively and clearly. Then, as my hon. Friend the Member for Heywood and Royton (Mr. Barnett) said, in his very able and trenchant speech, the Government have themselves put up the cost of living by the charges which they have imposed on the people.
It is to be welcomed that the Chancellor has accepted that some reflation is necessary, but I have come to the conclusion, after a lot of thought, that he is much too cautious. The worst thing about this Budget is that the highest goal that the Chancellor has set himself is to leave unchanged the intolerable level of unemployment. I am doubtful whether he will even attain his limited goal. Of course, the cut of Bank Rate, which I welcome and which I think overdue, will help by easing credit, but there are important factors on the other side which the Chancellor cannot have taken into account, if one listened to his argument.
First of all, the increased purchasing power provided through the Budget is largely nullified by the social insurance charges announced yesterday. Second, continuing inflation will erode real increase in purchasing power. But there is a third factor which has not been much noticed or mentioned in this debate.
Economists and Governments tend always, like generals who fight the last war, to fight the last depression. But every depression has new and different factors in it, because it concerns human beings, and human and psychological reactions are different. In this depression, it seems that the new, unexpected and paradoxical phenomenon, which is borne out by experience so far in the United States and here, is that any given increase in purchasing power tends to go much more than in previous depressions into savings, and much less into consumption.
It is much against theory, of course, that people should increase savings at a time of inflation, which erodes savings. Nonetheless, it is happening. The cause may be the Damocles' sword of unemployment, the fact that all classes and income groups are frightened of the sudden coming of redundancy and feel it right to provide, even though their savings may be somewhat eroded, a nest egg against this—right through society, wherever people are employed.
But whatever the causes of this new phenomenon, the consequences are clear. We need a rather greater infusion of purchasing power than in previous depressions to secure any given degree of reflation. Therefore, the Chancellor has been over-cautious and should have reflated on a greater scale.
But I feel that he is, like almost all previous Chancellors since the war, inhibited by certain conventional and orthodox fears and arguments. Of course it is a very respectable argument that, to get increased exports, one needs a flourishing home industry, but the first result of a flourishing home industry is an increase of imports before any corresponding increase in exports. That endangers even a large balance of payments surplus—as we have seen in the past—which leads us in due course into a balance of payments crisis and from that to the conclusion that it is therefore safer to keep the economy at half throttle. This is the conclusion which the Chancellor drew in the analysis on which he based this Budget.
The real problem facing us, therefore, is how to get out of this dilemma, how, in effect, to get the ideal which we never seem to get hold of—an export-led boom. This needs some Government guidance and encouragement of exports, but it is hard to expect that from this Government, who do not believe in any interference in the economy. But even if there were Government help and guidance to encourage the production of exports, to try to balance this first effect of stimulating the home economy, I still do not think that it would be enough. The only way in the end to be sure of getting an export-led boom is if export prices fall and import prices rise.
Therefore, the right course is to reflate on a greater scale than the Chancellor has so far risked, so as to get a more buoyant home economy, within which exports will gradually rise to use the balance of payments as a cushion, in the hope that it will preserve us, as it well may, because it is a very large one, but, if necessary—I do not think that it would be necessary—to be ready to resort to small adjustments in the exchange rate instead of waiting for some great, forced, large-scale devaluation.
Of course, if one were ready for those small adjustments, that would lower export prices and increase import prices at that point. This is a very unorthodox thing, which will be decried, but for the last 20 years we have tried every other possible solution, every variant of all other possible solutions, and every Government in turn, including our own, have come unstuck on this.
The policy which I have proposed is the only way that I can see by which this country can get out of this straitjacket which has for so long and so perniciously stultified economic growth. After all, economic growth is the only fundamental remedy for inflation and unemployment.
I wish to put on record in rising to speak in the House for the first time how much we regret the departure of Mr. Geoffrey Wilson, who was greatly loved in this House and who made an enormous mark on all questions affecting the transport industry. I am proud to succeed him in the Truro division.
The present Truro constituency, with 66,000 voters and one M.P., was a very different place in the days before the great Reform Bill of 1832. In those days there were five pocket and rotten boroughs, each of which had two M.P.s, giving 10 in all, embraced within the boundaries of the present constituency of Truro. As far as I am aware, that is a record for any modern constituency.
In those days the 10 M.P.s were elected by 300 voters. In Truro they consisted of the mayor and 24 members of the corporation—they are still there—and throughout the 18th century almost without exception the two M.P.s were representatives of the family of my hon. Friend the present Member for Wells (Mr. Boscawen).
The most distinguished representatives of the little village of Mitchell was the great Duke of Wellington, who embarked on his public life as the hon. Member for a Cornish constituency. Indeed, it could be said that the Battle of Waterloo was won on the playing fields of Mitchell.
The little village of Grampound also had two M.P.s That was such a corrupt borough that even the pre-1832 unreformed House of Commons could not abide it, and it was disfranchised by Lord John Russell, whose family owned a lot of pocket and rotten boroughs.
In the village of Tregony there were an unusually large number of voters, 150, and they returned two M.P.s This made corruption very much easier, though, of course, much more expensive. Every voter demanded £5 for each vote cast, and this meant that it cost about £750 to become an hon. Member for Tregony. The broker was the vicar of Tregony.
In the Port of St. Mawes, which some hon. Members may have visited during their summer holidays, representation was handed from one person to the next entirely as if it were a piece of property. There was one gentleman who, when he died, left it to his widow. She remarried and handed it to her new husband. When the lady died the second husband re- married, had a daughter and bequeathed the representation of the Port of St. Mawes to his son-in-law.
In those days there were no inheritance taxes or death duties and the world was a much simpler place. However, I leave the financial problems of 1771 for those of 1971. My right hon. Friend the Chancellor of the Exchequer has produced what I believe to be a splendid Tory Budget in the classic style. [HON. MEMBERS: "Hear, hear."] I thought that hon. Gentlemen opposite would agree with that. This Budget will be—indeed, it has already been—welcomed with great eagerness by my constituents in Cornwall.
Much as I like the content of the Budget, I must admit a certain reluctance to accept one measure, which is the reduction in the rate of corporation tax from 42-1 per cent. to 40 per cent. I would have been happier if that money could have been used by his effecting immediately the alterations in the structure of corporation tax which he has promised.
I would like to have seen an immediate reduction in the rate of tax on distributed profits to 35 per cent. accompanied by a tax on retained profits of 50 per cent. This figure would produce approximately the same result as a straight 40 per cent. tax on corporate profits. Eventually I would like to see the tax on distributed profits reduced from 35 per cent. to 25 per cent.
The reason why the present tax system is morally wrong is that it is unfair to shareholders. First of all profits are taxed in the hands of the company. Next they are taxed in the hands of the shareholder. My hon. Friend the Financial Secretary paraded these arguments most adequately, but there was one point where I parted company from him. I hope it was a slip of the tongue when he referred to the "servicing of dividends". One does not service dividends. One services interest. Dividends belong to the people who own the company—something which, in the Conservative Party, cannot be too strongly repeated.
The present tax system is not only morally wrong but economically inefficient. We must encourage companies not to retain their profits but to distribute them to their shareholders; otherwise we are in danger of getting into the position which my right hon. Friend the Prime Minister has described as "the survival of the fattest."
In the end, the shareholder knows best. The market has its disciplines, and shareholders are the best judges. They must be allowed to decide how best to use the dividends they receive from companies—whether to return them to those companies or find a better use for the money in other companies.
However, even if it could be argued that this would have this effect on investment, I often wonder whether investment does, in fact, create economic growth. It is sometimes said that one should not change the structure of corporation tax because companies would stop investing. Perhaps it would be a good thing if they did stop. There is a clear correlation between investment and economic growth, but which comes first? It is argued that investment creates economic growth. I suspect that it is exactly the other way round and that it is the expectation of economic growth which induces businessmen to invest.
A word about wealth. The Conservative Party should proclaim loud and clear that it is in favour of wealth—but not, I assure hon. Gentlemen opposite, the preservation of inherited wealth. I refer to the wealth which a man can accumulate within his lifetime. It should be possible for every Englishman to accumulate £100,000 within his own lifetime, if he has the energy and determination, and in the process he will enable his fellow citizens also to increase their wealth.
It may astonish some hon. Members opposite to learn that I find it morally objectionable that in 1971 any man should inherit and acquire £100,000 purely by the accident of being someone else's son. I have seen no evidence to suggest that large lumps of money in the hands of a relatively small number of individuals do anything to increase the prosperity of the rest of the country. I know that it is argued that people seek to accumulate wealth in order to leave money to their descendants. Those who believe this are kidding themselves. In my experience, people seek to accumulate wealth not for their children or their grandchildren but basically for themselves and possibly for their wives.
To implement these provisions I would, first, abolish capital gains tax, because it is inefficient. As I understand it, in the eyes of hon. Members opposite the declared purpose of a capital gains tax is to redistribute existing wealth. In fact, it does not have this effect. All it does is to stop a man from getting from £1,000 up to £100,000.
Second, we should replace estate duty with a system of inheritance taxes. Ideally, I should like a world in which every man could bequeath as much as he wished without penalty, but I must recognise the logic that every bequest involves an inheritance. I like bequests. I do not like inheritances.
Therefore, I should like there to be a system in which the present high rate of tax was maintained in the case of a man leaving £100,000 to one individual, or possibly an even higher rate, but a very much lower rate of tax for someone who bequeaths £10,000 to each of 10 people, who may or may not be his children.
I would also advocate a change so that a man's estate did not suffer inheritance taxes until his widow died.
A final suggestion which I hope will commend itself to hon. Members opposite is that we must have a tax on gifts inter vivos that works. We all know that the redistributive purposes of the present estate duty system are largely invalidated by the absence of an effective gifts tax. Here again, I should like to see a gifts tax which was smaller in its impact if a man gave small sums to a large number of people than a large sum to one person, but I recognise that administrative problems may be involved in doing that.
The hon. Member for Truro (Mr. Dixon) started his interesting speech by regaling us with the happy parliamentary doings of Cornwall, which gave us some hint of what might be possible were we to revert to those former happy days.
I was particularly interested to know that we have in our midst another growth man. I particularly welcome such an addition. I noted, too, the hon. Gentleman's suggestion about taxing gifts inter vivos, a suggestion which he will find is supported in many parts of the House, particularly on this side. The other rather more controversial matters the hon. Gentleman raised might be better dealt with in subsequent debates. I look forward to hearing the hon. Gentleman deploy his talents in arguments leading to the conclusions that he drew in his speech.
The reform of taxation introduced by the Chancellor fitted in rather oddly with a debate we had on 7th December on the Inland Revenue Department. I say at the outset that I am fully in agreement with the idea that there is scope for reform, there is need for reform, and the Departments of Inland Revenue and Customs and Excise are capable of instituting and initiating this reform.
However, this is rather different from the opinion expressed by the Financial Secretary on 7th December:
The hon. Member for Ashton-under-Lyne suggested, in the nicest possible way"—
the Financial Secretary is ever courteous—
that that was an exaggeration"—
that is, my view that the Inland Revenue Department was not being overworked—
and was not supported by the evidence given to the Committee. I am bound to tell him, from the full and thorough investigations which my right hon. Friends and I made on moving into the Treasury after 18th June, that the position is no less serious now than that described in the Report. Further, there is no doubt that it represents one of the major constraints on our freedom of manœuvre, and certainly it is one of the unhappier legacies which the Government have inherited from their predecessors."—[OFFICIAL REPORT, 7th December, 1970; Vol. 808, c. 115.]
If it is the Inland Revenue, understaffed and overworked, which is able to initiate the reforms that the Chancellor mentioned in his Budget Statement, there must have been some massive changes between December and March of a kind that would considerably strain the credulity of the House. We must therefore assume that the criticism that I made on that occasion that it was a nonsense that the Inland Revenue was being overworked was correct. No doubt those in the Department were asked, "Are you being overworked?", and they replied, as 99 per cent. of hon. Members would
reply and as perhaps 99 per cent. of the general public would reply, in the only possible way—"Yes". To accept such a statement was nonsense. The pity was that for a time it was accepted and certain reforms that should have been introduced and which needed to be introduced were not introduced because the Department's views were rather too readily accepted at their face value.
As a result, we did not get the income tax reforms that my hon. Friend the Member for Heywood and Royton (Mr. Barnett) and myself pressed for year after year, when we wanted this amalgamation of income tax and surtax, and when we wanted the rate of income tax reduced to the amount of the standard rate less the earned income allowance. As a result, for years people went on believing that they paid more income tax than they did, and, whenever income tax changes were introduced, there were disproportionate changes in surtax. The whole thing was less flexible because there was a failure to introduce the reforms which were available.
The Financial Secretary was rather embarrassed about the matter of the Van den Tempel Report. It is clear why this is so. The Green Paper is in advance of our knowing whether we shall get into the European Economic Community. If we are to join the Community, and if the Community adopts the Van den Tempel recommendations, we shall have to adopt them, too. Thus, the whole proposal is in limbo, and it is hoped by the Government that the period during which the Green Paper is in gestation will cover the period of negotiations, the period before the decision is known on whether we are to enter Europe.
I was particularly unhappy that the Budget did not bring some decline in the very high rates of purchase tax. This may not be the most important item to be included in a Budget, but it is one of considerable importance nevertheless, for this reason. These rates were introduced specifically to meet the problems of the post-devaluation economic situation. They were quite penal rates introduced for a specific purpose to cover us during that period, and rates such as 55 per cent.—and not only the rates but the distortion introduced by rates of that kind—really ought not to have been allowed to continue for so long. The hon. Member for Worcestershire, South (Sir G. Nabarro) knows the situation well. We have gramophone records, on the one hand, charged at the highest rates while, on the other hand, various more luxurious goods are charged at lower rates.
The main point is that value judgments are made by Chancellors when we have high rates of this kind, and they are value judgments which ought rarely to be left to economic Ministers. As a result of this Budget, however, we are still left with distortions of that kind.
As my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) pointed out, this would have been one the easiest ways by which the Government could not so much have redeemed their pledges—the time has long passed for that—but could at least have made some progress towards offsetting some of the odium which they have rightly incurred by deceiving the electorate.
The two main tests which I apply to the Budget are simple. Is it a fair Budget? Is it reflationary enough? Is it reflationary enough to produce the kind of growth which will end the slide which began many decades ago, and is still continuing, by which this country's economic growth, economic standing and industrial importance have year by year declined which, unfortunately, we cannot be sure even now has been brought to a halt?
I was repelled by the decision on surtax, the change from one-ninth earned income relief to 15 per cent. without an upper limit. It put one in mind of some of those small countries which are run for the benefit of the dictators and their friends. It is a sheer hand-out, with no basis in equity as between one section of our society and another.
Previous Conservative Chancellors, Conservative in their ideas and unswerving just as much as the present Chancellor is, had, perhaps, a better understanding of the people of Britain. They had the same desire to bring about a reduction in the highest rates of surtax, but they waited, rightly, for the time when they would be able to benefit all sections of the community, not wishing to give to their friends earning £50,000 a year a tax- free lump sum each year of £6,800 while the ordinary average man had precious little. They never had the impudence to do that. They were men of standing, men who really spoke for the nation even though they came from a party different from mine.
To do it in such a year as this is an insult to the people of Britain. I believe that the band of £50.000-a-year men is likely to grow. Admittedly, there are not many now at that sort of level, but one of the consequences of this change will be that directors will go on to vote themselves rather higher remuneration without any proof which can be submitted to us that they will earn it in any way by increased effort or application.
I do not believe that it can be shown that it is a question of incentives at that kind of level. I suppose that it can be rightly argued that there have been occasions when salaries at the top have been kept low because of the small incentive entailed in paying the tax man so much. But, none the less, there will be no benefit to the community necessarily arising from the change, and there will certainly be a feeling that a greater division has been created between one section of the community and another.
The Budget may have been clever. It may have been too clever by half, for at the end of the day people really do know how much comes into their pockets and how much goes out. From what was said on Budget day, and in the days thereafter, they will learn that the average person has got very little out of it and the wealthy have got a great deal.
It is a thousand pities that, for the first time since 1935 perhaps, a great opportunity was not seized by an incoming Government, a new Government with fresh ideas, energies and enthusiasm, and with a fair measure of ability, too—an opportunity presented to them by a balance of payments situation giving them far greater freedom of manœuvre than almost any previous incoming Government had for, perhaps, 30 or 40 years.
Although inflation may have been higher than normal because of the situation all over the world, the greatest economic constraint facing this country over the past 30 years has been the balance of payments constraint, and that was no longer there. So the Government had this freedom of action, this supreme opportunity to make decisions of a kind not available to previous incoming Governments. Their failure to use that opportunity to produce the necessary expansion will, I am sure, be judged as gravely wrong in the years to come. This could have been a historic Budget instead of a Budget which failed to take the opportunities presented.
We all know what the Government did with the balance of payments surplus. They used it to fight the trade unions. One of the interesting features during the 1950s was that Conservative Governments were always a little apprehensive of the trade unions, not only because of their natural desire to create an accord with the trade unions but also because there were certain situations in which the trade unions, if opposed by a hostile Government, could create balance of payments difficulties. But the present Government are using our balance of payments to fight the trade unions, accepting the loss of production, the bitterness and the inefficiencies which come from this battle with the unions. They are using the balance of payments partly for that purpose, but they have used it partly, also, to pursue policies of sectional interest which I find particularly unhappy.
I come now to the question of investment. We see from the Government's Financial Statement that their expectation for investment is that it will expand by zero per cent. in the second half of this year over the same period last year, and will expand by 0·5 per cent. in the first half of next year over the first half of this year. But it must be understood that that increase in investment is as a result of the Budget. It is not a pre-Budget decision. It is the Government's expectation as to how industry will react to the Budget statement. The Treasury believes that the level of investment resulting from the Budget decision will be zero per cent.
Most hon. Members will agree that there is a time lag, but I do not think that such a time lag has any mean- ing. If we are to produce changes with such a time lag it can be argued that all Budgets are meaningless, which is not a view that Chancellors, including the present Chancellor, have stated in the past.
We see that investment will be completely static as a result of the Budget, because of manufacturers' expectations of sales. My hon. Friend the Member for Heywood and Royton and the Secretary of State for Trade and Industry have reminded us that people invest only when they expect to sell their goods and make a profit on them. The Treasury estimates that the people concerned, after forecasting those sales and profits, have decided not to increase their investment as a result of the Budget. Because of the sales and profits expected as a consequence of it, they have decided that that is the level of investment that shall continue. This is a formula for further stagnation and further economic and industrial decline.
We also expected and hoped to see the balance of payments surplus used properly and productively for the reduction of unemployment. As is partly shown by the Treasury's own forecast of investment, and other forecasts, it is becoming clear that unemployment is unlikely to decline. All that may have happened is that the Chancellor has succeeded in arresting the increase in unemployment, if that. So the present appalling waste of lives, manpower and output will continue. I put to the Prime Minister the other day the suggestion that unemployment was costing the country output worth £1,000 million a year. That is the sort of figure we are squandering. This must be seen against the Budget judgment.
The main, central aim of the Government's policy has obviously been to control inflation before doing anything else. All hon. Members must know in their heart of hearts that the level of unemployment is a consequence of that policy. It is the Government's direct responsibility, which they cannot shrug off. The relationship that the Government have sought to establish between necessarily high unemployment and the desire and need to reduce inflation is almost obscene in its connection, giving evidence that the Government have no other way to combat inflation than to leave unemployment as it is.
I accept that inflation is an evil, though not the worst economic evil. There are worse, including unemployment, low growth and the decline in this country's industrial potential. We all know that if inflation makes it hard to sell goods abroad there are ways of combating that problem. But our present figures for exports of industrial goods are not bad. They continue to provide us overall with a balance of payments surplus. Inflation will, of course, raise prices at home but we have a vast amount of unused productive capacity which we can and should use but are failing to use.
The greatest condemnation of the Budget as a whole is that it has produced for the Government's supporters what they wanted, and has in turn created a more inegalitarian society than that which many of us hoped ever to see. This did not happen in the 1950s. It is necessary to draw a comparison between the present generation and the generation of Lord Butler and Mr. Macmillan, who remembered the past. They felt that in some way they had some responsibility for that past, for what happened in the 1930s, and they learned their lesson. In the words of the prayer that we have each day, they learned the necessity of uniting and knitting together. The Government have failed to understand the continuing need for this. They will eventually force their views upon the people, but the people will come to understand and oppose this Government's philosophy. I shall certainly be voting against it on Monday.
I am very pleased to be the first hon. Member on this side of the House to congratulate my hon. Friend the Member for Truro (Mr. Dixon) upon a splendid maiden speech. I recall with nostalgia and a great deal of pleasure at least four occasions when I have visited his constituency during the past 15 years, twice to the city of Truro and twice to the county part of his constituency. One notable occasion was a visit to Killaganoon House, when many thousands of his constituents attended a political rally on a Saturday afternoon. I hope to meet my hon. Friend there on future occasions, as I hope to listen to him with avidity and pleasure in the House, as I did today.
My hon. Friend is by profession a stockbroker, and he directed his comments most largely to financial matters and taxation, particularly as they affected the City of London. It is noteworthy that since my right hon. Friend's Budget on Tuesday, and including the drop in Bank Rate of 1 per cent. today, the Financial Times index of equities has risen by 24 points, as measured at 2.45 this afternoon. I draw that to the attention of my hon. Friend as a stockbroker, because he knows as I know that what is good for the City of London is good for Britain. [Laughter.]
Of course, we have the trade union cacophony from the benches opposite. People like the last speaker, the hon. Member for Ashton-under-Lyne (Mr. Sheldon), who belly-ache endlessly about unemployment, fail to understand that unemployment is at such a high level today most largely because of the loss of business confidence. One thing this Budget will certainly do is to help restore the lost confidence eventuating from many years of Labour rule and Socialist policies, which are disastrous to capitalist expansion and profits.
When my right hon. Friend the Prime Minister agreed with me the other day at Question Time that really the cause of low investment in the private sector of British industry today is the virtual disappearance of profits—a condition of what might be described as "profitless prosperity"—we were really agreeing with one another that the turgid condition of investment is due to lack of confidence in the future and this very low level of profits—the lowest since the end of the war in relation to capital employed.
The Budget reflated the economy by at least the £680 million of reduced taxation revenue measured in a full year. Mr. Feather, the General Secretary of the T.U.C., demanded before the Budget that reflation should be conducted on a scale —and he named the figure, rather boldly —of £1,000 million. He said that was the degree of reflation required in order to bring down unemployment dramatically. My right hon. Friend's measures are not very far short of Mr. Feather's demand. In fact, the whole of the £680 million of reduced taxation revenue may correctly be interpreted as a reflationary measure.
In addition to that, there will, of course, be the intangible results flowing from the lower level of Bank Rate by as much as 1 per cent. I say "intangible" because at this juncture we cannot quantify them in terms of the reaction on unemployment. We can say that, as a result of the dramatic drop of 1 per cent., instead of the cut being made in two stages of half of 1 per cent., there will certainly be more reflationary tendencies.
I wrote an article on the eve of the Budget, and I am not afraid to read it now. I like writing on the eve of the Budget—not as a prognosis, although my article did prove remarkably close to the words used by my right hon. Friend from his Treasury brief. I shall quote my words, and perhaps the hon. Member for Ashton-under-Lyne will take the grin off his face and listen to those words of wisdom. They were printed in the London Evening News on 29th April. I said:
Britain's economy is running down fast and business confidence for the future is waning. No Chancellor of the Exchequer this century has had to contend simultaneously on the eve of his Budget with high unemployment (more than three-quarters of a million), soaring prices (up by more than a third since 1965 and rising now more sharply than ever before), taxes doubled in the last seven years, strikes losing more than six times as many days as in 1963, the Stock Exchange on the floor, and Britain's biggest company, Imperial Chemical Industries, for example, paying an unprecedented 11 per cent. for 'blue chip' loans until the nineties.
All that adds up to great loss of confidence. This country will never recover full prosperity until absolute business confidence is restored, which only a Conservative Administration can accomplish. It is for all these reasons that I warmly congratulate my right hon. Friend on the best Budget since the war—far and away the best since the war and the one most likely to restore the waning confidence to which I have alluded.
First, I want to refer to four omissions from the Budget, all of which I hope will be repaired in the next few months. The first, which rather surprised me, was that my right hon. Friend took no notice at all of the Crowther Report. He does not accept Crowther's dictum that hire-purchase restrictions should virtually be abolished. This is a sad blow to the British motor industry, the greatest of all our exporters, for the British motor in- dustry last year exported about £1,000 million worth of tractors, motor cars, lorries and components.
I agree—the highest paid. But I am not on the subject of wages. I made the observation that it is the largest exporting industry in Britain and it is therefore of signal importance that that industry is working approximately 20 per cent. below its maximum capacity. This is in large measure due to the depression of the home market.
I represent a constituency in the Midlands with many thousands of motor car workers. I am close to the sentiments of Birmingham and Coventry, which are the hub of the industry. Halewood is an outpost of the industry. I direct my shaft at the hon. Member for Liverpool, Walton (Mr. Heifer). Halewood is an outpost of the industry.
It is memorable that, after the Chancellor's mini-budget of 27th October, 1970, Mr. Speaker, you called me quite early to ask a supplementary question. I asked my right hon. Friend then to ease hire-purchase restrictions on the motor trade because, if the industry is working at 20 per cent. below capacity, it is inevitable that prices rise, and this has a detrimental effect on the competitiveness of British motor cars, vehicles, spares and tractors in overseas markets. Since then, motor car prices have generally increased twice. I therefore make a further appeal to my right hon. Friend today to examine the position of the motor industry with a view to easing hire purchase restrictions, and I hope that we shall have a full discussion at an early date on the Crowther Report, which is so essential, in its concept and recommendations, to full employment.
The second omission I put to my right hon. Friend is in connection with the Tory Party's pledge—repeat, pledge —an absolute unequivocal pledge, in 1969, that, immediately power was resumed by a Conservative Government, they would abolish the iniquitous Socialist provision that bank loan and overdraft interest could not be admitted as a charge when assessing liability to personal income tax and surtax. There is no revisionary element in this Budget on that matter. It requires legislation to alter the Finance Act, 1969. I hope that my right hon. Friend, during the conclusion of the debate next Monday evening, will reassure all members of his party that this was an absolute pledge and that he will proceed to do so in the next few months.
The third omission from the Budget is in connection with unit trusts and capital gains duty thereon. I intervened yesterday in the speech of my hon. Friend the Member for the Cities of London and Westminster (Mr. Tugendhat) when he was talking about unit trusts and capital gains duty and the slight alleviation by my right hon. Friend—for which I am grateful—to point out that the Tory Party gave an absolute pledge, similarly, in 1965, when the present Prime Minister, leading from the Opposition Front Bench as Shadow Chancellor, said that capital gains duty on unit trusts would absolutely be abolished.
I am not trading on any academic assurance in this matter but I ask my hon. Friend the Minister of State to have a look at a dividend warrant for a unit trust distribution. I examined one a few days ago in respect of a small holding owned by my daughter, aged 16. The element of capital gain shown on the dividend warrant was printed to six decimal places of the fraction of a penny. All this kind of thing on tens of thousands of distributions from unit trusts in infinitesimal amounts involves the Inland Revenue, accountants, bankers, trustees, professional men everywhere with the most appalling burden of unnecessary administrative work. It should be got rid of at an early date in respect of unit trusts, which represent a total investment of about £1,500 million from several millions of relatively very small investors, and the abolition of capital gains tax on unit trusts would represent a very large administrative saving.
Finally in this passage, I should like to thank my right hon. Friend for the alleviation in estate duty which will remove from the estate duty net a substantial number of small estates, estates put together by men and women of relatively modest means who leave sums of £10,000 to £12,000. The alleviation is only £2,500, up to £12,500, and in that sum is often their single major asset, the house which they owned and for which they paid on mortgage, probably subscribing all their lives, and most of it is taken up by the inflated value of the dwelling house, which may be £6,000, or £7,000, or £8,000.
I want a further alleviation, which would cost the Treasury very small sums. At present, the law dictates, administratively or otherwise I do not know, that a testator may give £500 maximum free of estate duty to another person. That was arranged 30 years or more ago, and the £500 is now grossly out of date and ought to be £1,000.
In exactly the same way as my right hon. Friend the Chancellor of the Exchequer very kindly followed my contribution in the London Evening News of 29th March on the following day, and I am delighted with him for doing so—he could not have been more spot on—[Laughter.] I do not know what the hon. Member for Walton is laughing about.
I assure my hon. Friend that we read his article in the London Evening News and we were up all night rewriting my right hon. Friend's Budget.
Sir G. Nabarro: I noticed when my right hon. Friend announced this provision that he paused in his speech and bowed to me, and so I am not in any doubt that he read what I said. Here are the words:
Maximum of £1,500 a year for self-employed pension provision instead of £750 at present, as enacted in 1956.
I had no Budget secrets, but I asked him to do it before he did it and he did it, which is the proper sequence, Mr. Speaker. You, as a former Chancellor of the Exchequer, will recall the sequence of events on many occasions previously. Will my right hon. Friend bring the £500 figure inter-vivos free of estate duty up to date and make it £1,000?
I want now to deal with the major section of my speech, which is in connection with indirect taxation. I am delighted to know that the Minister of State proposes to devote much of his speech this evening to indirect taxation. I am an unqualified supporter, and have been in the House for the last 16 years, of a general sales tax at a nondiscriminatory, equal rate of application over the widest possible base.
I remind Labour Members, most of whom were not in the House at the time, that when the Labour Government left office in 1951, 20 years ago, the range of rates of purchase tax was from 90 per cent. at the top to 5 per cent. at the bottom. The Tories made it a great deal worse by introducing many new rates, with the result that by the time 1958 arrived, seven years later, the top rate was still 66⅔ per cent. and the bottom rate 5 per cent., and in between there were seven rates.
Because all these discriminatory rates applied to hundreds upon hundreds of manufactured products of all kinds, sold by retail by tens of thousands of shopkeepers, there were the most appalling anomalies. That is why in 1958 1 embarked on 100 Parliamentary Questions in every quarter of 12 weeks before every Budget Statement for four consecutive years, 400 Parliamentary Questions in all, deliberately ridiculing the Treasury for these absurd anomalies and incongruities. By 1963 the Treasury had "got fell-in" very largely. It had adopted the Nabarro plan stage by stage. This has passed into history now; I am not boasting about it, but merely relating it.
The seven rates of 1958 were reduced to three rates by 1963. The top rate was 25 per cent., the next 15 per cent., and the bottom rate 5 per cent. It was the intention of the Conservative Government had they won the 1964 General Election—and they lost it by only five seats—to introduce a single, uniform non-discriminatory rate of indirect taxation right across the board. We lost the election by five seats and the 1966 election by 100 seats, and so reform receded further into the distance.
The hon. Member for Ashton-under-Lyne had not done his homework about purchase tax. What he did not realise was that the Labour Government put up the top purchase tax rate from 25 per cent. in 1964 to the inordinately high level of 55 per cent., where it now is.
The hon. Member now admits it. We have wrung one reluctant admission from him. We have wrung one reluctant admission from him. I say it a second time in case he did not hear it the first. He generally gets so irritated with me that he stalks out of the Chamber.
Not only is purchase tax ridiculously discriminatory today. The hon. Member raised a cheap laugh with his own side by referring to the hon. Member for Worcestershire, South and mentioning gramophone records immediately thereafter. I will give him a gramophone record from the purchase tax records. He quoted only that one item at 55 per cent., but I shall quote four. Cameras and cosmetics are two major items; gramophone records, of which he is so fond, and jewellery make the four, to say nothing of clocks, watches and furs, all at 55 per cent.
Who imagines that a wrist watch is a luxury item? Who imagines that gramophone records, mostly bought as "discs" by teenagers, are luxury items? Who imagines that the Savile Row suit I am wearing is one quarter as luxurious as a Brownie camera for a child? It has only to be expressed to be seen to be patently absurd. Of course this garment is a luxury article. But in inverted Socialist logic, this luxury garment is taxed at a rate one quarter only of the ubiquitous Brownie camera for a child. My suit is taxed at 13¾ per cent. Whereas the Brownie camera is taxed at 55 per cent. Who invented this fiscal gibberish—fiscal gibberish—how euphonious the term—of taxing motor cars, our biggest export, at 36⅔ per cent. and liqueur chocolates at 22 per cent.?
So I could go through the whole gamut of fiscal absurdity. In case anybody is in any doubt about the amount of money involved in the Budget, and in case people think I am playing the fool—[Laughter.] It may sound funny, but I am not playing the fool in financial terms; nobody in the House can understand financial statistics better than I.
In 1960–61, 10 years ago, purchase tax raised £510 million. When the Tories left office in 1964 it was raising only £565 million. In the last year of Socialist rule, 1970–71 it was raising £1,280 million. The Labour Government put £715 million on to purchase tax, from £565 million up to £1,280 million. Not only are the rates highly discriminatory but they are directed at far too narrow a base. We all know the arguments against S.E.T. and I will not regale hon. Members with them this afternoon.
The selective employment tax is as highly inflationary as purchase tax because all of the tax goes straight on to prices in the shops and to the consumer. All purchase tax goes straight on to prices in the shops. The building industry alone paid £100 million in selective employment tax this year, prior to the reductions, all of which went straight on to the price of houses. Everyone who has a shirt or a garment laundered pays an extra 15 per cent. on account of S.E.T. I could go through the whole gamut. I rejoice that my right hon. Friend is abolishing S.E.T. and abolishing purchase tax and putting in their place an overall low level value-added tax which is no more than a general sales tax, as the Green Paper spells out.
This is what I wrote in the Weekend Telegraph—[Interruption.] It is no good the hon. Member for Heywood and Royton (Mr. Barnett) gasping. He will have to suffer it and have it read. What I wrote in the Weekend Telegraph on 31st May, 1968, was this:
SUMPTUARY (INDIRECT TAx): An Added-Value tax as evolved in France and West Germany, totally rebated on exports. It should be spread on a broad base, replacing all present Customs and Excise duties, Selective Employment Tax, Purchase Tax, Betting Duties and Road Fund Licences. It would be a flat rate tax and un-cognisant of so-called luxury. It would raise more than present indirect taxes, which would allow a reduction of direct Personal Taxation. Lower income groups not paying direct taxes would be compensated through social welfare benefits and pensions, for any increased living costs caused by the Added-Value Tax.
That is exactly what my right hon. Friend is doing; that is exactly what is contained in the Green Paper. I reject absolutely that an arrangement of this kind will involve an additional 6,000 or 8,000 officials.
The ultimate additional officialdom, if at all, will depend directly on the length of the accounting period, and whereas the Green Paper talked about the length of the accounting period being three months, I shall press for it to be 12 months and for payment to be based on an auditor's certificate of the accounts of the company, partnership or business involved, because 99·5 per cent. of all businesses in this country have their accounts audited. An auditor's certificate as to value-added tax based on a 12-month accounting period instead of a three-month period as postulated in the Green Paper, and only postulated, would reduce the ranks of officialdom by 80 per cent.
We are not pledged to adopt a value-added tax because the Europeans have it. The adoption of a value-added tax has nothing whatever to do with our going into Europe. The hon. Member for Heywood and Royton let slip halfway through his speech that, although he was in favour of going into Europe, he was against a value-added tax. My position is exactly the opposite. I am against going into Europe but for all fiscal and equity reasons I am in favour of a value-added tax.
All that has happened in the last 12 to 18 months is that propaganda has been spread through the country to the effect that a value-added tax will raise prices, increase the ranks of officialdom, be inflationary, and bear hardly on the less well paid and the poorer sections of the community. I reject all of those arguments. A value-added tax, I firmly believe, will reduce prices on account of its much wider base. Secondly, it will reduce costs on account of its relative ease of collection. Thirdly, it will prove absolutely equitable over the whole field of indirect taxation.
I do not want this form of tax restricted to those items which at present attract purchase tax; I want it spread over the whole area of indirect taxation, to include cigarettes and tobacco, alcohol, wines and spirits and beer: I want it to be spread over hydrocarbon duties so that all indirect taxes are brought within the ambit of the value-added tax. Then, as my hon. Friend the Member for Oswestry (Mr. Biffen said yesterday, we should amalgamate social welfare benefits and payments into our income tax system. By this means, the two formulae running side by side, we shall achieve administrative simplicity on the first hand, absolute equity throughout the economy on the second hand, and the reduction of prices on the third hand.
Those who think that a value-added tax is inflationary might care to sit down and do a calculation on the value-added tax at 10 per cent. as applicable to Scotch whisky. At present the duty on Scotch whisky per bottle is 44s. Id. The wholesale cost of the whisky is 5s. 9d. so that the wholesale price of the whisky is 49s. 10d. The incidence of whisky duty is of the order of 750 per cent. Were a value-added tax charged at 10 per cent. on Scotch whisky, the retail price of a bottle of Scotch might be 15s.
I have listened with interest to the hon. Member for Worcestershire, South (Sir G. Nabarro). Perhaps I can put one point to him which arises from his concluding remarks, when he was expounding his fiscal philosophy. He cited the case of Scotch whisky and pointed out what would happen if we were to replace the present very high Excise duty with a value-added tax. Obviously the rate of taxation on a bottle of Scotch would be very much lower. But when he invites us, as it were, to take this wholly unselective view of taxation he can surely think of another commodity which is sold and taxed very highly and on which I do not believe he would wish to see that tax severely reduced. I refer to the tax on cigarettes. The hon. Gentleman, for perfectly good, sensible, excellent reasons, would be the first to denounce the Government Front Bench if they were to adopt his views in that respect.
It would be wrong to use the time that I have to chase the hon. Gentleman, interesting as it would be, through the mazes of his fiscal philosophy. He said earlier that he had become aware of certain omissions in the Chancellor's Budget and mentioned a few. The subject of omissions is already a recurring theme in the debate and it will increase as the days and weeks go by.
As my right hon. Friend said last night, the joy with which this Budget was first received—most notably, and perfectly naturally, in the City, though perhaps reasonably it was well received elsewhere—on Day 1 was already turning quite sharply to something quite different, on Day 2, when the rest of the Budget and, above all, the details of the new and very heavy tax masquerading as a social security charge became known when the Secretary of State made his statement yesterday. People everywhere are now beginning to take the measure of the Budget, and I have a feeling that the conclusions they will reach will on the whole not only be unfavourable to the Budget itself, but gloomy as to its impact on the economy and on the outlook for the economy as a whole. I say, with regret, that I believe those feelings of gloom to be justified.
That takes me, not frankly pursuing the Financial Secretary through the trivialities of his speech, and it was a trivial speech—[HON. MEMBERS: "Oh."] It was a trivial speech about, basically, taxes and their impact, as he saw them, on the economy, with hardly a word about the prospects for the economy as a whole. If any hon. Gentleman thinks that for most people their welfare, their outlook, their satisfaction and their happiness are affected more by what the Chancellor of the Exchequer does on one day a year in either lowering or raising taxes than by the prosperity of the community and the nation, he is very wrong. People are influenced very much more by the course of the economy as a whole and by a 101 influences and measures than by tax changes which are made only once in a year.
I turn to the Financial Statement for 1971–72—a depressing document—and I draw attention to the first and most striking feature of the figures in it and, indeed, in the Chancellor's speech. It is perfectly clear to anyone who reads the document that the Government have made an important and, to us, quite unacceptable decision about the level of unemployment. This is the outstanding feature of the Budget. It is the first Budget that I can recall, certainly in the post-war period, in which a Government sitting comfortably on a substantial balance of trade surplus have produced a Budget as a result of which they know that an intolerably high level of unemployment will continue for at least a year ahead. I am afraid that this will happen because even on the Chancellor's figures, as also in this document, the forecast is that the growth of the economy will be of the order of 3·1 per cent., but even if that figure were to be achieved, and there are reasons to doubt it, I do not believe that it would have any effect at all on the level of unemployment which, I think, will rise, certainly for some months ahead.
Why will that predicted growth not have any effect on the level of unemployment? Many reasons can be given but one in particular impresses me. An estimated growth of 3·1 per cent. is very near what is thought to be the productive potential of the economy; in other words, in itself it is roughly equal to no change in employment, but this comes on top of two years of very low growth. In 1969 the economy grew by about 2 per cent. and 1970 was also a year of very low and unsatisfactory growth. We now have a really big margin of unused capacity in the economy, and I should be very surprised if the economy could not take on in terms of output or G.D.P. well over 3 per cent. without having any effect on reducing unemployment. That I am afraid, is the prospect as I see it.
If that is so, it has very important and disquieting implications to the 750,000 people who are unemployed. Unemployment, not just for a brief spell in a deep and unhappy winter, but going ahead over the whole of the coming year, is a very wretched social experience for far too many of our fellow countrymen. There will be a bitterness in the climate of relations in our society and in employer-worker relations, too, which we could certainly do without.
In addition, an appalling waste is involved. I do not here think only in terms of output, or even in terms of the kind of calculations which so appal hon. and right hon. Gentlemen opposite, who are always upset when working days are lost through strikes. I can understand that being a legitimate concern, but the House should recognise that if we were only to reduce the level of unemployment from the present 750,000 to 500,000 during the course of the year we would gain about 60 million working days. If that fact were related to the number of days lost through strikes—last year was probably the worst we have had, with about 10 million days lost in that way—hon. Members opposite would see the relevance of this piece of arithmetic. But I do not want them to think that that is our only reason for concern about unemployment.
If I am right, and if the Chancellor of the Exchequer is right—because it is he who has estimated that the economy will grow at that rate, and that, therefore, unemployment will not fall but will remain roughly at the same level—the right hon. Gentleman can just forget about his regional policy for at least a year, and probably for longer. We can forget about intermediate areas, development areas and special development areas—there simply will not be sufficient mobile industry. It is simply no good trying to attract industry when there is insufficient buoyancy in the economy to get those who are thinking of investing to wish to invest.
There are a few other key figures involved, and I and one or two others of my hon. Friends find the picture of the economy in the year 1971–72 given by the document depressing, not only because investment is predicted to rise by only half of one per cent., but also because the growth of exports is put at this very low figure of 2·3 per cent. while the import figure is estimated to be of the order of 6·3 per cent. In other words, the relationship between exports and imports is again expected to deteriorate, which will have implications for the balance of payments.
I wish to say a few words about the balance of payments, but I am afraid that they will not be very comforting. We have a strong balance of payments—more than £600 million, the highest figure on record. That is very good. But we should be deluding ourselves if we did not recognise that the figure is to some extent inflated by the depressed level of the economy last year. About £130 million of last year's balance of payments surplus could be accounted for by the fact that the rate of growth was 2 per cent. rather than 3 per cent. plus which the forecasters last year hoped we would achieve. That would bring a surplus of about £500 million a year, which I think is probably the right figure, assuming that a more reasonable level of growth could be maintained.
But what does that imply for the future, assuming that this is the basic balance and that the Chancellor gets his 3 per cent. increase in output? The Secretary of State for Trade and Industry said yesterday that he had some worries about
the future. He drew attention to three factors. The first was the extent of our indebtedness, which should not be lightly dismissed. These are debts which must be repaid. Secondly, the right hon. Gentleman said:
A second and no less vital factor is our application for membership of the European Economic Community, even when a satisfactory negotiation has taken place, is likely to cause a net outflow of exchange…".—[OFFICIAL REPORT, 31st March, 1971; Vol. 814, c. 1542.]
The third was the recent and unhappy developments over the price of oil. The Chancellor costed them at about £64 million on the direct balance of payments but did not give a figure for the effect on invisibles, which I think will be quite considerable.
Unfortunately, the Government have not given us a medium-term assessment of the economy. All we have is an assessment for one year. They must have made some estimates for three to five years ahead, and not just simply in terms of public expenditure. Assuming that they have looked three to five years ahead, as any sensible large 'organisation must do, what is the picture? We know our debt repayments schedule. Adding together the I.M.F. debt repayment schedule and the Anglo-American immediate post-war long-term debt annual repayment, we have to pay back roughly £350 million each year in 1971 and 1972. I am glad that a large advance payment was announced by the Chancellor of the Exchequer. Obviously money has been pouring into London because of our exceptionally high Bank Rate. But it would not be desirable for that to continue, and perhaps it will not continue after today's announcement.
There is the last of the I.M.F. borrowings which we made in 1969 which must be paid in 1973–74. Taking into account our I.M.F. debt and our long-term payments, we shall have to pay about £300 million each year. Therefore, over the next four years, we shall be faced with debt repayments of about £300 to £350 million in each year. If I am right in thinking that the balance of payments surplus on the basis of a 3 per cent. growth is £500 million, the margins available for further reflation or to guard against deterioration in our competitiveness are not very large.
I have taken no account of the extra oil payments, nor of other items which will occur to most people, such as the possible implications of renegotiating the Basle Agreement later this year. If the Government are successful in their application to join the E.E.C., they must take account of the first payments to the Common Market in 1973 and 1974. Taking the figures of the Chancellor of the Duchy of Lancaster, in view of the Budget contribution and the deteriorating trade effect which the right lion. Gentleman anticipates, there will be in those two years a further deterioration of about £80 million at best in 1973, and probably about £160 million 1974. In other words, even on the basis of an amateur projection of the figures over the next five years, the surplus totally disappears almost within the first year of the transitional period.
I mention that matter, not only to reflect the anxiety which I have felt for a long time, but to warn my colleagues and the Government against complacency and to urge upon them the need to take early and effective action to use an opportunity which is not as great as it may look and which unfortunately could rapidly fade away, namely, to take action to expand the economy and to deal with the problems which we know exist in a way which will not put us right back where we were and have been during most of the past ten years.
I am getting very worried, as are other hon. Members, about the general impact of the Government's policies. I am open-minded about taxes and I always listen with great interest to people who say that a particular tax is not very effective. But if people were as simple as the Financial Secretary seemed to imply, and if all we needed to do to stimulate economic activity and to stimulate people to perform well economically was to relieve their taxes, I am sure that the country would have been successful many years ago. The Chancellor's predecessors had a similar philosophy during most of the 1950s. It was not as extreme or pungent as that of the hon. Member for Worcestershire, South but it followed broadly the same path.
It was always one of the proudest boasts of the Conservative Party in the years up to 1964 that they had cut taxation and liberated the enterprise of people. But the economy did not respond sufficiently. I cannot understand why right hon. Gentlemen still give this exaggerated rôle to the impact of taxation and why, against all the evidence of experience, they completely ignore the supply side of the economy. They knew in the first years of the 1960s that certain situations faced certain industries which could not be solved by remote fiscal measures. They had actually to intervene in the economy to relate fiscal measures to particular problems on the supply side.
The hon. Member for Worcestershire, South mentioned four omissions, one of which was the lack of any direct relevance in the Budget to the problems of the motor car industry. As he pointed out, if an output near to capacity is not achieved in the motor car industry heavy additional costs are incurred. To think that we can run the economy by pretending that there is no difference in the response between a capital intensive and a labour intensive industry is to be extremely naive and to make certain of failure.
The Government are entitled to have strong views on taxation and to change taxes, but what I deplore is that, against all the evidence, they have destroyed every means available to them for intervening in the economy to make industries more efficient and more competitive, and to help to save imports. These objectives, and the means of achieving them, have suddenly been swept away as though they were no longer of relevance to our economy and to the future. There will be a retribution. The outlook is depressing, not merely for the short-term forecast period ahead but further ahead. I should welcome comments from hon. Gentlemen on the Treasury Front Bench if they have a different view and a different set of figures for the period I have described.
The Government have been given a great opportunity by this strong surplus, and they cannot afford to fritter it away. This is the time to go for measured growth. The 3 per cent. target is too low. It will not affect unemployment and will not produce sufficient buoyancy in the economy. On the other hand, I am not asking the Government to do what the present Home Secretary did in 1963–64. There must surely be a reasonable level of activity. We must stimulate the economy, but between these two extremes.
I would certainly go for growth. Cost inflation will not be solved by the measures which the Government are using. I do not think anyone seriously expects them to be successful in this. What is required is direct action on prices and perhaps on incomes as well. The idea that we can sit back in the hope that the level of wage settlements will diminish step by step while doing nothing about prices is an illusion which we cannot afford to live with. The Government should look again at the supply side of the economy and consider whether either their fiscal measures or more direct intervention can be related to what practical people, rather than fiscal theorists will tell them about the real needs of the economy.
Mr. Richard Hamby:
At the diagnosis of the right hon. Member for Stepney (Mr. Shore) and the way in which he thought things should go now, I can only gasp in amazement. One member of the last Government after another has said that the time is ripe for the introduction of direct measures on incomes and prices, and yet all the troubles of 1970 are attributable to the retreat from such policies in 1969. We need to bear the troubles of 1970 firmly in mind when we consider whether the current policies advocated by my right hon. Friend are sufficiently reflationary to deal with the admitted problem of unemployment.
I congratulate my right hon. Friend on the content and the method of presentation of his Budget. The Budget makes a start in fulfilling several pledges and has set us on the road towards tax reduction, which is widely recognised as being necessary. A great many people, within this country and without, have seen us for many years as an over-taxed country, and this has been doing us harm. The Budget takes significant steps towards simplifying tax procedures. For too long we have ignored the connection between the cost of tax collection on the one hand and the return of those taxes on the other. Important steps have been taken to simplify capital gains tax and to amalgamate income tax and surtax.
I also congratulate my right hon. Friend on what must have been a major managerial achievement in pushing through these reforms despite all the difficulties which an exercise of this dimension involves. I do not mean to imply that there is necessarily quite as much resistance to these reforms either in the Treasury or in the Inland Revenue as some hon. Members have suggested. The sheer process of change is extremely arduous, as any manager knows. To have done as much as he has done in the Budget is a tremendous achievement both for him and for staff of the Inland Revenue, who work such long hours of overtime at Budget time.
I do not associate myself with those who take the view that the annual Budget is an antiquated procedure which should be quietly set aside. The Green Papers are helpful to us in taking a longer view, but we also need the annual review, or something like it, as a regular measuring post. We need to have some degree of certainty and to know the length of time during which decisions are likely to run.
It is not true to say that the annual Budget makes policy wholly inflexible. We have only to look at the number of autumn Budgets or mini-budgets which have occurred in recent years, at the regulator, at the opportunities for changing monetary policy, and at the opportunities for direct investment decisions to realise that the annual Budget does not necessarily mean having an inflexible financial policy which runs from one 12-month period to another.
I wish at this point to strike one note of warning. Although a Budget can do much, it cannot by itself do everything. My view is that this Budget is to some extent the prisoner of the state of play in the incomes field. We cannot talk about the Budget without looking at what has been going on in regard to incomes. We cannot afford to ignore the 1970 record of earnings, which went up by 14 per cent., or that prices have risen by 8 per cent., that production has gone up by 1 or 2 per cent. and that investment has been virtually stagnant. That is the sad record of 1970. If we ignore that picture, and if it is allowed to continue, we are in for a further series of price rises with all that is involved—hardship, lost orders. more unemployment, and so on.
I believe that there is now a change of mood on the part of many people in regard to the respective dangers and hardships that flow on the one hand from inflation and on the other hand from unemployment. I recognise the real and damaging hardship and personal wounds which are inflicted by loss of work, but there is a growing realisation that inflation is no less a danger and often causes no less hardship. One could say that inflation has been to German minds what unemployment has been to British minds. There is the growing realisation that continuing inflation, which we have suffered through a series of Governments, is causing major damage to our social services, to retired people and to the value of pensions, as well as to the prospects of growth for the future. There is now a feeling that this must stop. We must not minimise the dangers of unemployment. We have reached the point at which many people take the view that inflation itself is a cause of unemployment and of the situation in which we find ourselves today. This in many ways is a disturbing fact. It is also a realistic view.
We know that there are many causes of inflation and unemployment, among them excessive taxation, excessive wage claims, low managerial efficiency, low productivity and so on. The two most significant facts in regard to the current unemployment figures, which have shown a disturbing rise, are, first, that corporate costs have been running too high, and, secondly, that the cash in companies has been running short and they have been compelled to sign off people to a greater degree than before. Because of rising costs companies have sometimes—though this has not occurred so much in 1970 when the export position has not been too bad—been losing orders as well.
The Budget, through reductions in corporation tax and selective employment tax, is attempting to help companies keep costs down and to reverse the present trend. The danger is that if private industry uses the opportunities given by the Budget, not to help to keep costs down but simply to finance more excessive wage claims, then opportunities for further growth will he lost, and there will be—and this is a warning to the trade unions—danger of further unemployment.
Baroness Wootton, whose views are respected in all parties, in a recent broadcast, which was reported in The Listener, put her finger on the problem when she said:
Nowadays there are very powerful unions who say 'We will push up wages and we do not give a fig for the unemployed'.
Judging from the history of certain wage claims at present I am afraid that regrettably this is true. It is because wages have been pushed up beyond the level of what productivity can stand that some other people have sometimes lost their jobs. This trend must be reversed.
For this reason, although we would like to have aimed for a higher growth rate than 3 per cent. in the coming year and would like to have reflated faster than perhaps seems possible at the moment until the wage trend is slowed down to a greater degree than has yet occurred, the Chancellor has been forced to a certain amount of caution even in a Budget which has reduced taxes to the extent it has. If we do not succeed then we shall be forced back to conditions which neither employers nor trade unions want. The history of the Labour Government proves that nobody wants to go back to a wage and price freeze with all its interventionism which employers and the T.U.C. dislike. If current policies fail and come to grief on the rock of excessive wage claims unrelated to productivity, this is where we shall land up for there will be nowhere else to turn.
It has been suggested by some hon. Gentlemen, and indeed in The Times, that we should now be thinking about an incomes policy. I would regard it as a policy of despair that we should be thinking of turning in that direction, because I feel that, if given a chance, current methods can succeed. If pressures grow too great we shall be forced back to the wasteful and disliked policies of compulsory interventionism.
The right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) suggested that this was a rich man's Budget. Is it so unfair that a man should be allowed to keep 25 per cent. of what he earns at the top end of the earnings scale? Have hon. Members opposite looked at the comparison of marginal tax rates in the Financial Times today? They will see that the new rate for Britain of 75 per cent. at the maximum, after the Budget compares with 65 per cent. in Sweden, 60 per cent. in the United States, 53 per cent. in Germany and 46·5 per cent, in France. Therefore, it is hardly true to say that this is a rich man's Budget when we are still at the top of the international percentage scale.
The former Chancellor mentioned the concession for married women and commented that this largely helped surtax payers. Is that so wrong when we bear in mind that some of the people who have suffered most in this category from previous policies have been the professionally trained—for instance, married women doctors, whose skills are needed? Is it really a sensible comment to say that it is the surtax payer who is gaining there?
The right hon. Gentleman said that investment grants had been discarded just when they were most needed. I suggest that the record of investment grants, which we have looked at time and again, does not suggest that they achieved what had been intended in most of the regional areas which needed them.
I refer now to the general gibe that this is a two-nation Budget. Looking at what has been done in the pensions sphere, the announcement made by my right hon. Friend the Secretary of State for Social Services about supplementary benefits, and the allowances which have been made across the board, it is neither correct nor helpful to suggest that this is what the Budget is about. If we are considering a policy of two nations at present, that two-nation policy comes from those who time and again, as Baroness Wootton said, have sought to grab 30 per cent., 20 per cent. or whatever it may be, for themselves regardless of the prices being passed on to many people who could not so easily fend for themselves. There is the two-nation policy to a far greater degree than anything which can be pointed at in this Budget.
Finally, two small points for the future which are not in the Budget. The first concerns incentives. I believe that many people feel that if managerial incentives are needed to stimulate greater efficiency, the Government would do well to see whether any means could be developed to enable executives to purchase shares in their own companies.
Secondly—perhaps a rather more eccentric point—there has been much discussion about rapidly growing populations in the world. In this Budget we have used the child allowance as the simplest method of helping many people. It is a singularly convenient method, and it is important low down in the income scale. If we mean what we say—I believe that we need to think harder about a genuine national population policy and many factors of it—financial considerations come in. I wonder, therefore, whether the child allowance right up the scale, however many children and so on, is necessarily the most appropriate method of giving tax relief.
I conclude as I began by congratulating my right hon. Friend on his Budget. I believe that it is about right in its judgment of how much can be done for the present. It sets us on much firmer foundations, and, provided that both unions and management recognise the dangers which can stem from increased wage claims unrelated to productivity, I believe that we can go ahead to a more successful economy than in the past.
The hon. Member for Tonbridge (Mr. Hornhy) delivered a very thoughtful speech, and he finished with some remarks on child and family allowances which may sound somewhat unorthodox in the present climate. I agree with the hon. Gentleman. I think that in the years ahead it may be necessary to review this aspect of our fiscal arrangements.
The hon. Gentleman, who is not a doctrinaire politician, gave us some interesting observations on cost inflation and wages pressure. Nevertheless, if I had to choose between the view that he and the Government are advocating and that expressed by his right hon. Friend the Member for Wallasey (Mr. Marples),I think that this Government, like all Governments, will have to learn certain things the hard way and that we shall have to come back to some form of voluntary incomes policy if we are to solve our problems and move forward to faster growth.
I take the hon. Gentleman's point, but I should like to move on.
The Chancellor has rightly been complemented on the clarity of his exposition. Essentially, he put forward a Budget in two halves—certain long-term strategy and certain immediate measures for dealing with the present situation.
On the long-term strategy and tax reforms, I should like to comment briefly on one aspect of the leader in The Times yesterday which, in effect, was saying, "This is a Tory Government, and it is right that it should introduce long-term Tory tax measures." I could not agree with that comment.
A simple argument can be deployed here. Basically—I hope that even the Financial Secretary might agree—we need a measure of consensus on the long-term tax reforms. I am not necessarily arguing about the rates, but about the tax structure.
One thing which worries me about the operation of party Government—this does not necessarily apply only in the tax sphere; it applies in other administrative areas—is that when Governments change we tend to change far too quickly systems of administration which require many years to settle down. It is right that the barnacles of centuries should be removed from our tax system, but I cannot help being worried that, over the decade 1964–1974, the two main parties in this House will have submitted the tax system to a violent shaking up.
It is important that long-term changes, whatever party is in power, should not be rushed; they should be deliberated by Parliament over a long period, not just in the Finance Bill. No doubt the Government would say that to some extent they are in sympathy with me, because they are publishing Green Papers. But the comment has been made by myself and many hon. Members in previous debates that, within the system of Government, we need a pre-legislative Committee which can examine and scrutinise long-term changes so that, when they come about, they are, broadly speaking, acceptable to the country as a whole.
These long-term measures proposed by the Chancellor, though important, do not bear on the immediate situation. The crucial question is whether the British economy will grow, whether it will stagnate, or whether it will actually recess. These are the options in the year 1971–72. I think that hon. Members will agree that the answer to this question will determine history's view of this Budget, not whether the Green Papers are good documents or not.
In deciding whether the Chancellor's Budget judgment is right we have to look at the full picture. In my view, we should at least look at the general economic diagnosis of my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) when Chancellor in April, 1970, at the mini-budget of 27th October, and at this Budget.
My right hon. Friend estimated growth on unchanged policies at 3 per cent. for the first half of 1970–71. He took the view that it was necessary to accelerate growth by ½ per cent. to 3½ per cent., and he brought in measures of relaxation which resulted in the injection of £220 million in a full year. At the time, he was criticised for being too cautious, though I freely admit that I advocated caution. But he added that, if it were found that we had been too cautious, he could correct the misjudgment later in the year. I will return to that comment when I come to the mini-budget.
It is now clear that the growth factors that my right hon. Friend forecast did not fully materialise. Instead of a growth of 3 or 3½ per cent., which is what the last Government sought, we now have 2 per cent. The present Chancellor wants to reach a figure of 3 per cent., which my right hon. Friend already had. To achieve it he says that he will reduce the Government's revenue receipts by £680 million in a full year. I want to be generous to the right hon. Gentleman. That is a bigger injection than many hon. Members on both sides of the House expected. However, it is much less than £680 million when one has regard to National Insurance contributions and so on.
The injection that the Government have undertaken in all probability will not be enough. It may be enough to get some more growth and to halt the rise in unemployment, but it will not be enough to bring down unemployment.
I am not sure that I have understood the hon. Gentleman. He said that the injection was not as great after taking into account National Insurance contributions. If he takes those into account, he must also take into account the benefits. The degree of reduction in taxation is the figure in the Red Book by itself.
I know. I do not want to become involved in too semantic an argument. I am referring to the Chancellor's speech where he spoke of £680 million and went on to say that that was not the amount by which he was injecting new purchasing power into the economy. That is the significant point that I seek to make and, therefore, I do not think that it will be enough to bring down unemployment.
However much one is generous to the Chancellor for what he has done in this Budget, one cannot say the same of his mini-budget. On that occasion, what he gave away in tax reliefs he balanced by cuts in expenditure. In my view, the stagnation of the economy and the growth in unemployment were in considerable part due to the mini-budget. It could be argued that the autumn was the time to take expansionary measures, as my right hon. Friend implied in his own Budget speech last April. Timing is the key to good economic management. Last October, the Chancellor missed the bus.
Leaving aside the general economic judgment, I come on to consider specific measures taken by the Government as an aid to their employment policy. The reduction of unemployment is the key test by which the efficacy of this Budget should be judged. Therefore, I wish to comment on S.E.T., irrespective of its merits or demerits as a revenue raiser, about which the two sides of the House hold differing views.
There is sound sense in a doctrine which states that taxes which bear directly on employment should be administered flexibly. There is a case for raising employment taxes at moments of over-full employment and reducing them when the labour market is easy. In last year's Budget debate, I said that I saw limits to the potential value of S.E.T. as a revenue raiser because it had to be viewed in combination with the growing responsibilities that employers had to carry for health and social security contributions and, therefore, that it could conceivably become a brake on full employment.
The Chancellor takes credit for reducing S.E.T. by half to £290 million. In that sense, it is quite a shot in the arm for employers. But it should also be pointed out that what the Chancellor gives with one hand he takes away with the other. He is raising the employer's contribution for retirement pensions and social security by roughly 65p per week. He is taking away half the saving. In saying that, I do not mean over the whole economy. I refer simply to the position of employers and how far it is an incentive to the employment of labour.
It could be argued that manufacturers, who are less hard-hit by S.E.T, will be worse off as a result of the increased employer's contributions. Thus the S.E.T. refund is of limited full employment value. I think that there is a case this year—and perhaps the Government will consider it even at this late stage —for a greater Exchequer contribution to the National Insurance Fund. As the level of employment rises, if it does, the contribution from the Exchequer to the National Insurance Fund can be reduced. When Lord Beveridge produced the present National Insurance Scheme, he had this policy in mind.
Moving on to the problems of investment, the Chancellor is rightly concerned about cost inflation. The best way of fighting cost inflation is by greater productivity; in other words, through more capital investment. Here again, one has anxieties about the Budget. The reduction in corporation tax will help, but the total effect of the measures in the mini-Budget will be to help companies to invest in the future. It will not help them invest in the immediate present, which is what one would prefer.
The measures taken in the mini-budget to end grants and go for allowances were doctrinal, and the mini-budget has contributed severely to our investment difficulties. This Budget has done little to ease them. I ask hon. Members to consider the present crisis in the machine tool industry and to pose the rhetorical question: what are the Government doing to help in that respect? Taking an example in my own constituency, I was grateful when the Financial Secretary announced last July a welcome concession on depreciation allowances for three-shift wool textile machinery working. But there has been no direct incentive from the Government which would have helped the more marginal firms, and these are the firms which need help. It is the closure of some of these marginal firms which is exacerbating the employment position.
In the mini-budget, not only were investment incentives reviewed but the Chancellor promised to trim the princely sum of about £5 million from the science research associations. I cannot imagine that all hon. Gentlemen opposite are happy with this policy. What is wrong with the British Government's scientific effort is not its scale—it is substantial—but its deployment. If the Chancellor wants to save —5 million which is somehow being wasted on unprofitable scientific research, I would gladly take him on an exercise into the aircraft or nuclear power industries.
There has been a misdirected and unprofitable exercise by Governments of both parties in prestige scientific projects. Britain, I am afraid, has the contradictory record of a very high R. and D. in science and a very low growth, but it is surely a mistake to go for the research associations as focuses of scientific extravagance, because they are the admiration of other countries.
My main criticism of the Budget is an economic one. I doubt its judgment, I have reservations about its effectiveness for full employment and investment, but there is also, of course, the equity argument which my hon. Friends have deployed and which I share. The rate of inflation justified an earlier rise in the pension and it would also be good for growth if there were an early increase. I wonder whether a summer holiday payment of the pension could not be the Government's aim. This too would stimulate the economy.
I echo the warning about prescription charges. Perhaps I should declare an interest here. I am a director of a market research company which researches in pharmaceuticals. There may be a marginal case for a basic charge which shifts treatment of minor ailments from the surgery to the chemist. It is arguable that it is cheaper to get an aspirin or an antacid from the chemist around the corner than to take up a doctor's time and pay fares and 2s. 6d. But it is another matter to introduce differential charges for medicines. This will lead to very bad medicine. The public may even shift their patronage to a doctor who they know prescribes cheaply rather than ones who prescribe dear products. This could even mean moving from the thorough to the slipshod doctor.
Apart from the question of employment, the greatest error of the Budget is its omission. There is no policy for tackling inflation, merely platitudes. I do not pretend that the problems of inflation in society can not be solved without high investment and an incomes policy. The two go together. Unless the Government actively seek a solution based on a dialogue, on national harmony and unity, they will not, however clever their tax reforms, succeed.
I was delighted that I was present to hear the maiden speech of my hon. Friend the Member for Truro (Mr. Dixon). I have known him for some 30 years as a person of particular independence and humour. He made an outstanding maiden speech today. I think that all hon. Members will feel that the Celtic fringes will not lose their reputation for wit and free-thinking while he is a Member of the House. I hope that he will be a Member for just as many years as he feels inclined.
I trust that the Chancellor will not think that I do not appreciate his great reforming Budget if, in a short speech, I touch only on the particular aspects which interest me especially. I suppose that, when a Chancellor feels that he is able to remit taxation, he then has to take the difficult decision whether to spread the tax reliefs as widely as possible in pursuit of numerical electoral advantage, or to be more interested in justice and in protecting the interests of minority groups. I congratulate my right hon. Friend on having chosen to concentrate help on particular areas where it is especially needed and justified.
For instance, this week's package has brought help particularly to widows, the chronic sick, the old, especially the very old, those receiving supplementary benefits and, of course—last but not least—the surtax payers. I am disappointed that hon. Members opposite should seek to take the credit for the amalgamation of surtax and income tax and yet should cavil so much at the reduction of the rates which is being introduced at the same time. They may find that, once the hands are released from the throat of the goose that lays the golden eggs, the results will be extremely gratifying to all concerned.
It is one of the strange anomalies that a party dedicated apparently to equality should have brought in the selective employment tax, which is nothing if not unequal; and that a party apparently dedicated to selectivity should be committed to abolishing it. It is all part of the political transvestism which makes our two-party system work.
Although some hon. Gentlemen opposite have shown some regret at the passing of the selective employment tax, I have not heard any of them yet pledge to restore it if they should ever be returned to power; but I shall of course listen attentively to the remaining speeches in the hope of catching them in that grave mistake.
My particular objection to the selective employment tax is not that it is a tax on employment, because I have believed for a number of years that employers in this country do not make a sufficiently large contribution to the financing of the social services. On the Continent, employers pay a much larger proportion on top of wages into the local equivalents of the National Insurance Fund. I recognise that it might be said that we are giving our exporters an advantage in that we do not place such heavy direct taxation on them, but the deficiencies in our social service system can be remedied only if employers are required to make a larger contribution.
Therefore, it is the selectivity of S.E.T. which I am glad to see go. In this Budget, it is being replaced to some extent by an increase in employer's contributions right away. It is not in the current year to be replaced by a value-added tax, but by increases in earnings-related contributions to National Insurance. This is something which I have pressed my right hon. Friend to consider, and I am deighted that he has gone some way in what I believe to be the right direction.
I feel in particular that it is the right direction, because earnings-related contributions to pension schemes are not a tax. They might be called a levy. They are in fact a form of forced savings. What we need more than anything else in the British economy is a switch from consumption into saving. I am delighted that a start has been made.
Would the hon. Gentleman agree that there is a difficulty about this, that if earnings-related contributions do not result in any earnings-related benefits, they become much more like a tax?
I will come to that shortly because it is another aspect of our political transvestism which is worthy of note.
There is obviously a certain degree of parti pris about the valued-added tax. When people think of V.A.T. they automatically seem to think of the Common Market. Because of this, they may not appreciate the advantages of V.A.T. as a tax.
We heard this morning of a practical joker in Belgium who had announced, it being 1st April, that in future Continental cars would be driven on the left to fit the British pattern. It might have been an agreeable joke for someone in this country to have announced that the Common Market had abandoned V.A.T. and intended to copy our form of purchase tax. I believe that we would suddenly have found a large group of agitators in this House—those who have so far been against V.A.T.—suggesting that V.A.T. was really the best form of taxation.
I am inclined to endorse V.A.T. because, compared with purchase tax, it is not selective. My hon. Friend the Member for Worcestershire, South (Sir G. Nabarro), in an enjoyable vein, again demolished any possible case that could be adduced for purchase tax, and I shall be glad to see the last of it.
I am glad to see the Financial Secretary in his place, because I would like him to know that he is in the running for the Rhys Williams award for the hon. Member who has made the most rapid progress in coming to grips with the finer points of occupational pension schemes in 1971. However, if he wants the award, which I assure him will be well worth having, he will have to avoid two serious mistakes.
First, my hon. Friend appears to be keeping alive the Practice Notes. There is a tremendous area here for him to show his energy and capacity, and he could cut through to a simple formula for tax approval for occupational schemes based on a double criterion, one related to employers' contributions and the other related to the size of the eventual benefit. My view is that the tremendous amount of detailed thinking which has gone into these amazing Practice Notes becomes unnecessary when we escape from the notion that what we are trying to do is to restrict the possibility that occupational schemes could be used as a loophole for evading surtax, and see them rather as a means to increase the total volume of savings.
While an hon. Gentleman opposite was speaking earlier I was reminded of a little verse of Nicholas Bentley, which I have slightly adapted:
At night I think it sensible to keep,
The Practice Notes at hand to help me sleep
Be careful, though, an overdose may cause,
The neighbours to be wakened by your snores.
Another mistake which the Financial Secretary might make in his treatment of occupational schemes is more serious. He might leave untouched the mixed benefits rule. The operation of this rule is a particular obstacle to employers and employees in coming to terms on the preservation of pension rights on a change of employment. This is a particular interest of mine. I have spoken about it on several occasions in the House and I hope to have opportunities of doing so again in the coming weeks.
We need to achieve preservation with a human face—preservation which is fair to employers and acceptable to employees. I have lately put forward recommendations about lump sums and post-with-drawal increases which I believe are worthy of discussion and I hope to have opportunities of going into the details of these recommendations in the coming weeks.
I give the warmest welcome to the Amendments to the 1956 Act. The increase in savings which will undoubtedly result virtually immediately the changes are brought into effect will be a useful addition to the total volume of savings in the private sector.
It was when the Chancellor came to the reform of direct taxation that we suddenly heard the screaming of the hinges as a door so long closed was forced open. Rats scattered for the wainscoting and huge spiders scurried to the edges of their webs as my right hon. Friend entered a room on a shaft of light with his new broom in his hand.
I have often spoken about the need for surtax to be reduced. I have been the despair of my friends and the laughing stock of my critics, many of whom thought that I was merely making a constituency speech. I have always had the certainty that I would live to see the end of surtax, though I had not foreseen its end so soon. My right hon. Friend can imagine my delight when I heard him on this subject.
I hope that he will now proceed to cut the operative rates, particularly in the higher ranges, so as to bring us at least into line with the practice in North America. I cannot see any social justice in a rate of tax which exceeds 50 per cent. of marginal income.
Having gone so far in the integration of the three systems of direct taxation by putting surtax and income tax together, I am disappointed with the signs that my right hon. Friend is hesitating before going on to the more important task of integrating income tax and national insurance contributions.
I hope that it may not have escaped the notice of hon. Members that this is also a particular interest of mine.
The only point that alarms me is that we seem to be left hung up with certain out-of-date nostrums on the subject of the cash relationship between the indi- vidual and the State in its widest manifestations. Consider the present situation in regard to children. Children are eligible for family allowances; child dependant's allowances; child allowances in the tax system; and family income supplements. It cannot be necessary to operate four different systems for relieving need or for the benefit of children in a mature society such as ours in which computers are freely available.
I trust that we will soon have another burst of light in these dark corridors of power, where there has for so long been murk and gloom on the whole subject of the cash relationship between the individual and the State.
In case my right hon. Friend is nervous of venturing further, I assure him that my thoughts will be with him. And if he is not perfectly certain what my thoughts are on this subject, I will see that the deficiency is remedied in the coming weeks.
I come to the intervention of the hon. and learned Member for Lincoln (Mr. Taverne), The House is advancing towards an interesting debate on the question of earnings-related contributions and flat-rate benefits. It seems strange that we on this side of the House should suddenly have taken up the theme of "from each according to his capacity and to each according to his need", while hon. Gentlemen opposite have discovered the virtues of 19th century insurance principles with the strictly mathematical equation of contributions and entitlement.
It is not necessary for the State to keep precisely to the maxims of private insurance companies in dealing with the individual. We must move forward to a new social contract in which the individual's contribution is related in a much more mature way to the total amount of benefit he receives as a member of society and is not strictly limited, in an arithmetical sense, to concepts of "this much in and that much out", which is nonsensical in a society such as ours.
A few weeks ago we had an extremely interesting report on the scrutiny of taxation from the Select Committee on Procedure. It was alluded to yesterday by my right hon. Friend the Member for Thirsk and Malton (Mr. Turton), who made some extremely interesting remarks. I hope that the Minister will deal with my right hon. Friend's speech in winding up.
There is no doubt that the Budget is a tremendous new departure in the important sense that members of the public, and particularly Members of the House, are being invited to take part in the formation of policy, and are no longer being presented with a Budget which amounts to a fait accompli. We have Green Papers of the greatest possible significance on value-added tax and corporation tax which we must digest. We must also do a lot of thinking about the reform of direct taxation.
I think that the subject is so vast as to justify the setting up of a Select Committee on Taxation, or at least a Taxation Sub-Committee of the Expenditure Committee, as recommended in the Report of the Select Committee on Procedure. Alternatively, there might be a case now for setting up ad hoc Select Committees of Members to look at the subjects which will take their place in this year's and next year's legislation.
Hon. Gentlemen may have noticed that I try not to spend too much time attacking political opponents in the House. We all ought to be more aware than we are of the historic rôle of the House of Commons in correcting and checking the Executive, particularly in the field of taxation. If the House is devoted to internecine squabbles it will neglect that duty and we shall inevitably get to a situation —very much as we have seen in recent years—where taxation is excessive, arbitrary, unfair and inefficient.
Therefore, I hope that hon. Members will be ready to work together in achieving a major overhaul of our taxation system and that we shall not be divided by considerations of party advantage.
The Budget presents the country with a challenge, and I believe that the country will rise to it. It also presents hon. Members with a challenge. I believe that we have the capacity and the will to rise to this challenge; and rise to it we must, if we are to remain the centre of political power in this country.
I will not follow the hon. Member for Kensington, South (Sir B. Rhys Williams), if he will forgive me, on account of the lateness of the hour. I shall confine my remarks as best I can, because other hon. Members still hope to take part in the debate.
I want to observe immediately my impression that the Chancellor has produced a radical and complex Budget—radical because of his attempts to simplify an archaic tax structure: complex because it involves a variety of reforms and tries to provide something for everybody. The two need to be kept apart, because tax reform is an administrative problem. Tax incidence is a matter for Governments and for parties and ultimately for the people. It is of prime importance, therefore, that we in our discussions set them apart.
There is a suspicion that the Budget may be a cloak for readjusting the burden of taxation to the pre-1939 pattern. It is significant that the Chancellor took a long look backwards in the early part of his Budget proposals and thus left himself open to the charge of my right hon. Friend the Leader of the Opposition that this is the two-nations Budget, meaning that it offers more to the "haves" than to the "have-nots".
I take the view that it is the Chancellor's intention to reflate the economy and to stimulate the national growth rate. I recognise the Chancellor's problem of having to find ways of increasing incentive and staving off unemployment. I am therefore moved to ask if he has done enough. Even with today's announced cut in Bank Rate, is the Chancellor sure that his growth target is not within both productivity and capacity? Has he addressed himself sufficiently to the central issues—inflation as well as unemployment and the climate without which neither can be resolved, confidence?
The Budget may encourage people to work a little harder and to save a little more, but will it create more jobs? Confidence once lost is not easily regained. Undoubtedly confidence has been lost in the board rooms of many companies. Hence the decline in investment and economic growth. The general expansion for which the whole country is now anxiously looking depends upon measures of confidence. Yet, despite the euphoric reception of the Budget in the City today
and yesterday, general confidence in industry may still continue to be eroded by unprepared announcements of redundancies, by the seeming absence of plans for making alternative use of scarce resources, by front pages such as that of my local newspaper—the Sheffield Morning Telegraph, that bears today, and not for the first time, headlines like these:
Sackings top 100 in Davy cutback"—
and a quite separate announcement:
Closures hit more jobs
and then goes on to refer to another three firms.
Nowhere is this illustrated better currently than in a city like Sheffield because of the recent announcements in the steel industry about closures, about redundancies, about short-time working, without any explanation of the reorganisation of the steel industry that everyone believes is impending, as well as the absence of plans for the future use of valuable industrial infrastructure of steelmaking in cities like Sheffield.
All this has escalated the declining confidence in steel-making centres generally and in places like South Yorkshire in particular. Yet no industry is better placed to stimulate the investment needs of the economy than an expanding steel industry. We are all aware that the British Steel Corporation's economic dilemma is compounded of falling demand and a legacy of too much high cost plant which has inevitably undermined its profitability, as well as inadequate cash reserves due to unrealistic pricing policies.
Some right hon. and hon. Members opposite lead us to believe that, in their judgment, economic viability lies in the direction of hiving off non-essential steel making activities or profitable sections like special steels. But how can this make for the profitability of the residual steel industry? Already, there is an awful warning in Sheffield of the possible consequences of such a policy, for that first headline which I read—
Sackings top 100 in Davy cutback"—
refer to the announcement by Davey & United Engineering of Sheffield that more than 100 workers at its Darnall office will be sacked by the summer.
Yet rumours are rife in trade union circles in Sheffield tonight that orders which would normally have gone to Davy & United, and could still go to Davy & United, have been placed by the British Steel Corporation with German firms in connection with the Anchor scheme at Scunthorpe, to the value of £13 million, and they in turn have been subcontracted to South African firms. I need hardly emphasise the effect which this will have upon the temper of trade unionists in steel making areas.
All this is subject to further clarification, but it is already clear in Sheffield that it could not have happened in the presence of a fully integrated steel industry. It is clear, also, that steel can become viable in conditions of normal demand only if all its assets are given the chance to become profitable.
The British Steel Corporation can become viable long-term only through modernisation. For the British Steel Corporation to be driven to seek solvency through cost saving alone is to opt out of growth and ultimately out of foreign markets and international competitiveness. I realise that the temptation confronting the Government and the danger facing the B.S.C. is that such cost saving will be most easily effected by speeding up closures and redundancies. None of this must be taken lightly and without regard to the counterbalancing effect which can come only from investment in new replacement capacity.
When I refer to the Financial Statement and Budget Report, 1971–72, I am heartened to note that nationalised industries will receive an extra £278 million in advances from the National Loans Fund in 1971–72. The largest percentage increase, from £43 million last year to £289 million in the next 12 months, is for the British Steel Corporation. Planned investment by the B.S.C. is to rise from £130 million to £203 million, and additional working capital will increase total needs to £250 million, from £163 million. But the major change in the borrowing requirement is the swing of £100 million from profitability last year, which allowed £66 million in internal financing, to an expected shortfall of £34 million in the coming year.
I wonder how far the modernisation of steel can go even on the basis of this additional cash flow. How far is the B.S.C. still being compelled to put some of its most important capital development schemes on ice at the behest of the Government? How far will the Secretary of State for Trade and Industry go in granting the Corporation's current application for a price increase? How far will this provide or otherwise service the essential investment needs of the steel industry?
The general impression which I have is that the Chancellor's technique of innovation is potentially productive. He has produced a Budget which is unorthodox and challenging and, above all, goes against the grain of Treasury thinking. No succeeding Budget will be able to revert to the old pattern because that old pattern has obviously been abolished. But the Chancellor has taken a grave risk in respect of investment. No industry is better equipped or better poised to help him reduce that risk than steel. Any further thought and consideration, therefore, which he extends to the needs of the British Steel Corporation during the next few vital months will be amply repaid.
The hon. Member for Sheffield, Attercliffe (Mr. Duffy) has made, in effect, a constituency speech. One always follows constituency speeches with respect, deference and charity, and, without in the slightest trying to denigrate his speech, I shall make no further reference to what he said.
I shall refer to only one speech made in the debate today, that made by my hon. Friend the Member for Truro (Mr. Dixon). How refreshing it was to hear from these benches a stout declaration and proclamation of Tory faith. I hope that we shall have it consistently from him again, and that he will be followed by all my hon. Friends.
I shall speak for 10 minutes, no more. I want to say just three things—something about the elderly, the widows, disabled and the like; something about tax reform; and something about the difference between the parties and our attitude to the economy of the country and political economy in general.
We all welcome the increases in pensions and tax allowances for the elderly, the widowed and the disabled. That is the compassionate element in the Budget. It is broadly true that over the years successive Governments, Labour and Conservative, neither one notably more or notably less than the other, have steadily increased, through money provided by taxation and contributions, the standard of living and real incomes of the elderly, the widows and the disabled. It is right that that should be so, and I am glad that it is so. It ill becomes either party to cast aspersions on the sincerity of the other's devotion to that objective. I am sure that the present Government will continue as they have begun, and as the Conservatives did the last time we had responsibility. In terms of Tory philosophy, this is the net below which none shall fall. The corollary to that is that above the net the sky is the limit. We have no quarrel with hon. Members opposite about the net, but we have a quarrel about the sky, and to that aspect of our political belief and thought I shall return.
I want to raise two questions on taxation, one minor but important, and the other more fundamental. First, why are we not restoring the right to separate sums inherited by widows under life assurance policies from the rest of the deceased husbands estate in assessing the rate of estate duty under the Married Women's Property Act? I hope that my hon. Friend the Minister of State will give an indication when he winds up that the Government will undertake to do this. A further question in the slipsteam of that is: why do we not defer the payment of estate duty on the death of the spouse until the next passing of the estate?
My major question is: why did my right hon. Friend the Chancellor, in announcing the major reform of the tax system, make no mention of the whole concept of negative income tax? There is an idea abroad in the country that income tax and social security arrangements, as operated through National Insurance, should be amalgamated into a single system, so that those with the highest incomes pay most tax, as now, but those with the lowest incomes receive payments, with all circumstances, including social security considerations, being catered for through assessment in the one system. It is an idea of such magnitude that it can hardly be encompassed in addition to, or supplementary to, a reform of the tax system such as has been envisaged by my right hon. Friend in his Budget. My hon. Friends the Members for Oswestry (Mr. Biffen), Kensington, South (Sir B. Rhys Williams) and Worcestershire, South (Sir G. Nabarro) referred to this. It is surely the major reform that is called for. The major reform that we are promised is comparatively minor and subsidiary. Have the Government closed their mind to the possibility of such a reform in the life of this Parliament? If they have is that because of the possible difficulty of harmonising with Europe? I rather fear that that might be so. If it is, the House should be told frankly now, so that we know that it is not to be done in this Parliament.
In my last two minutes I should like to consider the Budget as an example of the difference between the two parties. I am glad that it has been attacked, and I am glad that it has been attacked in the way that it has by Labour hon. Members. It has been attacked on the right lines, especially with reference to taxation. It helps to make clear to the electorate that there is a choice before it, and what that choice is, and it reassures me that Conservatives are true to themselves and in their true colours. I have never thought that it was the duty of Conservatives to conserve Socialism.
I have always taken a certain amount of pleasure and comfort in a remark made by a notable Labour supporter, Mr. Cecil King, writing in The Times a little while ago. He said:
The besetting sin of the Labour Party is envy.
I would be less than frank with the House if I did not add that he went on to say that the besetting sin of the Conservative Party was greed. But I think that one can turn the coin in either case, and it would be less than generous not to recognise that the obverse of the coin of envy which characterises the Labour Party is some very nice attitudes of compassion and considerateness for the weak —which I would not, myself, in any way admit as being absent from my own side of the political fence. Likewise, if Mr. King wants to call Conservatives greedy, at least it must be recognised that they possess that dynamic energy and creative and constructive vitality which is so im-
portant in keeping the world going round. For myself, my choice is, as always in all political questions, the choice between two evils. It seemed to me that there was more hope in mitigating and restricting the vices of the Conservative Party and building upon the constructive energy it offered than there was, however nice the compassion in the Labour Party, hope for the man or society whose moral outlook was poisoned by envy, which is the most miserable and sterile of vices and sins.
The fundamental difference in attitudes is brilliantly illuminated by the reactions on either side to taxation—which, for the first time since we last sat on these benches on this side of the House, has actually been reduced in a Budget. This has been called a rich man's Budget and a socially divisive Budget. We have a different attitude to this. Conservatives believe in private Property as the first principle of individual liberty, if I may be permitted to say so. We believe that taxation is an evil because it takes away from a man his private property, and that it has to be kept down to such minimum as may be necessary, firstly, to regulate purchasing power in the economy, and secondly, to pay for the minimum of State activity required by compassion—I would prefer to call it kindness, decency—in social policy.
But the Socialists believe, as they are entitled to, that taxation has at least one valuable social function. They believe that it should cause society actively to move towards the redistribution of income for the creation of equality. They have an egalitarian creed. I recognise that and I think that people are too mealy-mouthed about it. It is supposed to be the spirit of the age. I do not believe that it is the spirit of the age. I do not believe that it is the spirit of England. If it is let me make it clear that I am against it. I am not a political transvestite and never have been.
I do not believe that the creation of equality is possible by fiscal methods. If it were, I do not believe it desirable. Hon. Members opposite and I at any rate—and I hope all my hon. Friends—disagree fundamentally about that, and I think it best that we should recognise it. We cannot prove that one is right and the other wrong. It is not for us to convince one another. We have nothing to say to one another about that. Our appeal is to be made to the electorate. It is for the people to judge between us. They have judged. They have made their choice. We shall not disappoint them if this is the first earnest of what we intend to do.
In framing the Budget the Chancellor should have had three overriding aims, and I propose to assess the extent to which he has met those objectives. They are: first, to reduce unemployment; secondly, to provide a substantial increase for those who have been hit hardest by inflation; thirdly, to help directly to reduce inflation.
Unemployment in the South-East among males is 2·8 per cent. and the national figure is 4·4 per cent., but in Scotland it is 7·4 per cent. The people of Scotland were looking to the Budget to cut unemployment. They were looking for economic expansion, but they have not got it. The most crucial passage in the Chancellor's Budget Statement was when he said:
…the broad aim should be an addition to demand adequate to raise the rate of expansion of output to the rate of growth of productive potential, which is estimated to be about 3 per cent."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1370.]
The Chancellor was there saying that he would not take up the slack in the economy. He was telling the people of Scotland that the level of unemployment was to be stabilised at the present figure of 122,000. There is hardly a Scottish Labour Member who has not had a major redundancy in his constituency in the last few months. I have had a substantial redundancy in the small burgh of Mussel-burgh, and it has had devastating effects.
If the Chancellor had decided that he could not produce an overall expansion in the economy, as I should have wished, I should have liked a reflation of at least £500 million and not the £250 million immediately and £350 million at the beginning of 1972, which is the general assessment of the position. Surely he could have provided something special for Scotland. But there is nothing in the Budget to help Scotland.
If the Chancellor decided that in the short term he could not do something about growth, he might still have looked at the long term. He must have been alarmed by the likely deterioration in the balance of payments in 1972. But there is nothing in the Budget designed to promote an increase in exports. Not only is the short-term outlook bleak for the people of Scotland, but the long-term outlook Ls equally bleak.
The second aim should have been to help those on low fixed incomes. Hon. Members opposite seem to be under the impression that the increase in pensions will do just that; but it will do nothing of the kind. On 16th March I asked the Secretary of State for Social Services what percentage drop there had been in the purchasing power of pensions since the last increase. The answer was 9· per cent. I made the point that an increase of less than £3 a week for a couple would be inadequate because of that drop and because of likely increases in prices. That may have sounded like political polemics, but it was a sober assessment based on the present rate of inflation and expected price increases over the next year.
By early 1972 pensioners will be worse off than they were in 1969 and 1967. In reply to that point, the Secretary of State said yesterday that the last increase under Labour had only just restored the purchasing power of pensions. That is true, but the Labour Government's record on pensions is that they started well in 1965 and fell away, while the present Government are starting badly and, I am sure, will get worse.
The third aim should have been to act directly to reduce inflation. When will the Government end their schizophrenic attitude towards inflation? On the one hand, they are forcing up prices —food prices, rents, transport charges, health charges and so on—and, on the other hand, they are telling workers that they must not force un wages. When shall we have an end to this?
It is all very well for hon. Members opposite to say that when a man earning £20,000 a year gets tax cuts of £34 a week it does not matter because the cost to the 'Treasury is small. The Financial Secretary made the point that some of my hon. Friends had been taken aback when he quoted the figure. One or two hon. Members did lead with their chins on this issue and the S.E.T. issue during the Chancellor's speech, but the case for taxation of higher income levels, of estates, the case for a wealth tax, for a capital gains tax is not the revenue that it produces; it is the basic argument of social justice. We believe that it is anti-social for people to have large private fortunes.
This Budget does nothing to help the unemployed. It takes from the workers to help the rich. It has been described as a good Tory Budget, and it is that —a good, clever, Tory Budget. It is a cruel, socially divisive package, dressed up with fancy wrapping, but the people of the country are beginning to take off the wrapping and the more they see of this Budget the less they like it.
I hope that the hon. Member for Edinburgh, East (Mr. Strang) will forgive me if I do not comment on his remarks. I believe that this Budget will restore confidence and that the chief beneficiary of that restoration of confidence will be the level of industrial investment. Hon. Members opposite have made much of the fact that the increase in private fixed investment in the next year will be only 0·5 per cent. Private fixed investment involves the construction of buildings or the installation of heavy plant. The construction period can often be lengthy and it is often preceded by a period of work in the design office which itself may be preceded by negotiations for the acquisition of a site.
It would be surprising if investment decisions taken as a result of this Budget were reflected in financial terms within the next year. I am confident that in two or three years from now we shall see the benefits of the Budget in steadily increasing industrial investment. The Budget has rightly been hailed as a great reforming Budget and it is in that context that I want to say something about a value-added tax. I am sorry that my hon. Friend the Member for Oswestry (Mr. Biffen) is not in his place because I should like to take friendly issue with him. He expressed the hope that future savings in Government expenditure might make it possible to dispense with the other half of S.E.T. without resorting to a value-added tax.
I, too, earnestly hope that savings in Government expenditure might make it possible for us to make further tax reductions. However, I am persuaded by the arguments that my party has been putting forward over the last six years that we need to shift the emphasis from a tax on income to a tax on spending. If we find ourselves with capacity for further reductions in taxation I would rather see those reductions made in direct taxation.
If we ever get to the point when we felt that we had sufficiently reduced direct taxation I should have other candidates for reduced taxation before dispensing with value-added tax. I am thinking of Excise duties and particularly the Excise duty on hydrocarbon oils.
Given that we believe there is virtue in a general tax on expenditure, of all the imperfect ways of taxing general expenditure, a value-added tax is the least imperfect. We must first of all consider the disadvantages of the taxes it replaces. S.E.T. has few friends. It is discriminatory, cumbersome and has failed ostensibly to achieve its intended redistribution of labour. My hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) spoke of the absurdities and anomalies of purchase tax: it has the further small disadvantage that it finds its way into the cost of exports.
Value-added tax has some definite advantages. It is broadly based. It is neutral. Because it is a tax on general expenditure, it is an incentive to saving. Because it can be rebated, it has some incentive effect on exports. That effect may not be great, but very often a marginal effect is an important effect and can sometimes tip the balance and, perhaps, give our exports just that decisive extra edge.
But even the tax's best friends will agree that it has disadvantages. It will need additional civil servants—the right hon. Gentleman the Member for Birmingham, Stechford (Mr. Roy Jenkins) quoted the N.E.D.C. estimate of another 6,000 or 8,000 civil servants. I would not quarrel with that estimate, but one must look at it in the context of other savings; the abolition of surtax, of purchase tax and of selective employment tax, the streamlining of capital gains tax, the abolition of the Land Commission and the ending of investment grants, all of which will save on civil servants, so that the net increase resulting from V.A.T. will be small, if there is any increase at all.
As my hon. Friend the Member for Worcestershire, South pointed out, there are ways of further reducing the administrative costs of V.A.T. One way is by exempting small traders: I believe that in Germany and Denmark the number of potential V.A.T. taxpayers has been reduced by one-third as a result of exempting small traders. The scope in this country is considerable when we reflect on the fact that in the construction industry alone there are 60,000 firms each employing fewer than eight men.
The administrative costs can be reduced further by resisting the temptation to have varying rates of tax, and I hope that we will resist that temptation, apart from a few necessary exemptions. I suggest that where we consider it necessary to lessen the burden of tax on certain items, instead of changing the rate we should vary the basis upon which the tax is levied. In housing, for instance, instead of levying a tax on 100 per cent. of the value of the house, the tax could be levied on two-thirds, or 50 per cent.
A further effect of V.A.T. which is criticised is that it will increase the cost of living, and it will certainly have an effect. The right hon. Gentleman the Member for Stechford quoted the N.E.D.C. estimate of the additional number of civil servants, and presumably he did so because he regarded that report as authoritative. It is a pity that he did not also quote the N.E.D.C. estimate of the increase in the cost of living. In page 50, paragraph 5·13 of that report the estimate is that by a V.A.T. rate of between 10 per cent. and 15 per cent. the cost of living will be increased by only 1½ per cent. to 2 per cent., if we dispense with purchase tax and selective employment tax.
I should not have thought that such an increase was an insupportable burden, particularly as there are ways of mitigating its effect on poorer people by exempting, for instance, the necessities of life, by adjusting personal allowances for income tax for people with children, or even by increasing old-age pensions. Although V.A.T. has its disadvantages, it also has solid advantages.
One proposal in the Green Paper which worries me is that the value of goods for tax purposes should be the invoice value inclusive of duties and other taxes. I am worried about how this will work, particularly in conjunction with the Excise duty on hydrocarbon oils. A feature of the cost of these oils is that it works its way throughout the economy. There is no manufactured item in which hydrocarbon oils are not used. Therefore, there is an element of this cost in practically every invoice on which V.A.T. will be levied. That means that V.A.T. will be levied on the £1,400 million or so a year of the Excise duty on hydrocarbon oils. In other works, with a V.A.T. rate of between 10 and 15 per cent., about £150 million to £200 million a year in tax revenue will arise from a tax upon a tax—V.A.T. as levied on the tax on hydrocarbon oils. I believe that it is wrong in principle that there should be a tax upon a tax. I hope that further thought will be given to this matter, or, better still, that the Excise duty on hydrocarbon oils will be greatly reduced or even abolished.
I welcome the Budget. I think that it was received with mild disbelief. Members of the public had braced themselves for the six-year-old ritual of savage tax increases. Instead they were invited by the Chancellor to come out into the sunshine and to take advantage of the opportunities before them. I have always believed that under a Conservative Government the 1970s would be a decade of great opportunity for Britain. This Budget fittingly sets the stage for that decade.
It gives me great pleasure to be able to begin my first speech at this Despatch Box by congratulating the hon. Member for Truro (Mr. Dixon) on his maiden speech. I was not able to hear it, but I gather that he spoke with extreme fluency and without notes. It is clear from the accounts which I have received that the trepidation, if any, which he felt was a good deal less than that which I now feel.
At this stage of the debate, the rôle of the "winder upper" is not to contribute new thoughts—it is very difficult to have new thoughts at this stage of a debate—but to comment on some of the themes which have emerged. I should like to comment on three themes which seem to me of great importance. The first is that mentioned by the right hon. Member for Thirsk and Malton (Mr. Turton) yesterday and referred to by the hon. Member for Kensington, South (Sir B. Rhys Williams) today: namely, the theme of what I might call open government and of parliamentary control over the process of economic management and, in particular, of taxation.
In the Budget debate a year ago the present Minister of State at the Treasury asked that in future the Government should publish what he called a "before and after forecast"—a forecast, not only of what would happen as a result of the Budget, but of what would have happened if the Budget measures had not been introduced. I applauded that call, and I am very disappointed indeed to find that after nine months at the Treasury he has not been able to achieve that very important reform in open government.
It is true that the Chancellor of the Exchequer made a few references to the pre-Budget forecast on Tuesday. He mentioned that investment looked very bad before the Budget and that the prospects for growth were deplorable. But he did not give us anything like the full picture, nor does the Financial Statement. This point is of much wider importance this year than it might be in other years because it means that it is very difficult sensibly to appraise the right hon. Gentleman's Budget judgment.
The Minister of State was kind enough to ask me to let him know whether I had any questions. I told him that I would ask this question, but if he has not had time to find the answer perhaps it can be given on Monday. If we are to appraise this Budget judgment, it is important that we should know what, before the Budget, was the Treasury's forecast of the likely growth in consumers' expenditure. It is the growth in consumers' expenditure which will give what small degree of growth there will be in the economy over the next 12 months.
The Government are expecting consumers' expenditure, as a result of the Budget, to grow by 5 per cent. a year. It is expected to be the main impetus to the overall growth of 3 per cent. If one subtracts from that post-Budget forecast of a 5 per cent. increase in consumers' expenditure the effect of the Budget measures themselves, I believe that we would get a figure of about 3·9 per cent. In other words, the Treasury's forecast before the Budget must have been that consumers' expenditure would rise by around 3·9 per cent.
The National Institute for Economic and Social Research is not divinely appointed and its forecasts are by no means always right, but it is worthy of note that its pre-Budget forecast of the likely growth in consumers' expenditure over that period was about 1·3 per cent. It is of the utmost importance that the Minister of State should give the House tonight an intelligible reason for this wide disparity between the forecast of the National Institute and what must have been the forecast of the Treasury.
It seems to me that there can be only two possible reasons for it. Either the Treasury forecast assumes that the savings ratio will fall, which means that the Chancellor's policy of increasing savings will fail, or the Treasury is assuming that wage settlements will not decelerate in the way that the National Institute assumed they would. In other words, the Treasury's forecast of growth—which depends on its forecast of consumers' expenditure—appears to depend in turn on an assumption either that the Chancellor's policy on savings will fail or that his policy on inflation will fail. I may be wrong about this—indeed, I hope I am—but I should like the Minister of State to explain clearly to the House, if I am wrong, why I am wrong. By what process did the Government reach their totally different forecast from that of the National Institute? If we are to have intelligent debate on these matters, it is not enough to be given a few figures in the Red Book. We must have a clear and coherent argument backing up the figures. That is the real value of an economic forecast, not the figures themselves.
My second question to the Minister of State about forecasts in this. Where do the Government expect the extra 1 per cent. growth of G.N.P. to come from? If one goes down the list of tax cuts in the red book it is difficult to see how the Government can expect an increase of 1 per cent. of G.N.P. Half of the total tax cut comes from the reduction of S.E.T. The Government must be making some extravagant assumptions about the likelihood that the cut in S.E.T. will be passed on to the consumer in the form of lower prices.
It would be helpful—and, indeed, it is essential if we are to have a proper debate—if the Government could say exactly how much of that S.E.T. cut will be passed on in the form of prices, and why, and also what measures they intend to take to make sure it is passed on. So far we have had nothing on that matter.
The second aspect of this theme of open Government to which I should like to refer—this is something of a King Charles's head with me, but since I am speaking from this Box I might as well fly the flag once again—is the point which was raised by the right hon. Member for Thirsk and Malton, and taken up by his hon. Friend the Member for Kensington, South, about the need to set up a Select Committee on Taxation or a Sub-Committee of the Expenditure Committee to deal with taxation matters. I agree with them that this matter has become much more urgent as a result of this Budget and the measures associated with it.
I am glad that the Government have produced two Green Papers for consultation, but whom are they planning to consult? Both proposals in regard to corporation tax and V.A.T. are exceedingly complex. The proposal for a V.A.T. raises fundamental social questions, as well as questions of economic management. In my view, it would be intolerable if the Government were to consult a whole range of outside interests on the proposals in these two Green Papers and were never to submit them to detailed scrutiny by a Select Committee. It is not possible in exchanges across the Floor, or even at the Committee stage of a Bill upstairs, to scrutinise such proposals with the sort of detail and seriousness which they require.
The difficulties about corporation tax have been well outlined by my hon. Friend the Member for Heywood and Royton (Mr. Barnett), and I shall not repeat what he has said. On the value-added tax, there is an additional reason why a Select Committee examination is necessary. It is not just that the tax is administratively complex. It is also that the package proposed by the Chancellor, the substitution of purchase tax and S.E.T. by a value-added tax, would undoubtedly have a highly regressive effect. It would make the poor poorer and, relatively speaking, the rich richer. All the studies which have been carried out, including that in the Treasury's own "Economic Trends", suggest that the effect of S.E.T. and purchase tax on the distribution of income is broadly neutral. On the other hand, there is no doubt that a V.A.T., unaccompanied by any other measure, would take more from the poor than from the rich.
The Institute for Fiscal Studies has just issued a pamphlet by C. V. Brown entitled "Impact of Tax Changes on Income Distribution". This makes clear that the introduction of a value-added tax at a flat rate of 8·9 per cent. would mean that the lowest income groups would suffer a fall of 9 to 11 per cent. in their income, whereas in the highest income groups the fall would be around only 6 per cent. It also shows that it makes little difference if food and housing are exempted from V.A.T.
In my view, two conclusions follow. In the first place, it is outrageous that the Government should publish a Green Paper on a step of such importance without considering the social implications of this departure.
Secondly, it is clear that if we are to have a value-added tax—and like my right hon. and hon. Friends who have spoken from this Box earlier, I accept the need for a value-added tax if we go into Europe as part of the price of going in—there must be compensating measures to make sure that the regressive effects do not take place. That is absolutely indispensable. I think that a Select Committee examination could help in elucidating the options and problems in that sphere.
I hope, therefore that when the Minister of State winds up he will break the deafening silence which the Government have so far preserved on the suggestions contained in the Procedure Committee's Report and tell us whether the Treasury is prepared to move a bit further forward than it did in its quite deplorable evidence to us a few months ago.
The second major theme of this debate is the effect of the Budget on the rate of growth, on the level of unemployment, on the rate of inflation, and on the balance of payments—in other words, its significance as a tool of economic management. It was interesting, during yesterday's debate, to note that, on this aspect at any rate, there were quite marked doubts in some sections of the party opposite. We had fascinating and interesting speeches from the hon. Member for Oswestry (Mr. Biffen)—I am sorry that he is not here —from the right hon. Member for Thirsk and Malton, and even from the hon. Member for Horsham(Mr.Hordern)— "even" in the last case because of the loyalty which he normally displays to his Front Bench. All of them admitted that they were worried about the implications of the Chancellor's statement with regard to the money supply. If their worries meant anything, it seems to me that what they really meant was that they feared that the Budget, combined with the Chancellor's announcements about money supply, would be too reflationary and would not do enough to deal with the present rate of inflation.
This is significant, because it is clear that the Budget does mark a change of policy on the Government's part—at any rate, a change in their declared policy. Until a few weeks ago it seemed that the Government's economic policy could be defined as follows: squeeze the economy until the pips squeak, and only when they have started to squeak do anything about growth and full employment. Their policy until a few weeks ago seemed to be to deal first with inflation and then, and only then, to go for growth. In my view, it was a mistaken and, indeed, a cruel policy, but it was at least an intelligible policy; it made some kind of intellectual sense. As a result of the Budget, it is clear that that policy has been abandoned. Instead we have no policy at all; we have the worst of both worlds.
One point which has emerged from speech after speech from these benches, which has not been and cannot be contradicted by any speaker on the Government side, is that this Budget, whatever else it may be, is not a reflationary Budget. The Chancellor of the Exchequer is not aiming to lower the present intolerable level of unemployment. All he is aiming to do is to keep it at its present level. That is the most that he is hoping for.
As I have suggested already, there is room for doubt about whether the Chancellor will achieve even that. There is room for doubt about whether the stimulus is as much as he thinks, and there is greater room for doubt about whether the stimulus will work with sufficient speed. But by far the most important point is that, even if it does work to the extent that he expects, it is clear that it will work in the wrong way. It is clear that such expansion as will come in the British economy during the next 12 months as a result of this Budget will come almost entirely from consumption. There will be nothing from investment and virtually nothing from exports. It is clear that in the long run this is a recipe for economic disaster.
We all know that for the last 20 years the basic problem of the British economy has been low investment leading to low growth, low growth leading to periodic balance of payments crises, periodic balance of payments crises leading to deflation, and deflation leading to low investment. That is the rut out of which the Chancellor says he hones to get. The Budget does nothing to get out of it.
The whole point of devaluation was to escape from that vicious circle, to get out of the balance of payments straitjacket and go for sustained growth long enough to drag up the rate of investment, because that is the only way to drag up the rate of investment. The idea that it is possible to generate extra investment by clever changes in the tax structure while allowing demand to remain stagnant is, of course, absurd.
The critics of devaluation said that, if we devalued, all that we would do was to buy time. In a sense, they were right. The purpose was to buy time. But we did buy time. We got the surplus. The charge against the Chancellor of the Exchequer is that he is frittering away the time that was bought.
The Government's Financial Statement shows that the existing margin of spare capacity and unemployment will remain in being and that, because of it, investment will barely rise at all. In this House we often discuss the undesirability of a consumer-led boom. We are getting consumer-led stagnation from the Chancellor, and it is a certain recipe for economic disaster.
The reason for it was given plainly by the hon. Member for Tonbridge (Mr. Hornby) and by the Chancellor himself in his Budget Statement. The right hon. Gentleman said:
As far as fiscal and monetary policies are concerned, the first requirement is that they should not create any danger that demand inflation will be added to the present inflation stemming from rapidly rising costs."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1369.]
In other words, it is inflation which makes it impossible for the Chancellor to do more than he has to reflate the economy—
I am glad to have the right hon. Gentleman's confirmation.
This is where what has been the third theme of the debate links up with the second theme. For the third theme has been the inadequacies of the social philosophy enshrined in the Budget. There are only two ways of dealing with inflation. There is the way of unemployment, running the economy below capacity. Despite all the known difficulties and hazards, the only alternative is to try to hammer out some form of acceptable prices and incomes policy, as the right hon. Member for Wallasey (Mr. Marples) made clear in his very interesting speech.
The second major charge against the Chancellor is that the social philosophy which is embodied in this Budget makes it impossible for him to take the incomes policy road and therefore means that he has no alternative but to take the road of deflation and low growth. For incomes policies can work only if they embody some element of social justice, and the philosophy in the Budget, as has become clear in speech after speech from this side of the House, is directly contrary to the aim of creating greater social justice.
What are the major obstacles to social justice in modern Britain? I believe that there are two. The first is the persistent tendency in a society like ours for an ever-increasing minority of poor people to fall behind the standards of the affluent, comfortable majority. The second is the stubborn and persistent inequality in the distribution of capital wealth. The Chancellor has failed to deal with either of these, or indeed even to recognise their existence—
The hon. Gentleman disputes that. Let me mention one or two points in connection with these obstacles to greater social justice. It is true that the Government have done something to relieve poverty, but what they have given with one hand they have taken away with the other. One example which no one has yet mentioned is rates, just about the most regressive single tax we have. All that Treasury's investigations in "Economic Trends" show this. Yet, as a direct result of the Government's cuts in public expenditure, local authorities are now being forced to increase the rate burden. This is bound to make the poor poorer.
I have mentioned the effect of a value-added tax. There is no sign from the Government that they will compensate for this. They certainly have not said so. If they are prepared to say so, I shall be delighted. Even the increase in child allowances with which the Front Bench opposite make such play, however valuable it may be to those who receive it, does nothing to narrow the gap between the poor minority and the affluent majority. By definition, it cannot do so, because it is received by everybody with children, irrespective of whether they are poor or rich.
The Government have also done nothing to meet the second obstacle, that of a stubborn inequality in the distribution of wealth. Not long ago, one of the Treasury Ministers told me in answer to a Written Question that the wealthiest 1 per cent. of the people of this country own 34 per cent. of the privately-owned wealth, that the wealthiest 10 per cent. own 75 per cent, and that the poorest 50 per cent. own nothing at all. There might in theory be a case for relieving high income earners from some of the burden of taxation—although it is rather a strange policy to pursue when one is trying to contain wage inflation—but not against a background of this continuing, stubborn inequality in the ownership of wealth.
I think it was the hon. Member for Tonbridge who said that Sweden and Germany had lower rates of tax on high incomes than we have. That is perfectly true, but both have a wealth tax, which we do not have. If we are to have this sort of change in the taxation of high earners, we must do something to relieve inequality in the ownership of wealth. It is because the Government have failed to do this that we can see that, when they talk of incentive as their goal, what they mean is inequality. It is because of that that the Budget is unacceptable to my hon. Friends and, in my view, it is also because of that that the economic policy which the Chancellor is trying to follow in this Budget is doomed, and rightly doomed, to failure.
My first pleasant task is to congratulate the hon. Member for Ashfield (Mr. Marquand) on his first speech from the Opposition Front Bench. I do so with considerable enthusiasm and it is without presumption that I tell him that it was the best speech I have heard him make. The entire House enjoyed it very much. That is not to say that I agreed with his remarks, particularly towards the latter part of his speech. Nevertheless, it was a contribution which we enjoyed.
The hon. Gentleman raised a number of specific points and I will, in the course of my remarks, answer most of them. The answer to his question about forecasts is that we have many economic debates ahead in the coming weeks and months when this point can be pursued. As for the recommendations of the Select Committee on Procedure, my hon. Friend the Chief Secretary will be referring to those in his speech on Monday.
My second pleasant task is to congratulate my hon. Friend the Member for Truro (Mr. Dixon) on his maiden speech. He expressed some impatience with the time-table of our programme of tax reform, and that is understandable. However, he will appreciate that we are anxious, as the Green Paper makes clear, to have a serious discussion of all these proposals, and we look forward to hearing his views on them in the near future.
We have had three separate debates about the various parts of the tax reform package going on within the main debate on economic policy. My hon. Friend the Financial Secretary dealt this afternoon with the reform of personal and corporate direct taxation. I will take up some of the points which have been made by hon. Members on indirect taxation, but first I wish to look at the economic situation. I will examine our problems and, throughout, take as my theme the need to change the answers in response to changing economic problems and especially the need to change to Conservative answers.
As many hon. Members have pointed out, we are confronted with two problems combined. We have simultaneously a rising rate of unemployment and, at the same time, very serious cost-push inflation. This paradox cannot be resolved simply by demand management. It is for this reason that we are pursuing a policy which combines de-escalation of wage claims, to tackle the cost-push inflation, with a policy of reflation, to get the growth of output back in line with the growth of productive potential.
In this context, it is vital that the implications of the Budget should not be misunderstood as the hon. Member for Ashfield, among others, misunderstood them. Obviously it is not the kind of Budget which we have had for the last five years, with massive tax increases failing to deal with inflation. But in the complex situation we face, the responsible reflationary measures which my right hon. Friend has announced should not be taken as an indication that resistance to inflationary wage settlements can be relaxed. On the contrary. What is required is an intensification, rather than a relaxation, of the battle against inflationary wage settlements.
It is important to distinguish between the revenue and demand effects of the Budget. The degree of reflation which follows from my right hon. Friend's Budget judgment is, we judge, sufficient to bring the growth of output into line with productive potential, but not to add demand pull inflation to cost push pressures.
Despite the depressing survey in the Sunday Times last weekend, to which my right hon. Friend the Member for Wallasey (Mr. Marples) referred, the public at large is, I believe, increasingly aware of the connection between inflationary wage settlements and rising prices. There is, however, a particular aspect of our de-escalation policy which I want to stress. It is no part of the Government's policy to reduce the rate of growth of the community's real earnings. Indeed, it is a major objective of our policy in this Parliament to increase the sustainable rate of economic growth and to raise real earnings and the standard of living.
But excessive increases in money wage settlements of the present dimensions will not achieve this. On the contrary, they will endanger our prospects. It is necessary for faster growth, and the more rapid advance of real earnings, for increases in money earnings to be reduced to more realistic levels, levels which are more in line with the growth of national productivity. A policy aimed at this objective is in everyone's interest and is in no way aimed against wage or salary earners.
Our policy to deal with cost-push inflation and rising unemployment reflects our determination to "change the answers" to meet new problems. The same approach is to be found in our attitude to savings. Encouragement of savings is, of course, fundamental to Conservative philosophy, and so my right hon. Friend has changed, or rather improved, the terms of National Savings securities. Savings will also be generally encouraged by the fact that under our plan for unification of income tax and surtax the first slice of investment income will be taxed at the rate applicable to earned income, and by the changes made in capital gains tax, estate duty, the rules for pension schemes and retirement annuities and stamp duty.
The National Savings Movement has a particularly important rôle to play in encouraging thrift. Its structure has, however, developed over a number of years, and, as my right hon. Friend has said, we believe that the time has come to set up a Committee to review it. Here we have no preconceived ideas of what changes if any might be made. The Committee, under Sir Harry Page, will be entirely independent, and it will make its recommendations in the light of all the evidence and after making a thorough review. The Government's aim is to get a report which will enable them to ensure that the framework of the savings movement is soundly based, sensible and can develop in the right direction in the future.
In our present economic situation we regard a continued increase in savings as more vital than ever before. Every increase in savings widens the scope for reducing direct taxation, and increasing incentives, or cutting indirect taxes, which will help to keep down prices.
This, in turn, will enable us to achieve a faster sustainable rate of economic growth. In contrast with the 1930s, we can justifiably argue that today increased savings improve the prospects for higher employment.
As my right hon. Friend has pointed out, the recent figures for savings are encouraging, but there is certainly no room for complacency. It is significant and important that savings have continued to grow despite inflation. As I pointed out in answer to a supplementary question on Tuesday, it is true that inflation does have an effect on the value of savings. It is for that reason, among others, that the Government are determined to control inflation. But increased savings are also a major weapon against inflation, and it is very important that we should make full use of it.
I turn to the question of monetary policy, to which a number of hon. Members have referred. I return to my theme. As my right hon. Friend made clear in his Budget speech, it is also necessary to change the answers to our problems as far as the mechanism of monetary control is concerned, and, again, to change them in line with Conservative principles. For too long we have relied on specific quantitative controls which have, as is usually the case, tended to inhibit competition, produce distortions and lead to a misallocation of resources.
This is an area where we must proceed to reform with caution. It is essential to retain effective control throughout and to make sure that we do not destroy a delicate machanism based to a large extent on confidence without having a better mechanism to put in its place. My right hon. Friend has outlined our broad approach. It will be more comprehensive and rely more on the working of the market mechanism than existing arrangements, but there will need to be further consultations before firm decisions can be reached.
The other area of controversy in this field, as hon. Members opposite who have taken part in debates on Finance Bills over the years will know, is concerned with the relative merits of fiscal versus monetary policy. I believe that this is a false dichotomy, and whilst no doubt the academic battle raging between Professor Friedman and his troops, on the one hand, and Professor Kaldor and his allies, on the other, will continue, and, hopefully, end in a synthesis, the dispute is essentially about analysis.
In practical terms, the real lesson to be learned is from the experience of the United Kingdom economy in 1968–69, when the effects of massive tax increases were dangerously delayed by inadequate control of money supply. We have learned that fiscal and monetary policies must go together. In this context, despite the fact that it is impossible to fine-tune monetary magnitudes over short periods of time, the policy since last June has, I believe, hit the right balance.
The present choices for monetary policy are often presented as two distinct options—a neutral policy and a passive policy. It may be helpful to define these options and put the terminology on record, not least because the terms seem, on the face of it, to be interchangeable. I take a neutral monetary policy to mean a growth in money supply equal to the underlying growth in productive potential, plus some allowance for an irreducible price increase based on past experience. I take a passive monetary policy to be one which accommodates whatever rate of growth in money incomes and prices is generated by the development of the economy.
I am anxious to put it on record because there is a case for doing so for the sake of future debates which we shall have on this subject. I certainly do not intend to delay the House by repeating it on this occasion.
If we had adopted a strict neutral policy, as some have advocated, this might in time have caused the rise in prices to be moderated to something close to its past average. But, unhappily —I think that I take hon. Members with me on this—experience in most industrial countries suggests that a stringent monetary policy affects real output first and then affects the increase in costs and prices only after a long period. To have pursued such a policy would have caused, and would cause, widespread bankruptcies, massive unemployment and a waste of resources.
If our present inflation had stemmed from excessive demand, a much tighter monetary policy would have been an essential way of reducing pressure. But this is not the position, and there has been no evidence of any general excess of demand.
The hon. Gentleman put it very engagingly, and I entirely agree that "neutral" and "passive", while the accepted terms, are not totally satisfactory. But will he tell us, at the end of that piece of lucid exposition, whether the Government's policy is closer to neutral passivity or to passive neutrality?
I am not sure that that would really clarify the position.
I wish to answer those critics who have suggested that by not setting a target for money supply or D.C.E., we are really giving up monetary policy in the fight against inflation. This is certainly not so. Indeed, the reverse is the case. By refraining from setting targets here and now for the full financial year, we have given ourselves greater flexibility for adjusting the course of money supply and credit later in the year in the light of developments.
The passage in the Chancellor's speech in which he said that
there would be dangers for liquidity and employment if we sought immediately to reduce the growth of money supply to much below 3 per cent. per quarter".—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1374.]
has been misinterpreted by some commentators. The crucial word is "immediately", and it would be a mistake to
assume that this is the same as saying a growth of 12 per cent. over the next year. Our objectives, as the Chancellor explained in his Budget speech, remain the same. Monetary policy is intended neither to impede the real growth of the economy at which we are aiming, nor to provide an additional boost to demand beyond that envisaged in the Budget strategy.
There is at work here, as hon. Members will appreciate, a complex interrelationship between incomes and money supply. The change in the money supply is to an important extent a consequence of the rate of growth of domestic incomes. I say "to an important extent", because this is not the whole story. A change in money supply can also be a factor causing incomes to change. Looking back over the past year, we can see that it would seem that the main line of causation has run from incomes to money supply. Accordingly, a slowing down in the growth of money supply will partly depend upon a slowing down in the rate of growth of money incomes. It is the prime objective of our economic strategy to secure this de-escalation of costs.
We are not trying to curb the inflation by depressing demand. Indeed, it is the aim of the Budget to bring about a growth of output in line with the growth of productive potential, and in particular to assist industrial investment. The moderate relaxation of the credit guidelines announced by the Chancellor is fully consistent with these objectives, and, indeed, is an essential part of the policy for bringing them about.
But none of this—and this may help answer the right hon. Gentleman's question—means that monetary policy is to be passive, simply accommodating whatever rate of growth of incomes and prices is generated by the development of the economy, as my hon. Friend the Member for Oswestry (Mr. Biffen), I think, suggested it might be. It has a vital part to play in our management of the economy, ensuring that the cost pressures are not compounded by an unintended boost to demand.
That was a very interesting exposition, and a very important one. But, if the Minister is to have any effect on events, clearly other people, particularly those engaged in collective bargain- ing, must understand the implications of this. What steps does he propose to take to make sure that people do understand and, therefore, can arrange their conduct along the lines which his analysis suggests?
I might suggest that I was going to rely on the right hon. Gentleman to help interpret it. The fact is that these are complex matters, and it is important to get the analysis right. The right hon. Gentleman will agree that it is important that we should seek to analyse these matters as deeply as possible in the House. We then have the question of translating what may seem very technical, dull, dusty, stuff into ordinary, every-day terms. Both of these problems are important, but I wanted this evening to concentrate on the technical level, rather than the aspect of communications with those outside the House.
I am sure that the hon. Gentleman can answer one specific question of fact that I raised yesterday. Is the 2½ per cent.-a-quarter increase in bank lending above the present level or above the 105 per cent. ceiling?
I shall certainly revert to that question, and I hope that we shall be able to clarify it, but I hope that the right hon. Gentleman will excuse me now, because I want to cover a number of other important points.
There are three minor Budget Resolutions which I should like to mention briefly before I turn to the reform of indirect taxation. One concerns the use of liquified petroleum gases as fuel in road vehicles. Although use for this purpose is not very widespread, it does at present give users an unfair fiscal advantage over others and also poses a threat to the revenue from hydrocarbon oil for the future. It is proposed to put this right by taking power to levy a duty, related approximately to that on petrol on these gases; it will come into effect from a date to be determined later.
The other change in Customs and Excise duties is a purely technical one affecting the definition of dutiable bingo; the opportunity is being taken to stop-up the possible loophole for cash and "prize" bingo which stems from a defect in the wording of an exemption intended for other games. This is simply a safeguard, and no effective change is intended in the scope of the duty charge as hitherto generally understood.
Finally in this small group of measures, I should like to refer to a change in the vehicle excise duty. Generally, no major changes have been proposed. However, provision will be included in the Finance Bill to put right a flaw in the legislation, which has permitted some vehicles to pay only the agricultural rate of duty and to run on rebated fuel although used mainly on the public roads. The new provision will limit the category of "agricultural tractor" to exclude both certain adaptations of Land Rovers and also articulated vehicles used to deliver agricultural commodities to farmers. This correction of the law, which we propose to take effect from 1st September, will bring a small benefit to the revenue, as indicated in the Financial Statement.
I turn now to the point which has been concentrated upon by many hon. Members—the reform of indirect taxation. In his Budget Statement, my right hon. Friend said that he had decided to abolish selective employment tax and purchase tax and introduce a value-added tax in April, 1973. Before I come to that, I want to say something about the selective employment tax.
The hon. Member for Heywood and Royton (Mr. Barnett) came up with the extraordinary argument that there is no serious argument against S.E.T. After the many hours he and I have spent together on Finance Bill debates, I find that truly extraordinary. I do not think we have ever heard a more bizarre argument in favour of it than his today—which is that manufacturers would prefer not to have these forced loans taken away from them because they were relying on it to raise loans as security. That was the most far-out argument in favour of S.E.T. I have ever heard.
It rather reminds one of what the then Chief Secretary had to say two years ago, when he said that S.E.T., like other new taxes, had
… followed a general pattern of acceptability—that the moment the first announcement of them is made they are greeted with considerable interest; then that is followed by a sense of complete bewilderment; next one gets mounting opposition; this leads to a long and bitter campaign against the tax … and this in turn leads to a long and, as far as I
can see, never-ending period of grumbling acquiescence"—[OFFICIAL REPORT. 21st April, 1969; Vol. 782, c. 45.]
That has not proved to be the case with S.E.T. The campaign against it has mounted steadily, and, while hon. Members opposite may say that this was the result of sustained propaganda, there is a great deal more to it than that. The general public genuinely and widely and rightly believe the tax to be biased and unfair. For that reason, I am sure that it is right that we should first of all halve it and then abolish it.
I want to say something about a point raised by my hon. Friend the Member for Oswestry last night. He seemed to be suggesting that we should abolish S.E.T. but not impose a value-added tax. What we are seeking to do is abolish both S.E.T. and purchase tax and substitute what we believe is a much more sensible tax. The implication of what he said was that purchase tax is somehow a good tax. I do not think it a Conservative tax because it tends to distort the general pattern of consumer expenditure. Although when previously in office we reduced the rates and narrowed the bands, the last Government widened the bands and increased the rates. Even so, it is a bad tax as such, and this clearly came out in the speech of my hon. Friend the Member for Dartford (Mr. Trew). He made a very fine speech. It began perhaps the discussion which we shall have on the Green Paper on the value-added tax.
I stress that we looked at all the possible alternatives to a value-added tax before coming out in favour of it. I know that my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) is anxious to get away from purchase tax to a value-added tax. It looks as though he is putting himself out of what has been one of his major jobs over the years—advocating the abolition of purchase tax.
The alternatives we examined were numerous. We looked first at a general employment tax, but this could not be rebated on exports nor charged on imports, and would leave us at a competitive disadvantage in all markets. We looked at a retail sales tax, but, at the level needed to replace purchase tax and S.E.T., it would put too great a burden on retailers and would be administratively impossible. Cascade taxes on the old Continental model create economic disportions and are largely discredited now.
After considering the alternatives, we came to the firm conclusion that a value-added tax was undoubtedly the best way to carry out the necessary reform of indirect taxation. It avoids the economic distortions of selective taxes and their disadvantages to the balance of payments, and, while being in form a multistage tax, it is in effect a broadly based tax on consumer expenditure on goods and services, with the power to raise substantial revenue from moderate rates.
We have not been alone in recognising the merits of the value-added tax. France Germany, Holland, Belgium, Luxembourg, Denmark, Sweden and Norway have all adopted the value-added tax system, and Italy and Ireland are planning to do so. Member States of the E.E.C. are required to adopt the value-added tax system, and if our application to join the Common Market is successful, we shall in any case have to have a value-added tax. But although the European considerations are important, they are not the main reasons for adopting this tax. We have decided on value-added tax on its own merits, because it is a better tax than S.E.T. and purchase tax, or any of the other alternatives.
It is a comprehensive tax, and it would run counter to the object of our tax reform and cause serious administrative complexities if we were to introduce a large number of special cases, but there are certain areas where relief from the tax would be justified. My right hon. Friend announced that there will be relief for food, except, perhaps, those few items already subject to purchase tax, for newspapers, periodicals and books, and he said that there would be an exemption for small traders.
The Green Paper on value-added tax mentions certain other areas where special treatment may be required, such as housing and accommodation, finance, health, education, charities and religious institutions. No decision has been taken on these matters, and one of the main purposes of the Green Paper is to provide a basis for discussion and consultation with those concerned on the treatment of such sectors. The Customs and Excise will be glad to learn their views and to enter discussions with them.
The rate or rates of the tax will, of course, be a budgetary matter to be decided in the light of the circumstances nearer the time. Until the rates and the exact coverage of the tax have been decided, no prediction can be made of the possible effects on the cost of living, or on different social groups, and there is, therefore, no foundation for the extravagant fears which were expressed by the Leader of the Opposition in this respect last Tuesday.
I should like finally to say a few words about the other possible solutions to our problems which have been mentioned by hon. Members opposite. I take up one mentioned by the hon. Member for Heywood and Royton and by the hon. Member for Ashfield. The hon. Member for Heywood and Royton said that we should go for growth on a much more imaginative scale than 3 per cent. It is very important to distinguish between growth in output and growth in productive potential. If we attempt to expand at a significantly higher rate than we are planning, what we shall do will be to revert very quickly to stop-go economic policies. We should simply expand and hit our head on the productive potential ceiling and get back to the old cycle.
What we must do, therefore, is to encourage by every means possible the basis of our plans and to put forward proposals for encouraging investment. This is what the Budget does. It makes a substantial increase in the size of the market available to producers, and this will increase investment prospects. In addition, it reduces corporation tax and improves incentives, and it will add to the cash flow out of which investment can be financed. The halving of S.E.T. will itself improve confidence. improve liquidity and encourage expansion. In addition to these present changes, the firm prospect of radical reform and simplification of the tax structure will give a fillip to enterprise and saving and investment in the economy.
So the three strands of my right hon. Friend's Budget—short-run management of the economy, a massive programme to improve our tax system and a long-run strategy for growth—all work together. As my right hon. Friend the Prime Minister has said, we are seeking to change the course of the nation so that we can indeed ensure that the real standard of living of the country moves forward at a progressively higher rate.
This is, indeed, a historic Budget. It is a Budget which embodies responsible reflation, reform and resurgence, resurgence of Conservative principles and of confidence in our future, and as such it deserves the support of the House.