Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 7th April 1976.

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Photo of Mr Robert Sheldon Mr Robert Sheldon The Financial Secretary to the Treasury 12:00 am, 7th April 1976

I have nothing to add to what my right hon. Friend said yesterday. He was as clear as he could be at this stage of the negotiation. [Interruption.] The hon. Member for Henley (Mr. Heseltine) is smirking. Perhaps I may say something partly to remove that smirk. His right hon. Friends' performance in the last Conservative Parliament was hardly creditworthy. They tried unsuccessfully to create an accord with the trade unions; it was not available to them because of what they had done before. My right hon. Friend is conducting these relationships in a way which has every possibility of success. The main decision in this country about the level of pay increases sought by most working people lies with their trade unions. The way in which the economy is subsequently managed is a matter for the Chancellor, subject to the approval of Parliament.

We have altered the timetable so that those matters about which more will be known at a subsequent time will have their legislative implementation at that time. I very much regret that the right hon. and learned Member for Surrey, East and the Leader of the Opposition have not understood the way in which these matters come together. If they understood it, perhaps they might be a little less optimistic about the way in which Budget judgments are made in the absence of agreements of the kind we are currently seeking.

The relationship which has existed in the past between estimates of pay increases and of inflation and the requirements for tax allowance which form the Budget judgment is not a simple one but is one that can be made and which the Chancellor each year has to make. It is a great problem to make it comprehensible to Members of the House. My right hon. Friend is showing the relationship that exists in the normal Budget judgment between levels of pay settlement and changes in taxation, and is explaining to the people who have great responsibilities—namely, the trade unions—the mechanism that links the two. Instead of these decisions being made in the absence of an understanding of how economic policy is formulated and how tax changes are instrumental in economic policy, the trade unions will have the advantage of understanding this relationship and taking part in it.

I shall now say something on the higher-rate value added tax, because right hon. and hon. Members opposite will know that last year I set in motion the monitoring of this higher rate. I announced that I was doing this in the interests of industry to see was effect the introduction of the higher rate would have on industry. I said that I owed it to the House to provide this monitoring and that I would explain its scope and findings when these were finally produced. The main parts of British industry subjected to the higher-rate VAT were domestic electric appliances, radio and television, caravan building and boat building, and it was here that the monitoring report largely concentrated.

It was very difficult to distinguish the effects of the higher rate from the cyclical fluctuations occurring over a period of years as well as various aspects of seasonal fluctuations to which many of these industries are susceptible. As a result, some of our conclusions are a little more tenuous than others. Following the first results of the monitoring exercise, however, my right hon. Friend announced on 17th December last a number of relaxations in credit controls on goods to which the higher rate applied. These were largely electrical goods and television equipment. Under the relaxation, these goods could be purchased on 20 per cent. deposit with 30 months to pay. Boats and caravans were removed altogether from hire-purchase restrictions, and these relaxations were valuable and were widely welcomed in the industries concerned.

I grant to hon. Gentlemen that this followed a number of representations made to me personally to which I tried to be as receptive as I could. The monitoring exercise subsequently showed that there was considerable spare capacity in the higher-rate industries, and following meetings with a number of delegations it was pointed out that there were abnormally high levels of stocks in manufacturers' and retailers' premises, along with widespread short-time working and, in some cases, redundancies.

The boat-building and caravan industries also made representations to me through hon. Gentlemen opposite, and the difficulties, particularly of small firms, were explained to me in forceful terms. The larger boat builders did very much better. They had considerable export potential. They had it before and they continued to export satisfactorily. The caravan builders had a good export record, but following the oil crisis of autumn 1973 they have had a depressed market both at home and abroad from which they have been recovering only very slowly.

Following the introduction of the 25 per cent. rate, the industries explained to me personally that they were not in favour—neither are the Government—of frequent changes in the rate of any tax. The situation last year was exceptional because the Chancellor found himself with the need for considerable increases in taxation owing to the problem he then had of financing the deficit. Other factors were involved.

Another point that was put to me by a number of manufacturers—it was not put by many Conservative Members—was the need to avoid too great a stimulus. In 1971, under the Conservative Government, restrictions were relaxed too readily and too widely. There was a consequent flood of imports. Importers obtained a foothold which was maintained long after the industries received their stimulus.

My right hon. Friend had to strike a balance between over-stimulus and the need to assist firms with their redundancy problems, with the problems of clearing unsold stocks and with maintaining, and even increasing, the scale of their operations. I noted as a result of various representations that I received from some of my hon. Friends that much of that assistance was necessary as a result of the Conservative Government's policies of dispersal and redevelopment in development areas. Problems arose in the assisted areas, especially Wales, the South-West and the North-West.

I now turn to the industrial strategy, to which much reference has been made. Any Budget and any economic policy that is founded upon an industrial resurgence rightly demands some considerable increase in assistance to industry to enable it to plan over the long term. We have provided a range of such assistance to industry from which it should be able to take considerable advantage.

For example, stock relief was introduced. It is now to be available for at least another two years. The principle of stock relief is now established. The clear understanding has been given by my right hon. Friend that there is no question of a clawback of tax relief for those firms whose stock valuations and rates of investment are maintained. There is a change in the profits deduction which is to be calculated after the deduction of capital allowances. The consequence is that relief will be concentrated more and more on the companies that are expanding and investing.

The Sandilands Committee on inflation accounting recommended that 100 per cent. capital allowances should be continued. The Chancellor has given a commitment to continue the present system of capital allowances. The small companies rate increased from £25,000 to £30,000 with marginal relief increased.