Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 28th March 1974.

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Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli 12:00 am, 28th March 1974

The hon. and learned Member for Solihull (Mr. Grieve) made an extraordinary speech. One would not have thought that he had been a Member of the party which had formed the Government of the past three and a half years—a Government who have bequeathed to us one of the gravest financial and economic crises which this country has faced for a long time. If his Government had not been in office we would not have had a balance of payments deficit of—quite apart from the oil problem—£2,000 million. His Government also presided over inflation now running at 15 per cent.

Perhaps the hon. and learned Member would care to explain to his elderly constituents, who he says are suffering, that the main cause of their suffering has been the inflation brought about by his right hon. and hon. Friends' fiscal and monetary policies when they were in government. Perhaps he would also care to explain to young people paying huge interest rates on mortgages that this is largely due to the disastrous decisions of his right hon. Friend the Member for Altrincham and Sale (Mr. Barber) as Chancellor of the Exchequer during the past three and a half years.

Listening to Opposition Members one would have thought that my right hon. Friend the Chancellor of the Exchequer had been Chancellor for a long time, whereas he has been in office only three weeks. [Hon. Members: "Too long".] He has inherited a considerable financial and economic problem. A period of humility, if not of silence, would have been more in order from the Opposition, considering the state in which they left the country.

I congratulate my right hon. Friend the Chancellor on producing in a short time a Budget which most people would regard as fair and which goes some way towards creating that just society without which we shall be unable to solve the country's problems.

I therefore hope that my colleagues on the Treasury Bench will not think it amiss if I make a few reservations on some of the matters in the Budget, and I hope that they will not believe that I am unmindful of the difficulties they have faced. A major problem facing the country is inflation. Another is the distribution of wealth. There are still vast concentrations of wealth in the hands of a few people. These are two of the major problems. Inflation is the more immediate problem, but there is also the concentration of wealth in our society.

I believe that the running of a Budget deficit—we have been running large deficits recently—contributes to inflation and that reducing the deficit can, to some extent, reduce inflation. It seems that a Labour Chancellor of the Exchequer is in the not too unhappy position of being able to reduce the borrowing requirement and, at the same time, to take action towards breaking up large concentrations of wealth which still exist in this country. My right hon. Friend has made a start. He has been able to reduce the borrowing requirement by about £700 million. That is not a particularly large figure and we still have a long way to go, but no doubt further steps will be taken to reduce the requirement further.

I am somewhat disturbed that my right hon. Friend has taken only £250 million of the reduction for the year 1974–75 from increases in direct taxation. I understand the difficulties of raising vast sums of money at the higher rates of income tax, but I feel that in this respect more could have been done. For instance, a married man with two small children, fortunate enough to earn £10,000 a year, will, following the Budget changes, be worse off in terms of direct taxation to the extent of about £180 a year—not a vast sum for a man earning £10.000. I do not advocate taxing people for the sake of taxing them, but a man in the position I have described will probably consider that he has come off fairly lightly under the Budget changes.

There was an intervention regarding the 98 per cent. top rate of tax on investment income, but I believe that there are few people receiving investment income at such a level as to attract that rate of tax, and the point made about it is not particularly relevant. The higher income groups have come out of the Budget in not too bad a shape.

I wish that my right hon. Friend could have increased direct taxation a little more than he did—£250 million in 1974–75.

We are facing a grave financial crisis. The only way to solve it is by reducing the borrowing requirement and, thereby, the rate of inflation.

I also take issue with the Treasury Bench on the subject of child allowances. The cost of increasing these allowances will be about £165 million in a full year. The richer taxpayer benefits more from an increase in allowances than does the poorer taxpayer. A man with a tax rate of 60 per cent. gets more benefit from an increase in child allowances than a man with a tax rate of 30 per cent. A person who pays no tax gets no benefit from an increase in child allowances. The money could have been better spent in increasing family allowances, which cost in a full year, I understand, between £340 million and £350 million. But the £165 million now coming back in increased child allowances could have been better utilised to give an increase, admittedly not a large one, in family allowances. The higher tax a person pays the more allowances he claws back.

I welcome the changes in indirect taxation as being the fairest way of raising more revenue from that source. I have, however, two reservations about this. First, I was sorry that I heard nothing from my right hon. Friend about the possibility of increasing the rate of VAT on certain goods which might be called luxuries. He could have introduced a higher VAT rate for those goods which fell into the top rate under the old purchase tax system. A higher rate on such goods at a time of grave national crisis could have been a way of raising extra revenue without hurting people at the lower end of the income scale.

I also take issue over the proposal for VAT on petrol. I understand why my right hon. Friend took this action, but a fairer system would have been a differential licensing scheme for motor cars, based on cubic capacity. A figure of, say, 1,800 cc could have been chosen on which to base a differential licensing scheme. Many people in country areas, as well as in industrial constituencies, have to use cars to get to work because there is no public transport. Others who work on shifts cannot depend on public transport and have to use their cars. It would have been fairer to impose a tax on those who can afford to buy and run larger cars, without penalising those who drive smaller vehicles and have to use them to get to work.

I welcome my right hon. Friend's announcement that he will introduce a gift tax. We are one of the few countries in the Western world without a comprehensive gift tax.

I am glad that my right hon. Friend also said that he would not introduce a wealth tax now but would produce a Green Paper. I am possibly in a minority on the Government benches in not believing, although I may be convinced later, that a comprehensive wealth tax will necessarily achieve the objects we on this side of the House want to achieve. There are considerable problems in extending a wealth tax over the whole range of assets, because there are difficulties with valuation and exemptions.

But I am disappointed that the Inland Revenue was unable, it seems, to advise my right hon. Friend that it would be possible in the Finance Bill to introduce a simple capital levy on certain accumulations and aggregations of wealth. For instance, a vast amount of money is tied up in trusts and settlements, much of it accumulated from generation to generation. It would have been simple to impose a kind of capital levy on the asset value of all trusts and settlements. That was done under the 1965 Finance Act in relation to capital gains tax. It would not have been administratively difficult, and I am disappointed that my right hon. Friend did not introduce it.

Such a levy could have been extended to property companies. Over the past few years the property investment company has benefited enormously from inflation. It has not sold its properties, it has not turned them over, but has merely used the increased value of its assets to borrow more money. A capital levy on the assets of a property investment company could have raised a great deal of money and gone some way towards achieving our purpose. If later we wanted a wealth tax, we could have dovetailed such a levy into the legislation on that tax.

By announcing a gift tax, my right hon. Friend has made it expensive to avoid estate duty. But someone could have remembered that over the past two years the previous Chancellor had benefited those paying estate duty to the tune of £150 million. That is the size of the concession made by the changes in estate duty of the past two years. I believe that in our present economic situation a way could have been found to take back the £150 million. By adopting these measures my right hon. Friend could possibly have raised another £500 million, not for the sake of raising money from people but for the sake of reducing the borrowing requirement by another £500 million.

My right hon. Friend inherited not only an appalling internal situation but one of the worst balance of payments situations in our history. The underlying deficit is probably £2,000 million and the oil deficit £2,000 million, making about £4,000 million. Therefore, I was somewhat disappointed to hear my right hon. Friend say that the deficit should be covered by direct monetary inflows.

I hope that my right hon. Friend has not fallen into the hands of those false prophets who believe that the balance of payments problem can be solved by borrowing and not by other means. It may be my puritanical, Nonconformist background, but I do not believe that we can solve our balance of payments and inflationary problems by borrowing vast sums in foreign money markets and from international institutions.

I am not saying that we could or should eschew all forms of borrowing. But we are now running a deficit of about £4,000 million and in the past three weeks we have borrowed about £4,000 million. That takes us on for one year. What about next year and the year after? We cannot go on borrowing every year to try to solve our deficit problem.

If my right hon. Friend was unable to introduce a form of direct controls over imports, will he consider introducing a form of import deposit system, which worked so well under the last Labour administration?

The balance of payments problem and the deficit in our borrowing requirement I believe to be at the heart of our inflationary troubles. If those matters are not dealt with, the crunch, when it comes, will be even worse, and the problem will take longer to solve.

My right hon. Friend has made a start. I hope, and know, that in the autumn he will take further steps which will reduce inflation, increase the distribution of wealth and put the country back on a firm financial and economic basis.