Income Tax (Personal Allowances)

Part of the debate – in the House of Commons at 12:00 am on 10th November 1977.

Alert me about debates like this

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey 12:00 am, 10th November 1977

Does anyone on the Government side challenge the proposition that the post-tax real purchasing power of the average wage-earner has fallen by 9 per cent. since October 1973? That was the question with which the Prime Minister was dealing. [Interruption.] The Prime Minister perfectly clearly claimed that the average worker is as well off today as in October 1973, and the House must be in no doubt about this. The Prime Minister gave a wrong answer, and that it why his right hon. Friends are now wriggling. The post-tax real purchasing power is down by 9 per cent., and the Chancellor of the Exchequer seeks to defend that by saying that it is entirely due to what has happened as a result of the increase in oil prices.

Let us examine that proposition. Is the Chancellor really contending that this change in conditions has taken place as a result of the increase in oil prices and that we are no worse off than any other country? If he asserts that, he is asserting something else that is wholly untrue.

Let me give the figures on that. During the time that this Government have been in office industrial production in this country has fallen by 3·7 per cent. Of the other OECD countries the next worst performance has been by France where industrial production has risen by 1·5 per cent. The best performance has been in the Federal Republic of Germany, where it has risen by 7·9 per cent. Production has risen in other OECD countries, notwithstanding the oil crisis.

Prices in this country since the first quarter of 1974 have risen by 75 per cent. The next worst performance among OECD countries was that of Japan, where prices have risen by 40·6 per cent. In the best of the OECD countries, the Federal Republic of Germany, they have risen by 17·6 per cent.

In Britain the gross domestic product per head in the three years since October 1974 has risen by 0·3 per cent. In the next worst OECD country, Italy, it has risen by 3·8 per cent. In the best OECD country it has risen by 6 per cent.

The reality is that in every other OECD country, notwithstanding the impact of higher oil prices, there has been a real improvement in the wealth and well-being of the people of those countries. Britain has been alone in having a substantial fall over the whole three-and-a-half-year period under this Chancellor of the Exchequer and this Government.

The Chancellor has sought to advance an alibi for this 9 per cent. cut in post-tax living standards. He has sought to suggest that it is due to the impact of oil prices. Does he now accept that he cannot lay the blame for it on that cause? Does the Chancellor of the Exchequer accept that this country and the people of this country have done a great deal worse, as a result of his economic mismanagement, than the people of any other OECD country? I give the Chancellor his opportunity. Does he have any other alibi that he wishes to offer, or any other explanation, other than his own economic incompetence?

We have watched those mistakes taking place throughout the Chancellor's time in charge of the Exchequer. The first mistake was a public sector pay explosion running at 35 per cent. in his first year in office. It was the direct consequence of the campaign on which his party fought the 1974 General Election. It led to the imposition of a rigid incomes policy, the effects of which still persist, with the winter of strife and discontent that is ahead of us.

The second mistake that the Chancellor has had to correct was his massive expansion of public spending. It is all very well boasting today about having achieved a tighter control of public spending when between 1974 and 1976 it rose by 20 per cent. while production rose by 2 per cent. Throughout we told the Chancellor that he should check it. He told us that it would be "cruel folly" to do any such thing, but eventually he has reversed his policy, under the guidance and pressure of the International Monetary Fund.

Another mistake was that he came into office determined to impose massive increases in taxation on the people of this country. He achieved the imposition of those taxes with relish. Now, he is struggling to claw back the burdens that he has put on the backs of the British people.

His next mistake was to embark on a reckless policy of high borrowing which continued, despite our warnings, so that he lost control of the money supply in the autumn of last year. It was growing at an annual rate of 30 per cent. last September. The right hon. Gentleman talks as though this had nothing to do with him, but it was as a direct result of that fact that the pound collapsed, that we moved into dramatically high interest rates, and that there was a collapse of confidence.

Finally, he has refused, until recently, to contemplate floating the pound and he only did so when it was too late. The burdens heaped upon the people of this country and the price that they have had to pay have been caused by the Chancellor's economic mismanagement.

If we examine why the position has improved in the way that the Chancellor described, we find that earlier this month he referred at the Mansion House to changes of policy made last year. He said that the accretion of confidence in this country was due to the stabilisation programme set in hand at the end of last year. It is not usual to get such a candid admission from the right hon. Gen- tleman, but sometimes, even in his speeches, a little truth will out.

Why did confidence return only as a result of the December stabilisation programme? Why had it taken more than three years of his time in charge of the economy before the stabilisation occurred? It was because only then did he correct some of the mass of mistakes that he had been making and he took guidance from the IMF and began to stabilise the consequences of his own previous misjudgments and bad objectives.

However, he is still making mistakes that concern us. My hon. Friend the Member for Horncastle (Mr. Tapsell) rightly asked him about the outlook for exchange controls and the maintenance of control of the money supply. I am concerned about the Chancellor's use of the phrase "keeping the money supply close to the preferred range ". We should be happier if he were announcing a firm target, and we expect him to announce a firm target for next year before long.

Now that the right hon. Gentleman has decided to abandon control of the exchange rate of the pound, we are anxious about his failure to accompany that with changes in the pattern of exchange controls. The right hon. Gentleman says that we must not be misled by the size of our reserves compared with our debts. That is fair enough—as long as he stops boasting about the size of our reserves. It is wrong for the Government to continue maintaining, without relaxation, the existing pattern of exchange controls.

If the controls were relaxed, we should be able to acquire income-producing assets overseas against the day when North Sea oil runs out. We should be able to establish bridgeheads in other countries for our exports, as well as a more prosperous expansion of our invisible earnings sector. Until this is done, we shall be facing the consequences of a lopsided float. If exchange controls are continued, they will lead to an artificially high level for the pound, discourage prospects for overseas sales, diminish the value of overseas profits and damage profits, investment and jobs in the United Kingdom.

I appreciate that there are other arguments to be balanced against this, but I suggest that before long the Chancellor will be obliged to accept our advice—as he has had to do on the other matters to which I have referred—and begin to relax controls. He should not be prevented from doing this by the prejudice of Left-wing members of his party or by the TUC's failure to appreciate this matter.

The Chancellor of the Exchequer spent some time on the outlook for the year ahead on inflation in relation to pay income and earnings. The long search for stage 3, which was the cornerstone of his policy earlier this year, may have been responsible for the delay in the decision to float the pound. The Government have been obliged to recognise the inevitability of a return to collective bargaining, but the mistake that they continue to make is to carry on using the language, and even the sanctions, of incomes policy.

The Government are conveying the wrong message. The Chancellor told us today, rather sotto voce, what he told us much more plainly in July, namely, that if money supply is controlled along the lines that he has in mind, the total national increase in earnings that is compatible with that, without higher unemployment, is probably about 10 per cent. It follows that the average level of settlements compatible with his target is between 5 per cent. and 6 per cent. He told us that in July and repeated it today, but in the intervening months he and his colleagues have failed to ram home that message. All we have heard is talk of Government guidelines of 10 per cent.

What should have been said and what is still of great importance is that the average level of settlements—not a rigid guideline—should be 5 per cent. or 6 per cent. and that what can be paid depends on the profitability and prices of the employer, his cash reserves and his need for an increase in his labour force. Instead of getting that message through, the Chancellor and his colleagues have allowed a belief to grow in the existence of a norm of 10 per cent. As his arithmetic makes clear, that will lead to a growth of earnings that is incompatible with his target for inflation. The result will be that the Chief Secretary will be proved right in what he said on television a few weeks ago in an unexpected moment of candour. The right hon. Gentleman said that he thought that prices would be rising by 10 per cent. to 12 per cent. in a year's time. If that happens, there will be higher unemployment or the monetary guidelines will be blown aside.