Oil Revenues and Taxation

Petition – in the House of Commons at 12:00 am on 25th November 1977.

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11.19 a.m.

Photo of Michael Spicer Michael Spicer , Worcestershire South

I beg to move, That this House will use North Sea oil revenues with other measures to reduce income tax on taxable incomes of up to £5,000 per annum to 20 per cent., on taxable incomes between £5,000 and £10,000 to 25 per cent., on taxable incomes between £10,000 and £15,000 to.35 per cent., on taxable incomes between £15,000 and £20,000 to 40 per cent., on taxable incomes between £20,000 and £25,000 to 45 per cent., and on taxable incomes over £30,000 to 50 per cent. Before going into detail on the motion. perhaps I may pursue the fraternal consensus which is pervading the House by saying that I should have thought that there was agreement on both sides of fir House that, whatever the merits of the motion, its subject matter is important for at least two reasons. First, North Sea oil revenue, however modest, is one of the major new British assets—perhaps in some respects the only one—which have come like manna from heaven in recent years. Secondly, we are talking about tax proposals that will affect half the population of this country. Nearly 25 million people will be affected beneficially by them.

Having spent many hours with the Minister of State in Finance Bill Committees, I am delighted to see that he will be replying to the debate. I am a great admirer of his objective and agile mind. Perhaps he will so be agile and objective in this debate and that he will help me to expedite the motion so that we may get on with the appropriate Money Resolution and have the whole scheme brought speedily into effect before Christmas.

However, having seen this week reports of the Cabinet get-together with the TUC, it is predictable that the Minister will not accept the motion. It is entirely predictable that, after what will be called a period of public discussion the Labour Party will announce a wild public spending spree with North Sea oil revenues. If the Secretary of State for Energy has anything to do with it, the catchword will be to the effect that we are restructuring industry or investing in manufacturing industry. On current form, it will mean giving taxpayers money primarily to meet the wage packet of British Leyland.

Selective assistance to industry is currently running at almost £500 million a year. Half of it goes to British Leyland, mainly to pay the current account debts of the company. The total amount spent on subsidies to industry represents about 20 per cent. of the expected average annual revenue from North Sea oil. On present rates of progression, it is not hard to visualise the doubling of that amount by the Government to the point at which public spending on industry will amount to half the North Sea Oil revenues. I suspect that broadly that is the intention of the Government, in so far as they have an intention.

There may be a case for using taxpayers' money to set up casualty clearing houses for certain industries, but, as a long-term strategy, a policy of propping up uneconomic industry will have the effect not of restructuring the economy but of embalming it. If North Sea oil revenues are seen by Governments as money to be blown on short-term spending projects, the long-term impact of the oil discoveries will be negligible.

Part of the reasons for that is that the amounts of revenue expected from the North Sea, though substantial, are not overwhelming. At today's prices they will average between £2·5 billion and £3 billion per annum from 1978–79 to the end of the 1980s. The effect of using such revenues to assist present policies of insulating people from the economic realities of life by providing subsidised housing or subsidised jobs will, in the long term, be worse than negligible. If used further to insulate people from the realities of life, they will positively contribute to the further long-term decline of our country.

North Sea oil revenues can and must be used as one, but only one, ingredient of a formula for long-term national economic revival. As I believe that the longterm recovery of our country depends directly on releasing the energy of the people, I am convinced that the simplest and most imaginative act of policy available to Governments is to use North Sea oil revenues substantially and dramatically to reduce personal taxation. I suggest a personal standard rate of tax of 20 per cent. rising to 50 per cent.

I have no doubt whatsoever about the feasibility of achieving the income tax scales in the motion. In an article in the July edition of "Euromoney", Mr. Brian Reading made a very strong case for the introduction of a flat rate of income tax of 15 per cent., together with the abolition of all allowances and reliefs and the payment of increased benefits to people below the present tax threshold. His argument was based largely on the fact that the British tax system, despite its penal rates, is one of the most inefficient in the world and, by international standards, results in one of the lowest tax takes as a proportion of GNP once allowances have been taken into account. Mr. Reading chose the rate of 15 per cent. precisely because Britain's income tax currently collects only 15p in the pound once allowances and reliefs have been taken into account.

Every hon. Member can be his own do-it-yourself Chancellor of the Exchequer, and I was fascinated to read in the Daily Telegraph today that my hon. Friend the Member for St. Marylebone (Mr. Baker) proposed precisely the same standard rate of tax on the basis of a different package from the one that I shall propose. I have no fixation about the package which I shall suggest. I make a specific package recommendation merely to anticipate or, indeed, to answer the accusations continually made by Labour Members that we on this side of the House recommend tax cuts and public expenditure cuts without having thought them through.

My package is as follows. The calculation of the gross loss of revenue which would be incurred by my package is £7·5 billion. In order to balance the budget in the fiscal year 1978–79—and this is merely one combination; there are many other possibilities—I would, first, allocate £2·5 billion from accumulated North Sea revenues. Secondly, I would allocate £1·5 billion from equalising value added tax to the present top rate of 12½ per cent., or one-eighth. That view is shared by my hon. Friend the Member for St. Marylebone. Thirdly—this might be open to doubt, but I would argue it strongly—I would allow £1 billion for real fiscal drag, assuming a growth in real incomes next year of 2½ per cent. which, even under this Government, is not unreasonable. I would allocate £ ½ billion from the increased sale of council houses. The final £1·5 billion would come from the revalorisation of duties on tobacco, wines and spirits, beer and petrol. There are many other ways in which one could find, easily and relatively painlessly, the sum of £7·5 billion.

In the debate last week on raising allowances, the hon. Member for Cornwall, North (Mr. Pardoe) suggested that an increase of £3 a week in employers' national insurance contributions would bring in £2 billion in the year 1978–79. Given the fact that we have one of the lowest rates of employers' contributions to national insurance in Europe, one can understand that there is a case for adopting that ingredient of the package.

If one wished to pursue other alternatives, another area of public spending rich in potential savings is the £2 billion a year spent by the taxpayer on public sector housing subsidies. Of that £2 billion, 20 per cent. only is taken up by rent rebates. This gives some measure—and I accept that it is not a foolproof measure—of the extent to which people living in public sector housing could be less of a burden on the taxpayer.

As for the proceeds from council houses, the estimate that I submit is £½ billion. That is an extremely modest figure, bearing in mind some of the calculations that I could make. At present 5,000 houses are being sold each year by the Government. The revenue gained is about £78 million. I believe that there is no reason for the rate of selling not being increased to the level at which it was running when the Conservatives were in government. At that time 50,000 council houses were being sold in a year—in other words, 10 times the present rate. The selling reached a peak in 1972 with the sale of 60,000 council houses. If that sort of selling rate is computed, we should get savings in excess of £¾ billion in the year in which the sales took place. That is the sort of figure that would be a saving to the Revenue. As I have said, my estimate is £½ billion.

The whole future of public sector housing has to be considered in the context of a declining population and in the context of the Government's own policy—incidentally, they are not meeting it—of setting rents that cover at least half of the economic rental. When my right hon. and hon. Friends start talking of reducing taxation there is no need for Labour Members to get too excited. It is clear that we could meet the loss of revenue. The £5 billion could be raised quite painlessly by North Sea oil revenue and the revalorisation of the various duties. The only real issue of debate that is left is centred on matters such as employers' national insurance contributions and the sale of council houses. I accept that contention lies in those areas.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

Is the hon. Gentleman seeking these reductions in revenue for 1978–79? I take it that that is what he is doing. Am I right in thinking that the reduction would not take place over a period but would take place for 1978–79? Is that what he has in mind?

Photo of Michael Spicer Michael Spicer , Worcestershire South

As my hon. Friend says, much depends on the election. It may be that if, for instance, the sale of council houses, or what the Minister has in mind, runs out, we shall have to find other means. There is no great significance in what I have put forward. There are many means at the disposal of the Government if it is desired to reduce the rate of taxation. The figures are entirely within the bounds of credibility. Of course, there are areas of discussion as to how we should do it. The point is not whether we can cut taxation but whether we want to do so. That is the issue to which we should be addressing ourselves. I am sure that it is the issue to which Labour Members will address themselves.

I have been able to find four substantial arguments against cutting personal taxation. The first is that the shift which I am proposing, and which others have proposed, from direct to indirect taxation is said to be inflationary. It is true that the suggestion I have made in respect of VAT and other duties would raise the retail price index by 2 per cent. to 3 per cent. Against that we have to take into account other factors. The first is that in conventional terms if we lower the rate of personal taxation we increase the rate of savings. To that extent it would be deflationary. The whole package is fiscally neutral. There is no question of an inflationary element from a fiscal point of view.

More important than that, if we reduced the level of personal taxation we should take some of the steam out of present wage demands. The Government's present guidelines allow for an increase in gross incomes of 10 per cent., which would give the present standard rate taxpayer a net rise of 6·6 per cent. Under the package that I am suggesting the total take-home pay as a result of the new tax system would be increased by 8·2 per cent. with the same guidelines. It seems logical to suggest that in respect of wage demands the change that I am suggesting—namely, the lowering of personal taxation—would be deflationary.

Furthermore, it has to be said that even if one accepted—which I do not—that there is an inflationary element in what I am suggesting, if the intrinsic merit of the case is accepted this is surely the time so to act with falling world prices and a strong currency.

The second objection to the policy that I am suggesting is the one that was voiced on both sides of the House in the debate last week on increasing tax allowances. This is the objection of those who believe that rather than use spare resources for reducing taxation we should use them for increasing benefits. The point that was made last week was that we should use spare resources for increasing child benefits. The first thing to be said against that argument is that on the whole benefits are already indexed. Presumably those who wish to pursue the argument that we should increase benefits rather than reducing taxation are talking about real increases in benefits.

The way that I meet that argument is to say that this is a public expenditure decision. If we wish to increase the real level of benefits, we are saying that we wish, for better or for worse, to increase public expenditure. If we wish to balance our budget under that policy it means that we have to increase the level of taxation. However, I believe that is a totally different argument and should be seen in a totally different context from that which I am putting forward—namely, the reform of the tax system under a neutral budget.

More fundamentally, however, I believe that the emphasis at the moment has to be placed on encouraging those who create wealth, from which it will be possible at a later stage to increase benefits.

The third objection to the lowering of the rate of personal taxation is that it is regressive and increases differentials. This argument holds that if the object is to reduce the overall level of taxation, it is better to raise the thresholds. It is said that that is a much better method than the one that I am proposing, which is to reduce the rates of taxation. Leaving aside my belief that there is a positive case for increasing incentives and therefore inevitably differentials, I further believe that as long as the rate of tax is kept low there are positive reasons for not putting the threshold too high.

The first reason, as the Minister will be aware, is that it is extremely expensive to raise the threshold. The second and more fundamental reason—it is difficult one to put forward—is that the more people who pay some form of tax at a low rate, the more public interest will be directed to and pressure put on those who are the guardians of the public purse to spend wisely. I have noticed very much at a local government level that there is now a much greater awareness than in central government of the need to save money in many respects. The new mood in my local authority has come about only in the past two or three years since immense pressure has been exerted by ratepayers on local authorities. Therefore, I feel that as long as the rate of tax is sufficiently low it is in the public interest that the threshold rate should not be too high.

The fourth argument against what I am proposing was raised last week by the Diamond Report. Incidentally, I am never quite sure about the numbering of the reports. There seems to be some doubt as to the number of the current report. The standing reference suggests that it is the third report but numbers it the fifth report. I have never been able to understand that. It may be that the Minister can enlighten us.

The Diamond Report suggested—invidiously as I shall argue—that we are not too highly personally taxed compared with other countries. There are several objections to that point of view. The first and most fundamental is that since 1974, when most of the Diamond Report statistics were collected, we have had 70 per cent. inflation. As a result, at least 1 million new taxpayers have entered the tax net. I accept that some of these will have been relieved from paying tax by part of the mini-Budget going through Parliament, but a substantial new taxpaying public has arisen since the Diamond Report was published. It is an important factor which the report totally ignored.

The second factor which the report ignored, and which has been well publicised, is the whole question of the computation of employers' contributions These have been assumed into the calculations in comparing taxes, as a result of which the report grossly under-estimated in comparative terms the taxes paid in this country compared with other countries where employers' contributions are considerably higher. If we take out the employers' contributions, we find that only people in Sweden pay higher rates of tax than we pay. Sweden is not a particularly happy country at the moment, and I would not wish to emulate its tax system.

Photo of Mr John Lee Mr John Lee , Birmingham Handsworth

Sweden has a Conservative Government.

Photo of Michael Spicer Michael Spicer , Worcestershire South

The Conservative Government in Sweden has inherited a long inheritance of Socialism which will take a long time to reverse.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

The Swedish economy is in a complete shambles at the moment.

Photo of Michael Spicer Michael Spicer , Worcestershire South

My hon. Friend says that the Swedish economy is in a shambles. and I support that view.

The case for reducing the rate of personal taxation is irrefutable. I accept that to reduce personal taxation is not to guarantee that people will feel obliged to work harder and invest more freely. What is certain is that the present rates of taxation, especially the higher marginal rates of taxation—this is a point that is often missed—and the standard rate of taxation at lower levels of income. are serious disincentives to greater effort.

Under present tax conditions it is almost impossible for employers and companies to attract and keep managers and skilled operatives with generous bonus arrangements. Furthermore, it is almost impossible for a paid employee in this country to create any real personal wealth, in direct contrast, for example, with the United States, Germany and Japan.

Both these factors work to the specific disadvantage of our country. The only way in which personal wealth can be created in this country is by financial manipulation or by converting income into capital through the formation of closed companies. It is as a result of that, and particularly as a result of the second factor, that the whole mass of anti-avoidance legislation affecting closed companies has arisen in the past 10 years. That legislation is crippling small companies.

I believe that a direct link between this debate and the debate that is to follow is the proposition that if we can reduce personal taxation we shall remove much of the requirement for anti-avoidance legislation. That itself will release the energies of small businesses. At the very least, one is entitled to state that we have tried for some time working in one of the highest taxed countries in the world with conspicuous lack of economic success. We certainly have the highest marginal rates of taxation in the Western world.

There is a strong case for at least having a go at a system with a lower tax rate. What Labour Members can never concede—here I come back to the argument on benefits—is that in order to be generous to those who cannot help themselves for reasons of age, disablement or inherited poverty, we have first to create the wherewithal to give help. All political action is a matter of timing and of judging the right cycle in events. I believe that the time is right in this country to encourage those who work and invest to create the wealth—and we can argue at a later stage how to spend it.

I accept that the Labour Party can never be committed to a long-term reduction in income tax. That is partly because it would pose a direct threat to its plans to extend the powers and influence of the State. It also goes against the grain of the paternalistic—or, in the case of the right hon. Member for Blackburn (Mrs. Castle), the maternalistic—strain in Socialism. This is, in effect, based on a fundamental mistrust of the wage earner to spend his money wisely. In last week's debate the right hon. Member for Black burn constantly returned to that particular theme in her defence of child benefits. Indeed, I believe that the real political divide is between those who place their faith in their fellow citizens and those who do not: between those who believe that society is no more and no less than the sum of the individuals within it and those who believe that the State is greater than the people who live in it.

11.47 a.m.

Photo of Mr Willie Hamilton Mr Willie Hamilton , Central Fife

I congratulate the hon. Member for Worcestershire, South (Mr. Spicer) on moving the motion, which clearly demonstrates how the Conservative Party might move if the country were unfortunate enough to get it in at the next election.

This debate will obviously be one of many on what we should do with the North Sea oil revenue resources. Only this morning on the radio there was a very short discussion on this matter by two academics. The alternatives were posed to them, and they disagreed on certain aspects. But there was general agreement between them that the kind of reduction in direct taxation—in income tax—of which the hon. Gentleman has spoken so eloquently was very low in their priorities. The shortcoming in the hon. Gentleman's speech was that he concentrated far too much on the prospect of reducing income tax as the top priority, presumably, in his mind for the use of these revenues.

The vital problem is how to get the maximum benefit for the nation over the longest possible time. That seems to me to be the crux of the problem that is now facing us. Considerable freedom of manoeuvre has been given to the Government as a consequence of these discoveries. We have all seen the massive leak of the Government's Green Paper on these matters. It is quite clear that there are disagreements, even within the Government, and no doubt in the country as a whole, as to how we should use these revenues. There will never be unanimous opinion on these matters in any of the political parties or in the country.

I agree with the hon. Gentleman—I think that the whole country would probably agree—that direct taxation is too high, particularly on low incomes. The Chancellor has made that clear over the last 12 months in particular. But cuts in tax rates will have to depend on current wage demands. That is why he played it coolly in the mini-Budget. Indeed, my right hon. Friend is waiting to see the eventual outcome of the current wage demands before deciding on his strategy for the next Budget. Cuts in taxation also depend on the increased public expenditure demands that are made repeatedly by the Opposition and were repeated this morning by the hon. Gentleman. We do not get a single Question Time or a debate without the Opposition, and, indeed, some Labour Members, making demands for further public expenditure, whether it be on hospitals, schools, roads, houses or whatever.

Another point on which there might be general agreement is that the economy as a whole still has many structural weaknesses. Our productivity is bad compared with that of our competitors. Our investment is low, and such investment as there is —

Photo of Mr Willie Hamilton Mr Willie Hamilton , Central Fife

It has been low since the war under all Governments. It has never been satisfactory. Where there has been investment, compared with other countries such as Japan, it has often given us an inadequate return.

The motion ignores those fundamental long-term problems. It ignores those who would not benefit from the tax reductions that the hon. Gentleman has in mind—the sick, the unemployed, the disabled and the old-age pensioners. Many millions of these people would not benefit in any way from the proposal in the motion.

There is no mention—and I can understand this in a Private Member's motion—of alternative fuels. All these problems must be considered in the context of this problem which we are discussing.

I should like to pose one or two facts on oil and gas in the North Sea which I think should go on the record. It is not the bonanaza that it is often supposed to be. By the mid-1980s—less than a decade hence—the total addition to our wealth, the gross national product, would be about £5,000 million. That sounds a colossal sum, but it is only 3 per cent. or thereabouts of our total gross national product. We shall save considerable sums on the import of foreign oil. The Govern- ment will also collect additional revenue from the oil—as much as £3,000 million a year—by the mid-1980s. Again, it sounds a lot—£3,000 million—but public sector revenue is currently £50,000 million a year. Investment in manufacturing industry today is £5,000 million, which we all regard as inadequate. The figures must be put in the perspective of our GNP.

We cannot be sure, but all the prophecies indicate that the flow of oil will eventually begin to decline. It will build up to a peak of production round about the mid-1980s and thereafter will begin to decline.

That may be problematical—it depends on a lot of things which none of us here can foresee—but in those circumstances, with the uncertainty which must prevail, it is extremely difficult for the Government to lay down any firm strategy and I hope that they will not seek to assume that everything will be fixed in 1985 or 1990 and start from those highly problematical assumptions.

I wish to put some general propositions to the Government for their consideration. We on this side speak without apology as Socialists who want, first, to raise the standard of living of all our people, second, to return to full employment, and third, to ensure that those two objectives are sustained. It is no good having a short sharp burst, for whatever reason, to achieve those objectives if after a short time we revert to the old problems.

It is easy to state those objectives, but their achievement is not easy. I give but one example. Because of demographic and other factors, we have to provide at least 2 million extra jobs in the next 10 years. This will be easier with the help of the oil, but it will not be all that easy. It requires about 4,000 new jobs a week for every week of the next decade, and no Government can do that on their own. There must be considerable co-operation between Government, trade unions and employers. We are all in this together. It goes without saying—it is a trite proposition—that we can do this only by an expansion of private and public services—houses, hospitals, schools, transport—we can all give our own priorities. The crux of the matter is that the basis for securing the provision of those facilities, of which I have mentioned but a few, is a constant increase in industrial efficiency and production.

That is no new discovery by my party. We have always known that that was so. The only foundation on which we can have a soundly based Welfare State is a sound, efficient and productive manufacturing machine. This entails massive reorganisation of our industry, massive restructuring, re-equipment and retraining, and a revolution in the thinking of many people—trade union leaders, trade union rank and file, management and Government.

It is wise to remember that the marathon runner who wants to win seldom starts at a gallop, or, to take another analogy, that some of the most unhappy people in the United Kingdom today are those who win on the football pools. it is easy for the Government, running up to a General Election, to yield to the temptation facing the spendthrift pools winner or the foolish marathon runner. It do not believe that the people would accept with equanimity a Government who behaved as irresponsibly as that with this enormous asset which has come our way

The record of successive Governments over the past 30 years does not inspire much confidence. We have steadily fallen in the international economic league. By whatever yardstick one takes—investment, productivity, standard of living or anything else—we have steadily gone down until we have found ourselves in the ranks with Portugal and perhaps Italy and Turkey. It is not a record of which any of us need be proud.

To underline that I take just one figure. In 1950 we had no less than one quarter of world trade in manufactured goods. Today we have less than one-tenth. In less than 30 years, our share has been massively reduced. As a consequence, we have our impoverished social services and a society in which improvement in education, housing, health or the quality of life generally has not proceeded as we should wish.

It is no good sloganising about this. My party is as guilty as the Tories are of using shibboleths or slogans to pretend that there is an easy or short-term way out of our problems. Whether such slogans come from the lunatic Right or the militant Left, they are utterly irrelevant in our present situation.

Photo of Michael Spicer Michael Spicer , Worcestershire South

The hon. Gentleman is making some wise cautionary comments, but what he has just said seems to fly in the face of an earlier remark when, as I understood him. he spoke of using these new resources for massive public investment projects. There seems to be a certain inconsistency there.

Photo of Mr Willie Hamilton Mr Willie Hamilton , Central Fife

I shall say a word about my view on what we should do with these revenues, although I do not pretend that my opinion is worth more or less than anyone else's. I suppose that it is probably worth less than the opinion of some and more than the opinion of others, but be that as it may. I was about to say that no one believes that the problems we face can be solved wholly by the free play of market forces, which is sometimes the view put by people on the Right of the Tory Party. Equally, on the other side, I say that no one in control of his senses—this is certainly my view—can believe that all will be fine if everything is nationalised or brought under public control.

It seems to me that we are all mixed economy men in this country, whether we like it or not. Whatever may be our party, privately, or sometimes publicly, we believe in a mixed economy, and my view is that anyone in my party who says that the salvation of our country depends on the implementation of Clause Four of our constitution is bonkers.

We all believe in the "more or less" theory. Whatever we might say or preach, we know that that is what will happen in the foreseeable future. That is the sort of society which we have and in which we shall live and work for the forseeable future.

However, we in the Labour Party—I come directly to the point just raised by the hon. Member for Worcestershire, South—attach greater importance to public enterprise than does the Tory Party. This is understandable so long as we hold to the "more or less" theory. We attach great importance, for example, to the National Enterprise Board, to the Scottish and Welsh Development Agencies and other public bodies such as local authorities—local councils are among the biggest spending agencies in the country today—as well as to the National Health Service and organisations of that kind.

We attach more importance also to the principles of industrial democracy than does the Tory Party. Again, it is easy to attach importance to the principles, but when one seeks to translate those principles in to practice one finds it extremely difficult to reach any sort of agreement even within the trade union movement and even within the Labour Party. But that we need more answerability and more public accountability by private enterprise to the workers and consumers there can be no doubt.

What is done has much to do with the opportunities now open to us, and whatever course the Government take—I gather that the options are spelt out in the White Paper, though I am not sure—no one can be certain that it will be the right course. It might be the right course for a limited time, but then circumstances might change and the direction of policy would have to change.

I give one example of an alternative course that has been bandied about in the Press and elsewhere. Our external debts are about $22,000 million. As was said in the discussion on the radio this morning, much of that must be repaid before 1985. One of the academics debating the subject on the radio said that the value of the money was likely to decline over that period, and that therefore this was a good time to be a debtor and we should not be too hasty in repaying. That is a point of view. The Government must face up to the question. But we have obligations that we must meet by 1985 and I should like to see speedy repayment of the debt. It is a matter that will no doubt invite much discussion over the next year or more.

I come directly to the point that the hon. Gentleman raised: should we binge—if that is the right word—on big tax concessions now? I believe that my party would be in general agreement that we should not. But if we did, the Tory Party and the Labour Party would have distinct and diverging views about which sections of the community should receive the tax concessions. There would be much argument about that. My own view—and I suspect, the Government's view—is that there will be tax concessions, but we attach great importance to what is often called the social wage. If cutting direct taxation to the kind of levels to which the hon. Gentleman referred meant impoverishing or threatening the growth of the social services—the Health Service, education facilities, housing and so on—we should be resolutely opposed to it. Not only working-class people but middle-class people attach great importance to the quality of the schools to which they send their children, the hospitals to which their old people go and the housing accommodation provided for them. That is what is meant by the standard of living for ordinary people.

The Government's industrial strategy will be underlined by the propositions that the Government are shown to favour in the course of this discussion. In the allocation of the oil revenues, high priority must be given to long-term investment in manufacturing industry. That is vital to the interests of our nation long after the oil revenues have run out. One does not obtain short-term results.

Many years ago Nye Bevan said that because we were a nation with a tradition of five-yearly elections—which usually means elections every three or four years—it was extremely difficult for a Government to say "We shall put forward a long-term plan of investment which will not bring beneficial results for 20 or 30 years". It is very difficult to persuade people to forgo benefits now in expectation of benefits 20 or 30 years hence, when one knows that long before then one will have to account to the people at a General Election. That is a dilemma that successive Governments have faced. There is always a temptation for a Government within striking distance of a General Election to insult the electorate by seeking to bribe it. I do not believe that that is an honourable course, or that it is wise from the point of view of the nation as a whole.

I should like to give one example of the kind of investment on which we must embark. I have a constituency which used to be based on coal. Coal is not as important there as it was, but I still have a great interest in the coal industry. I strongly believe that the investment on which the Government have already embarked in the coal industry is far more important for the long term than all the revenues we are likely to receive from North Sea oil and gas. At present prices, the known coal reserves of the United Kingdom are three or four times more valuable than all the North Sea oil and gas that we have so far discovered. The estimated life span of those coal reserves, given current rates of consumption, is about 300 years. I know of no expert who gives a life span for oil and gas of more than 40 years. It depends on rates of extraction, alternative sources of energy, patterns of energy consumption, and so on.

There are also strategic considerations. Coal is much less vulnerable militarily than the oil in the North Sea. We can be sure every rig in the North Sea is targeted by Soviet submarines. Therefore, from the point of view of military strategy and long-term energy requirements the coal is infinitely more valuable than the North Sea oil. We do not know the long-term future of the nuclear power industry. All that I am saying is that much of the revenue from North Sea oil should be devoted to providing alternative sources of fuel and to long-term investment in other manufacturing industry.

I hope that I have made my position clear, that I would not give high priority to the reduction of taxation as the best way to allocate the North Sea oil revenues. I take the opposite view—that that would be the high road to disaster. We must use the revenues to get the structure of our economy right, to improve productivity and modernise our plant to make sure that we can compete in the world long after the oil has gone. We shall not do that by the method suggested by the hon. Gentleman. We must use the opportunity wisely and in the interests of the nation as a whole, and not for any privileged sector.

12.15 p.m.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

The hon. Member for Fife, Central (Mr. Hamilton) made an interesting and thoughtful speech in putting forward his programme. He normally comes to speak on other matters on a Friday and I thought for a moment that we were to have the suggestion from him that part of the oil revenues should be used to increase the Civil List. That seems to be one of the characteristic features of the hon. Gentleman.

I congratulate my hon. Friend the Member for Worcestershire, South (Mr. Spicer) on tabling his motion and initiating a debate, for the first time in this House, on the supremely important issue of oil revenues. I believe that we have yet to appreciate the economic, social and political consequences of the oil revenues upon our country. They are fundamentally profound. Much of the history of Britain in the past 100 years has told of a loss of wealth, possessions and influence. What the oil revenues allow us to do is to stop the long march away from influence and prosperity which has made our people sullen and resentful.

The advent of the revenues from North Sea oil allow us to make certain choices fundamentally different from those that have been available to a nation that has been economically on the retreat. That is the excitement about the debates on North Sea oil revenues. This is the first occasion on which the House has debated the subject. There is obviously a debate going on in the Cabinet. There have been leaks about the various points of view being taken and we are being promised a Green Paper. I hope that the Government will publish this as soon as possible. Many other bodies will want to make their contributions. I am sure that the National Executive of the Labour Party will want to break its vow of silence concerning policy statements which it has just taken so as to issue its own manifesto telling us how it would squander the wealth of the North Sea. I hope that this is just the beginning of a great debate.

I am not too worried about the potential unhappiness that North Sea oil revenues could bring to us. The hon. Member for Fife, Central said that we all knew of the unhappiness that some pools winners suffered. Some of them may do, but it is unhappiness that I would willingly shoulder—indeed, share with my hon. Friends because I am a generous-hearted soul—if I were lucky enough to win the pools. I agree with the hon. Gentleman that the sales of North Sea oil give us the opportunity to regenerate the British economy. I disagree with several of the suggestions which he made. I do not believe that it is as easy as he imagines and that Government, irrespective of which party is in power, can stimulate growth and regenerate British industtry, changing the structure of British industry, in the way that he has put forward. A Government can only act as a catalyst. That is the lesson of the pattern of industrial-State relations since 1945. No one can point to great successes in this area. No one can point to the British Steel Corporation as an example of how to create productive wealth. The problem is by no means as simpliste as the hon. Gentleman has suggested.

If we are to create productive industrial growth, and I agree that we must try to do so, it is much more complicated that having the State throw vast amounts of money at different companies or industries. We have to create the climate in which much of the growth will be spontaneous. This is one of the divisions, and the differences which will become clearer, between the views of the Labour Party and those of the Conservative and the Liberal Parties. I believe, as does my hon. Friend the Member for Worcestershire, South, that North Sea oil revenues could be used to bring about a reduction of direct taxation. But I would not use anything like the amount my hon. Friend has suggested.

If we are to regenerate British industry and the British economy we have to work to create a psychological change in attitudes within industry and society. One of the ways we can do this is by substantially reducing direct taxation. I would certainly favour moving towards a standard rate of income tax of 20 per cent., over a period. Last week I saw the payslip of a fireman. He had a gross wage of £74 per week from which was taken £18 in tax, £5 in national insurance and a further amount for his own pension fund and his rent because he lived in a fireman's house. He was left with £40. The biggest deduction was £23 a week for tax and insurance.

That fireman wanted a higher wage but he also desperately wanted to pay less tax and national insurance. Nearly 30 per cent. of his wage was taken up in meeting those two items. This has a clear disincentive effect upon workers throughout British industry. It is not a board-room problem, it goes right down to the shop floor and the office. There is great resentment among people in all walks of life, doing all sorts of jobs, over the high rate of taxation which they have to pay.

My own credentials as a tax-cutter are impeccable. At about this time in the life of the previous Labour Government, in 1969, I introduced a Ten Minute Rule Bill to reduce the standard rate of in come tax by six old pence. This Bill was bitterly opposed by the present Leader of the House who believed that it represented a profligate waste of money and that it was totally un-Socialist to cut taxes. I suspect that the right hon. Gentleman still believes that. I know that his hon. Friends below the Gangway, members of the Tribune Group, believe that. They are not in politics to cut taxes. I can understand that. The whole organised purpose of Socialism is the distribution of public money. That is why those hon. Members are here. This is one of the big divides between the parties.

I do not believe that the Chancellor will cut taxes all that much. The Chancellor is the last of the big taxers. He has raised more money in taxation than any of his predecessors. Now, rather like St. Augustine, he is something of a convert after two years of profligacy and has gone through two years of more sober economic management, but, unlike St. Augustine, when he stumbles upon the truth he picks himself up as though nothing has happened. I do not believe that the Chancellor will cut taxation substantially. It is not in his heart to do so. He will do a little bit before the next election. There is no one so quick as a death-bed repentant but I do not believe there are many cases where a death-bed repentance has averted the advent of death.

I strongly believe that the standard rate of income tax should be reduced to 20 per cent. I am glad that we in the Conservative Party have the support of the Liberal Party on this. The Liberal Party has issued a policy document which has at least understood that we must get the standard rate down to 20 per cent. The difference between us is that the Liberals' way of doing this is to have a new wealth tax, a new payroll and a new expenditure tax. There are much better ways of doing it than that.

If we are to move to a standard rate of income tax beginning at 20 per cent. it will cost about £7,000 million. We should move to that level over three years. That means a target of finding a little over £2,000 million a year. I would do that in three ways. I would shift some of the balance of taxation from earning to spending. VAT could be in-creased to 12½ per cent. Petrol duties, and excise duties on wines, spirits and tobacco could also be increased. [Interruption.] The Minister of State ought not to say too much. The Government plan to do some of these things. He ought to be careful.

Those taxes should be increased over a period of three years to bring in a yield of about £3,500 million. Then £1,000 million of that could be used on social expenditure on the lines suggested by the hon. Member for Fife, Central. I would use it to help those who would be hit by increasing taxes of that sort, particularly the groups the hon. Gentleman mentioned. That would leave about £2,000 million. The second £2,000 million over a period of three years I would look for in restraining Government expenditure.

Hon. Members will ask where I would find that sum. They may say "Tell us how to find it". I say "Ask the Treatury how it found it last year". The Treasury has just published its expenditure figures for the financial year 1976–77. It took the Treasury by surprise, including the Minister of State and the Chancellor, that they had underspent by £2,000 million and that no one had noticed. It was not as a result of the great cuts exercise last winter or of the IMF package. They had nothing to do with it.

There was no rioting in the streets, or if there was, I missed it. The Welfare State did not collapse, or if it did, I missed that also. Yet we had a cut of £2,000 million. When I say that we can find savings of £2,000 million I believe that we can. The Government have done it. They did it by stealth and not by purpose and intention. It just happens that total Government expenditure this year is £57.000 million. It will probably be over £65,000 million next year. Can anyone honestly say that by prudent management and proper control we cannot find that amount of money?

The third of my tranches, as it were, of just over £2,000 million would come from the North Sea and also from increased employers' contributions for National Insurance. This package would produce the sum of £7,000 million over three years which my hon. Friends and I have set ourselves. Many of those measures will be unpopular. Increasing petrol duty, the price of a packet of cigarettes and the price of a pint of beer will. we know, be immediately unpopular.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

I shall seek to take my hon. Friend with me because when it comes to the price of a pint of beer or a bottle of whisky my hon. Friend speaks with a professional knowledge. However, I shall try to persuade him that these sacrifices are worth making by us all because the goal at the end of it is a substantially reduced level of direct taxation.

Photo of Mr Tom Litterick Mr Tom Litterick , Birmingham, Selly Oak

It was inevitable that I would intervene. There are so many hollow arguments in what the hon. Gentleman says. The nub of his argument is the standard rate of income tax. But he knows that this leaves a substantial minority of the people who do not pay income tax, either because their wages are too low or because they do not work at all. We are talking about many millions of people. They will not be "incentived"—that is the current word—into producing far more, any more than people paying the standard rate will be encouraged to produce far more. The reason is that most people do not make the decisions about what is produced, when it is produced and in what quantity. Other people make the decisions, people such as the Arnold Weinstocks of this world, and such people will not be affected by the cut in the standard rate of income tax which the hon. Gentleman has proposed.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

In the debate a rather similar point has been made—that many people will not be affected. But I believe that if we are to get the economic growth in this country over the next 10 or 20 years, and the wealth which that growth creates, we shall do so only by giving incentives to those people for the work which they produce. The wealth which they create can then be spent upon those groups who need it, such as the handicapped, the elderly, the under-privileged or those out of work. That sort of money does not grow on trees.

The hon. Member for Birmingham, Selly Oak (Mr. Litterick) betrays the falsity of his thinking, and the thinking of his colleagues on the left wing of the Labour Party, by suggesting that they would spend all this money on the underprivileged groups. I recognise these special needs, but I want to spend the money in such a way that growth is created which can then be spent on those groups.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

We decide, because that is what we are elected to do. I hope the hon. Gentleman can appreciate that. That is why I believe that priority must be given to reducing income tax. That is one of the methods of creating greater incentives and, therefore, greater economic growth which will create greater wealth. That is how the cycle goes.

Mr. Littcrick:

I must challenge the hon. Gentleman on this point.

Photo of Mr Myer Galpern Mr Myer Galpern , Glasgow Shettleston

Before the hon. Gentleman proceeds, I should like to advise him that I am calling him not to make a speech but rather to make a brief intervention. Even on a Friday we allow only limited interventions.

Photo of Mr Tom Litterick Mr Tom Litterick , Birmingham, Selly Oak

The people who would be the immediate beneficiaries of this tax reduction would be so only if they make the decisions about production. They do not. It is people such as Sir Arnold Weinstock who make the decisions. He is living off a fund of about £40 million at the moment. How will this affect his decisions?

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

If the hon. Gentleman believes that our proposals are just to benefit Sir Arnold Weinstock

Photo of Mr Tom Litterick Mr Tom Litterick , Birmingham, Selly Oak

They will not. That is the point.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

—he is living in cloud-cuckoo-land. The hon. Gentleman should have a shop floor meeting in his constituency and talk to the people on the shop floor about what they think about the level of income tax. He will find that they are obsolutely fed up and choked off with it. That is what this debate is about.

Photo of Michael Spicer Michael Spicer , Worcestershire South

Taking the argument even at the level raised by the hon. Member for Birmingham, Selly Oak (Mr. Litterick), does my hon. Friend agree that even in the case of Sir Arnold Weinstock it would present him with the opportunity to give incentives to his employees at all levels—particularly skilled employees—which he does not do at the moment?

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

My hon. Friend makes a good point.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

Incentives to work harder and to save more. This wealth does not grow on Socialist trees tended by the Tribune Group. That is what this is all about. I want to see more productivity and a wealth-creating British industry. That is where social improvement like better hospitals and health for the handicapped and the old will come from. Such improvements will not come from internal meetings of the Tribune Group squandering the wealth of the North Sea.

I must return to my theme because I am reassured by the interventions that the arguments we are adducing from this side of the House must be right.

Photo of Mr Geraint Howells Mr Geraint Howells , Cardigan

I am interested in the hon. Gentleman's arguments and agree with a great many of them. He said earlier that if he had his way he would increase the price of petrol. Has he given any thought to what effect this would have on the rural areas where there is no sort of transport at all and where the majority of people, as in my constituency, are self-employed and rely on the car to go to work?

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

I accept the hon. Gentleman's point. It takes us back to the debates of the summer. It was a point on which the Liberal Party rebelled against the pact if I remember correctly. But it is reasonable that one should look over a period of years to a growing revenue arising from petrol duties. It is a question of how much and over what period.

I take the point that a heavy increase would bear particularly heavily on the rural areas. I accept that some of the proposals involved in a shift from direct to indirect taxation—a shift from taxing earnings to taxing spending—are unpopular. But I believe that such a change is necessary and that we have to argue the case. Fundamentally, the argument is that if we achieve reduced taxes on earnings, on which the hon. Member for Cardigan (Mr. Howells) supports me, we must find the money from elsewhere. It would be quite dishonest to say that we favoured a reduction of income tax to the levels that we recommend in this motion without finding revenues, and part of the revenues, though not all that significant a part, can come from petrol duties.

I believe that a reduction in the standard rate of income tax is one of the most effective ways of reducing taxation. The Chancellor of the Exchequer does not agree. He increased allowances in the mini-Budget. He made great play with the fact that by increasing allowances some 900,000 people were taken out of the tax sector—in other words, he acted on the threshold.

There is no doubt that allowances should be increased, but I believe that the House may well live to regret the total indexation of allowances which was approved by the House earlier this year on what was called the Rooker-Wise amendment. In our fiscal system, we have partial indexing. We have indexed the personal allowances and pensions both of which give money away. We have indexed the easy bit—the "give away" elements. It is rather like indexing the party but not the hangover. I believe that we may live to regret that. But that is how the Chancellor did it. He took 900,000 people out of tax. But those 900,000 people are the right hon. Gentleman's yo-yo. They go down into the tax bracket, and they come up again. When the right hon. Gentleman pulls them up he says "What a good boy am I", and he takes credit for taking them out of the tax bracket. But he tries to dodge the responsibility for pushing them down.

I do not believe that ordinary people understand tax cuts which are based entirely on personal allowances. To them, the proof positive is if the standard rate comes down. Currently it is 34 per cent. The Chancellor inherited 30 per cent. I dare say that he will try to move to 30 per cent. before the next General Election. I believe that we should do much better, for the arguments which I have adduced. I believe that we can get down to a 20 per cent. standard rate over the next three years, though I do not believe that any Socialist Government will do it.

As I said earlier, the organised purpose of Socialism is the distribution of public money. The organised purpose of Conservatism is the enhancement of individual choice through the spending of more of one's own money. That is what divides the House. I do not expect any support from the Tribune Group for what I say, but most certainly I expect support from ordinary people for this thesis at the next General Election.

12.38 p.m.

Photo of Mr David Weitzman Mr David Weitzman , Hackney North and Stoke Newington

The hon. Member for St. Marylebone (Mr. Baker) said quite rightly that what we did with the resources of North Sea oil raised a fundamental issue. Over the many long years of my political career I have thought that we ought to recognise that what we really want is the common good and that we should discuss this problem in a proper manner and not descend to petty party politics It is so important and so fundamental that all of us surely can discuss this and recognise that what we want is the best possible solution to the problem.

There is no doubt that many of us would wish to see all future revenues from North Sea oil used along the lines set out in the motion—in other words, to make a substantial reduction in the rate of personal taxation even though, as my hon. Friend the Member for Fife, Central (Mr. Hamilton) rightly said, it would not benefit the people with low wages, the sick or the disabled.

No doubt there are also pressures to improve take-home pay by increasing money wages. Rises in wages raise industry's costs and must lead to higher prices and fewer jobs. If the real take-home pay of working people can be increased by a reduction of personal taxation without inflationary rises by the use of such revenues, it will be an important step.

I note that the hon. Member for Worcestershire, South (Mr. Spicer) advisedly used the words "with other measures" in his motion. I say "advisedly", because the use of North Sea oil revenue for the purpose set out in the motion, although it must be given the most careful consideration, is only one of the uses that must be taken into account.

After all, what are the benefits of North Sea oil? I understand that the output will amount to nearly half the nation's oil requirements during 1977 and that by 1980 our net import bill should have been eliminated. The main benefit is in the saving of foreign currency. The underlying balance of payments position should be improved by about £5 billion in 1980, rising to £7 billion or £8 billion in 1985. It provides a new source of revenue to the Government, rising to about £3·5 billion a year in the mid-1980s. However, in the late 1980s oil production will begin to fall.

Our total public sector revenue is already about £50 billion a year, and the contribution made by North Sea oil revenue, although exceedingly valuable and important, must be dealt with in a manner that is practical, and not dissipated in any way. Therefore, in my view it is important that the most careful consideration should be given to the best ways in which the North Sea oil bonanza can be utilised.

No doubt a reduction of taxation is one way, and, of course—despite the criticism which has been made by the hon. Member for St. Marylebone—the Chancellor of the Exchequer has referred on a number of occasions to the burden of direct taxation and the need for a reduction in personal taxation. I have no doubt that my right hon. Friend is making a sincere effort in that direction.

But the cost of such a reduction is a vital factor, and the Government must necessarily take into account how the economy is developing. They must make sure that there is substantial expansion and not merely a temporary consumption boom.

The primary objectives at which the Government should be aiming are to reduce inflation, to restore full employment and to raise the standard of living. But in endeavouring to achieve those objectives the Government must always bear in mind that their aim ought to be to make sure that higher living standards and full employment are maintained if and when the oil runs out.

What, then, are the immediate areas to which the North Sea oil revenue can be put? I agree that a reduction in personal taxation is one, but it is only one, and it must be related to the importance of others.

I put at the forefront for consideration the argument that the oil revenues should be used to finance new public spending and to restore the services that have had to be cut. Our social services, our hospitals and the construction industry, are all calling out for help. Such public expenditure would provide additional employment, which, in turn, would expand the economy and raise consumption.

There is, of course, the question of investment in manufacturing industry. We have extremely intricate industrial problems. There is a vital need to take more direct steps to promote investment, efficiency and employment. If such steps are to be taken, some part of the on revenue should be used in that direction That, in my view, is a matter of the greatest importance.

There are other considerations to he borne in mind. There is the question whether oil revenue should be used to reduce Government borrowing. There is the question of the repayment of our foreign debt. I do not want to go into detail on these matters, but they are of exceedingly great importance. It is essential, therefore, that the most careful thought should be given to how the economy should be managed while oil is contributing so largely to our balance of payments.

North Sea oil, by taking the place of the oil that we would otherwise import, improves our balance of payments position. Certainly the Government should pursue a course that would achieve a higher level of employment and output. I agree that the hon. Member for Worcestershire, South has performed a useful service in drawing attention to the problem which arises. I believe that proper consideration will be given to it, but I emphasise that there are so many other fields in which this is important that one must give the closest scrutiny to them.

After all, if the Government are sincere in their aim—I think that even some Opposition Members would be ready to accept that—they must take all these factors into consideration. I see the hon. Member for Worcestershire, South shaking his finger. I hope that he recognises that, as I said at the beginning of my speech, this is a vital and fundamental problem, and we ought not to descend to petty politics and party abuse in endeavouring to adopt the best possible course.

12.48 p.m.

Photo of Peter Viggers Peter Viggers , Gosport

We have enjoyed some classical speeches during this short debate. My hon. Friends the Members for Worcestershire, South (Mr. Spicer) and St. Marylebone (Mr. Baker) have shown us just how many potential Chancellors we have in the Conservative Party. We have also had classical speeches from the hon. Member for Fife, Central (Mr. Hamilton) and the hon. and learned Member for Hackney, North and Stoke Newington (Mr. Weitzman), who spelt out more clearly than could a Conservative seeking to say it himself exactly how the Socialists would approach the spending of oil revenues.

I regret that I shall not be following the remarks of the hon. Gentlemen, because my approach is rather more radical. I regard this as the most important subject of debate that we have had since I have been in the House. I start from a radical point of view. We are talking first about revenues from North Sea oil and gas. The word I emphasise is "revenues". But, of course, we are not talking about revenue; it is capital that we are talking about. The point is an extremely important one because, unlike any ordinary prudent human being or family man, and unlike any prudent business, the British Government do not choose to distinguish between capital and income.

We emphasise the spending of the oil revenues, but they are not revenues. If we regard them as capital we shall start working towards the real answers. The Government regard capital and income as one. You will recall, Mr. Deputy Speaker, that last year the Government chose to sell BP shares, which were a capital asset, to pay revenue. But in using oil and gas from the North Sea we are depleting our capital even more than we are when we cut down growing timber, because timber grows again. Oil and gas will not grow again for a million years. We are using capital in exactly the same way as we would be if we were carting truckloads of earth and dumping it in the middle of the Atlantic Ocean. We are taking away part of the United Kingdom itself, part of the mineral resources of the United Kingdom. The carting away of soil is the best parallel that I can think of.

If we regard ourselves as dealing with capital we shall at least start to approach the problem in the right way. The biggest problem of all is that the capital will not replace itself. The total amount of the oil and gas funds over the next 20 years will be about £50,000 million, that is, about £1,000 for each man, woman and child in this country. But this is made up of precious hydrocarbon resources, oil and gas, which will not be replaced in a million years.

We are planning—no we are not planning; we are expecting—to use up all our oil and gas over the next 20 or 30 years. Expert opinions vary. Some experts say 25 years; some say 30 years. The hon. Member for Fife, Central mentioned 40 years—the longest assessment that I have heard. However, that is not very significant when one is thinking in terms of the period of history that we ought to be considering. No one is claiming that the oil and gas will last for more than 30 years or so. That is the figure that I take.

There may, of course, be a technological breakthrough—the energy equivalent of the invention of the wheel—which will make the whole oil and gas industry look redundant and old fashioned. But that has not happened yet, and every indication is that any new energy source will not be particularly cheap, and may be more expensive than oil or gas. Sources such as nuclear fusion are likely to be more expensive than oil or gas.

My young children are aged 7, 5 and 1. I have to contemplate the thought that when they are my age all the oil and gas reserves that we have under the North Sea will have gone. They will have been burnt and obliterated by my generation. I cannot see how we can sit here in Parliament with a responsibility, in theory at least, for the proper government of this nation and plan to burn off one of our most valuable resources within a mere 30 years.

Let us look at the time scale of history. Homo sapiens sapiens came to Western Europe about 25000 BC and he recorded his activities in the Cro-Magnon caves in the Dordogne. Recorded history covers about 25,000 years. Are we now to contemplate the burning off of our oil and gas resources in one-thousandth of our recorded history as human beings? Are we so blind, greedy and selfish that we shall squander our precious hydrocarbon reserves in that short period?

It is our duty not to be put off this fundamental question. We should not be distracted by cosy thoughts that more oil may be found, that synthetic natural gas may be made more cheaply fairly soon, or that there may be a breakthrough in one of the many sources of alternative energy.

I am saying that we should not be using our oil and gas funds at all without having first given careful thought to the way in which they are to be spent. We have already been profligate and shortsighted, and this must not continue.

Britain as a nation is now beginning to discuss how to spend the North Sea funds. We are even promised a Government contribution to this discussion, at last—and I say "at last" advisedly. But so far, the question that we have been considering is the wrong question. We should not be dismussing how to spend our oil revenues; instead, we should address ourselves to the question: what is the proper use of our oil and gas reserves?

I think that we can justify the use of those reserves only if we apply them in one of three ways. The first is to diminish future energy requirements—that is, conservation. The second is to restock our energy resources. The third—this is where I join with my hon. Friend the Member for Worcestershire, South—is to build up alternative capital assets.

Let me take the first way. The conservation of energy, by itself, has been described as a slow walk up a dead-end street, but it has a vital role as part of an overall energy startegy. We could impose sanctions on the use of energy. I suppose that we could increase prices and keep down use that way, but I think that the best methods of conservation are education and—above all—incentives.

I put forward one possibility for consideration by the Government. Over a 10-year period, the British Gas Corporation carried out one of the most extensive operations of this kind of all time. It converted appliances in virtually every home in the United Kingdom from town gas to natural gas. It was a massive operation, carried out, albeit with lots of hiccups, with great success. What thought has been given to a comparable effort to install insulation in houses and flats? One measure alone, roof lagging, could have a substantial effect and conserve up to 50 per cent. of the excess heat currently lost. Imaginative conservation measures are a worthwhile way in which to spend a portion of the oil and gas funds, because they diminish future demands for oil and gas.

I know that in the context of conservation some thought is being given to the construction of a secondary gas pipeline to take out the methane and some of the heavier gases of the oil fields under the North Sea. A possible figure for the cost of construction of this full secondary pipeline is £5 billion. But that is not very much if it enables us to preserve some of these valuable resources under the North Sea. From a number of informal discussions about the construction of the secondary pipeline, I am satisfied that the issue is being discussed with the right degree of priority and is being looked at energetically.

The second way in which our oil and gas funds could be used is in the search for other energy sources. We should ask whether we should spend more on research. A figure that I have seen for current research on alternative energy sources is about £185 million a year, of which about 90 per cent. is spent on nuclear research and 10 per cent. on research other than nuclear research. Within that 10 per cent., 1 per cent. of the total is spent on alternative energy sources—geothermal, wave power, tide power, wind power, solar energy, and so on.

We are entitled to ask whether 1 per cent. of that amount, or thereabouts, is a sufficient sum to enable us to be sure that alternative energy sources are being examined carefully. We should bear in mind that having previously decried the possibility there is nevertheless a chance that if a proper battery storage system could be found it could be just the breakthrough that we need to enable alternative energy sources to play a much more important part than we currently contemplate.

I apologise to my hon. Friend the Member for Worcestershire, South, be cause it is only at this point that I join him in the important points that he made. The third way in which we can use funds from the North Sea is in building up alternative capital assets. We could find ourselves in the worst of all possible worlds. The oil and gas funds could be burned off and used as revenue. The could be used by Socialists to fulfil their dream of Socialism. This would fuel inflation and simultaneously push up the price of sterling, thus making our exports uneconomic. Meanwhile, State funds would be used to prop up British industry while it became increasingly uncompetitive. In 20 years' time we would awake looking like rakes after a heavy party, with the oil gone, having been burned off, the funds having been used as revenue, and finding that our industry had become increasingly feather-bedded and uncompetitive. Frankly, I find the ignorance of those who put forward this proposal absolutely breathtaking.

What should we be doing? We should be restoring incentives by reducing taxation on income. My hon. Friends have made that point, and I join them in that. Secondly, we should be encouraging research and development by industry. For this we need a stable background and the confident expectation of long-term profits.

Here I join in the discussion—if discussion is the right word—between the hon. Member for Birmingham, Selly Oak (Mr. Litterick) and my hon. Friend the Member for St. Marylebone. The hon. Member for Selly Oak said that no amount of increased incentive would make Sir Arnold Weinstock work harder. I think that that was broadly what he said. However, I recently asked industrial leaders, particularly in the electronics industry, with which I have a connection, what they regard as the principal disincentives to expansion. Their reply surprised me. They said that, apart from the need for stability, the principal disincentive for expansion and improved productivity is the inability of companies to give proper rewards to middle management. In the electronics industry it has been found that employment in the Civil Service gives a better rate of return to the individual than that to be found in industry. Therefore, incentives are of critical importance.

Thirdly, we need to encourage mobility of labour and industrial retraining. We must change the attitude "We had a wonderful industry in the 1950s. What has gone wrong?". We should look sideways to see what is taking place in other countries. There are about 20 semi-industrialised countries in the Far East, the Mediterranean and Latin America which are moving into industries in which we have traditionally had a leading rôle but are now falling behind. Those other countries started from scratch. They have had an atmosphere uncluttered by regulations or by neurosis, whereas we suffer from historical hang-ups between management and work force—a kind of industrial arteriosclerosis. They also have cheap labour.

For these reasons we are losing out in iron and steel, vehicles, electronics, shipbuilding, and chemical and processing plant. These are areas in which we used to be leaders. We should be looking forward and seeing what skills we can offer, and we should also be examining ways in which to develop them. We should concentrate on industries that have a high content of research and development and involve a high added value. We shall not succeed in this important duty by shouting at industry from Westminster, or by telling it to invest, or by funnelling taxpayers' money into industry through Whitehall via State enterprise boards. I believe that the way forward is to seek to increase incentives to work and to invest, and in that respect I agree with the comments of my hon. Friend the Member for Worcestershire, South.

I congratulate my hon. Friend on instigating this debate—a debate that the Government should have begun years ago. If we apply oil and gas funds wrongly we shall not get another chance in a million years—literally a million years.

1.4 p.m.

Photo of Mr John Lee Mr John Lee , Birmingham Handsworth

Despite the Poujadiste overtones from the other side of the House, which reached their peak in the speech of the hon. Member for St. Marylebone (Mr. Baker), this has been a useful debate. We are grateful to the hon. Member for Worcestershire, South (Mr. Spicer) for choosing this subject, if not for the wording that he selected in tabling his rather extensive motion.

The most encouraging aspect of the discussions to far#—this has embraced both sides of the House—is the realisation that we are dealing with something which, although of considerable value, will on all likely estimates have a limited life. That has led everybody, whatever other conclusions they have drawn, to advance arguments based on the supposition that this is not something which we can regard as bringing about any fundamental change in the nature of our problems.

My hon. Friend the Member for Fife, Central (Mr. Hamilton) put the matter in the right perspective by comparing our coal resources, which are likely to last 300 years, with our oil resources. I thought that my hon. Friend was somewhat optimistic in that respect. I agree with the hon. Member for Gosport (Mr. Viggers) that the likely period during which we shall have the benefit of undersea oil resources, as we are now identifying them. will be less than the 40 years to which my hon. Friend the Member for Fife, Central referred. Nevertheless, making all due allowances, the Government have an opportunity to do something which no Government since the war have been known to do. They now have an unrequited bonus, over and above other resources.

I reject the idea that the oil discoveries should be regarded as an opportunity for mass tax remission. I shall not take up the comments on that score made by Conservative speakers, except to say that there were a great many trumpetings in 1951 in the promises made by Lord Eccles, as he now is, or "Smarty boots" as he was then known in this House. The Tories said that they would cut taxation by £600 million, but nothing of the sort happened. Expenditure under the Conservatives rose, as it has risen under every other Government. That happened because the needs and demands of government are recognised to be expanding all the time.

There are two exceptions to what I have said, in the right hon. Members for Leeds, North-East (Sir K. Joseph) and Down, South (Mr. Powell), both of whom live in worlds quite separate from the rest of us. Nobody who looks at these matters seriously can ever contemplate a situation in which there will be more than marginal reductions in taxation and, indeed, generally over only a short time. I am not saying that there is not some benefit to be gained by certain marginal reductions in tax levels.

I have some sympathy—although not too much—with the hon. Member for Gosport, who underlined the tax problems that face those who are in middle management. I have more sympathy with those who advance the argument that it is better to raise the tax threshold because of the immediate impact on those who cease to pay tax. That is the most important single factor—namely, that the difference between paying and not paying tax must have a greater psychological impact than any marginal reductions in the amount one pays out at the end of the week.

Furthermore, there is the not inconsiderable administrative fact that if we reduce the number of taxpayers our beleaguered and overburdened Inland Revenue officials might be able to catch up on their work. The hon. Member for Worcestershire, South referred to some aspects of inefficiency in the tax system. One aspect which deserves ventilation is the fact that the Inland Revenue officials are so behind in collecting tax that a great deal of revenue is lost to the Exchequer because of tax that is untraced. In other words, more is lost through tax demands that are unenforced than is ever lost through abuses in the social services system. We tend to lose sight of that fact. We must always bear it in mind.

What alternatives presented by the Government should we select? I believe that we can discount overseas investment almost in a sentence. With the obvious and wholly untypical exception of overseas aid, it is merely a method by which one invests in one's rivals. It strengthens other peoples' economies at the expense of one's own. One of the many dotty by products of EEC integration is that at present the investment that pours out of this country into the rest of the Common Market exceeds by five times the amount of investment coming the other way. I am not saying that that would not have happened in some measure if we had not joined the Common Market, but so long as we are a member of that organisation there exists a legal impediment which makes it more difficult to staunch the flow.

I wish to deal with the repayment of foreign debts. We must get this matter in perspective. It is true that the load of foreign debt is considerable, but let us not forget that the total assets that are British-owned and scattered throughout the world far exceed our total foreign debts. Not all such assets are able to be realised at once, because that would be impossible, but the latest figures that I have been able to obtain show that at the end of last year the total of privately-owned portfolio investments was about £8,000 million, and the total of privately-owned fixed assets amounted to £18,000 million.

Photo of Mr Douglas Jay Mr Douglas Jay , Wandsworth Battersea North

These assets are, however, the result of overseas investment in the past, which my hon. Friend has been criticising.

Photo of Mr John Lee Mr John Lee , Birmingham Handsworth

That is true. That was in the days when we were relatively far richer. Most of the investments, certainly in fixed assets, some of which are of long duration, go back to before the Second World War. That was a war in which we lost about one-quarter of our total capital assets. Investing overseas is a different matter nowadays.

I do not say that there are not some ways in which it is of benefit for us to invest overseas—social reasons apart, I accept the need for overseas investment—but to invest in our economic rivals does not seem sensible. Within the Common Market it is not unknown for us to try to sell washing machines to people in Dusseldorf who already make them. What is the logic of investing in competing industrial nations? There should be a greater realisation of our overseas investment, which is sometimes referred to as the third line reserve.

Happily, at the moment we are not in a financial crisis. North Sea oil is one of the reasons why we are not involved in such a crisis. Sooner or later one would expect many of the resources to be appropriated by a local General Amin. It might therefore be as well to sell some of them, to realise them and incorporate them in our reserves, to be used as part of the debt repayment exercise. But I do not feel that we should devote this bonus to debt repayment when there are more worthy demands on our resources. The Government, but not the Opposition, would regard direct investment in industry as the most important alternative. Although that is an attractive idea, I do not believe that it is the most desirable use for these resources.

We start from the premise that the resources will be of a comparatively limited duration, with perhaps fewer years elapsing before the amount of oil trails off drastically than have elapsed since the end of the Second World War. There has been a chronic lack of investment in industry since the war. If one recognises that, one sees that it is not desirable to anchor the re-equipment of British industry to a resource which has a known limited duration.

I represent part of a deprived inner city area. Unemployment is acute, and unemployment amongst young people is particularly bad. Unemployment amongst young black people is conspicuously worse than it is among white youths. It is an area which is in many ways bleak and unattractive. It lacks many amenities, and is certainly in dire need of beautification. It is an area in which there is a great deal of crime, as one might expect, and a great deal of social tension. But the constituency is no worse than those of many of my hon. Friends who represent inner city areas, and I suspect that it is more fortunate than some.

It is against that background that the Secretary of State for the Environment has decided not to increase the rate support grant. I was disappointed to learn of that decision. In the light of that observation, I plump for investment in inner city areas and urban rehabilitation. If there is a single area in which the impact of the investment of a bonus resource will be proportionately greater, it is in such places as I have the honour to represent.

The other day I asked for an estimate of how much it would cost to bring all the substandard housing in the country up to acceptable standards. That might be a difficult question to answer, but we all recognise what is substandard and what is tolerably acceptable.

I was told that the total cost would be £9,350 million. The total cost of dealing with outstanding repairs would be £8,350 million. The cost of providing amenities such as parks which are essential for the quality of life would be £1,000 million.

The estimated peak revenue from North Sea oil in the next five or 10 years is between £3,000 million and £5,000 million. If one matches one sum against the other over a period of four or five years, one can see what a really dramatic impact that revenue would have on the last really acute social problem in the country.

I do not say that complacently, but if one compares the present quality of life for most people with what it was 40 years ago, there is no doubt that it has improved dramatically, in spite of all our failures and disappointments.

Before the war two-thirds of our people lived in poverty and many in abject poverty. That is no longer the situation, but a submerged percentage still live in poverty. Clearing the slums and beautifying areas of social decay would make a larger impact on that situation than on anything else.

During the debate on the Address the hon. Member for Chelsea (Mr. Scott) said that such action would help to counter the National Front and other extremism which brings about social tension, and would help to deal with the problems of racialism which are so often the side-wind of social deprivation. My plea to the Government is to spend the lion's share of the oil revenue upon the inner city areas.

A few days ago I asked the Secretary of State for the Environment to what extent Birmingham would benefit from his new monetary measures. I learnt that it was the not very princely sum, initially, of £11 million on construction. Bearing in mind that housing construction and road construction in the inner city areas are highly labour-intensive, his measures will also strike a blow at unemployment, because the two go hand in hand.

To hear people talk about cutting Government expenditure on the urban programmes beggars belief. I cannot understand how anyone with any sense of social responsibility and social conscience could contemplate such a policy. Whatever criticism I may have of the Government, and whatever their failings may be, I am sure that they will disregard such callous Poujadiste nonsense. The only question that must be settled is how urgently and vigorously they will take the opposite course.

I wish to discuss briefly one other way in which part, but a much smaller part, of the money should be spent. Here I agree with remarks that the hon. Member for Gosport made before he decides to join in a routine piece of Tory flag-waving. He referred to alternate energy sources, and mentioned geothermal sources. I agree with him that research into geothermal sources would be of great benefit. He was right to refer to the time scale involved in these matters. Geothermal energy will last far longer than the human mind can comprehend. We sometimes forget that we are standing—fortunately it is miles away—on a raging inferno. The whole of the centre of the earth is a molten bowl.

But we also forget, less excusably, that since Roman times, and before, in some measure, that source of energy, through hot springs, has been used. It is extraordinary how little attention has been paid to the question of harnessing it on a much greater scale. In such countries as Iceland and New Zealand, where hot springs are dramatically in evidence, very much more has been done; but even we have had Bath hot water for a long time. To drill into the crust of the earth and examine hot rock structures for further sources of energy should excite people's imagination more than it does.

Such energy sources have an advantage over nuclear sources, with which so many people are obsessed, in that they are not accompanied by appalling problems of waste and pollution, and security risks. I cannot understand why they should have been overlooked. One does not have to be completely sold on the outlook of the ecologist magazines. How can we disregard so attractive a source, not immediately available in any quantity but there for the taking if there is sufficient investigation and forward planning over a period of, say, 20 years, while we irresponsibly build up mounds of toxic nuclear waste for future generations?

I asked in a Question the other day, purely out of curiosity and not with any particular thought in mind, what was the longest estimated radioactive life of any nuclear fuel being produced. I was told that for thorium 232 it was 14,000 million years. The mind boggles at such a figure. That is the worst, but we know that we are dealing in periods of millions of years. It is not right that we should present generations yet to come with a Pandora's Box of this kind. We should rapidly turn away from it. We have the opportunity of searching out other sources.

If the bulk of the money should be spent, as I believe it should, on urban rehabilitation, and if a small proportion should be spent on seeking out other sources of energy—and I agree with the hon. Member for Gosport on the question of conversion from solar energy —a little could be spent on the examination of the accessibility of other undersea resources. Most of the earth's surface is covered by water. We are only just beginning to address ourselves to the extraction of undersea resources. The oil is there and it is accessible. Thirty years ago people had hardly thought about it. There are obviously many other sources to be extracted. Manganese is one. Potassium nodules are said to be on the ocean bed, well within a feasible extraction depth, and the ocean bed is certainly worth exploration for other minerals.

I therefore echo the plea of the hon. Member for Gosport that some of the additional resources should be spent on research. If we apply our minds to these matters, and, above all, if we apply ourselves with imagination to the windfall that has come to a nation which for so long has been beleaguered, we shall have made it worth while.

1.28 p.m.

Photo of Mr Ivan Lawrence Mr Ivan Lawrence , Burton

I congratulate my hon. Friend the Member for Worcestershire, South (Mr. Spicer) on his foresight in introducing the motion and giving us the opportunity to debate it.

It is an extraordinary irony that one of the most undeserving Governments of all time in Britain should be the beneficiary of the largest windfall this country has ever had. How will it be spent, and how best should it be spent? Let us begin by looking at the Government's record to see what good spenders they are of the scarce economic resources which have been available in this country since they took office.

Prices have risen by 83 per cent. There has been a decline of one-fifth in the exchange value of the pound. There are 750,000 more people unemployed now than there were when the Conservative Government left office, and 20 times as many unemployed school leavers. Indus- trial production is 4 per cent. less than it was during the three-day week. Investment in manufacturing industry is down 18 per cent. We have £12 billion of overseas debt to be repaid. The average family with two children under the age of 11 is about £5 a week worse off even after the great benefits that the Chancellor of the Exchequer has recently bestowed upon this grateful nation.

I could go on to speak of a relentless build-up of bureaucracy, of how 20 per cent. of the country is producing the manufactured wealth upon which the other 80 per cent. are living. I could speak of the insane situation whereby we pour taxpayers' money into supporting the over-manned industries of steel and the railways but hold back from increasing the manning to acceptable levels of the police and the Army. I am giving only random examples of the way in which the Government, on their record, have been handling the country's economic resources. For our ills they blame everybody but themselves. They blame the world economic recession. It suits them to forget that they never allowed the Conservative Government to blame the remarkable world commodity rise that doubled prices, or the oil crisis, which increased the price of oil fourfold, causing us to curb our attempts to restrain public spending. It does not suit them to remember that when we left office our competitors' rate of inflation was the same as ours and that now our inflation rate is twice that of our competitors. It does not suit them to remember that they now have benefits that we never had. For example, there has been a fall in commodity prices that has improved the terms of trade in our direction by about 12 per cent. There has been an improvement in our balance of payments as North Sea gas revenues have increased from £310 million in 1973 to £2·7 billion now.

Photo of Mr John Lee Mr John Lee , Birmingham Handsworth

I know that the hon. Gentleman wants to get all this off his chest, but will he remember just for a moment the great benefits that the Conservative Governments of the 1950s enjoyed from falling world commodity prices? I do not remember that they modestly disclaimed the chance character of that trend.

Photo of Mr Ivan Lawrence Mr Ivan Lawrence , Burton

Not at all, and the standard of living of the British people under Conservative Governments was increased I am comparing the situation when we left office with the present situation.

No credit can be given to the Government, for the fact that we have a massive bridging loan from the IMF, a loan that saved us from bankruptcy and disaster last year. They have had the advantage of North Sea oil, which has benefited our balance of payments this year by £2·1 billion. These are factors that suggest that Britain should be doing much better and not much worse than when we left office.

The Government's excuses are hollow. The country knows that, North Sea oil aside, we are in a pitiful economic condition because the Government needed to win the past two elections. Having won them, they needed to quieten the internal pressures within the Labour Party. They conducted disastrous economic policies, beginning with the ending of wage curbs in 1974 and the doubling of public expenditure.

With that record, can we trust the Labour Government to use the bonanza of North Sea oil for the benefit of the country? Can the incompetent and disastrous leopards of the past three and a half years possibly change their spots? What do we have to go on to make these assessment?

Of course, Friday debates are always occasions for sweetness and reason. Many of the barbs are withdrawn from the teeth of Labour Members. Let us not rely so much upon these speeches but upon "Labour Programme 1976" which has been recently embraced and warmly welcomed by the Labour Party conference. It contains their proposals to spend the country's money—no doubt the money from North Sea oil—to nationalise whole industries and individual companies, including the banks, the insurance companies, the ports, parts of the construction industry, parts of the food manufacturing industry and parts of the brewing industry.

That is the promise that the Labour Party is forcing upon a Labour Government for the expenditure of the bonanza of wealth that we shall get from North Sea oil. We are promised massive increases in State spending. Of course, we could not expect anything else under a Labour Government. There are the increased taxes that must necessarily follow and further cuts in our defence.

If I am wrong, perhaps the Minister, when he replies, will deny that these things will happen. Perhaps he will deny the pressures that are being exerted not merely by Labour Members below the Gangway but by members of his own party outside Parliament—for example, his constituency party and the party workers within the country. Will he deny that they will seek to force the next Labour Government to commit themselves to the items of expenditure that are listed in the Labour programme? Will he deny that the benefits of North Sea oil will be thus squandered?

I suggest that it is patently clear to everybody, including the blindest, the deafest and the most slow-witted, that if Labour wins the next General Election the pressure will be on to squander our resources from North Sea oil. That will be done in a way that will not necessarily benefit the health of Britain's future.

The most significant failures of the Government are to be found in the statistics dealing with industrial production, which is down 4 per cent. since the three-day week, and with the 18 per cent. reduction in industrial manufacturing investment.

We are talking about the importance of personal taxation and the spending of the benefits of North Sea oil in reducing personal taxation. We were told that the Government's taxation policy would be successful. We were promised that the Government would work more easily with trade unionists, who would work harder under a Labour Government. Why have they not done so? Why is industrial production so low? Why is our industrial production so low when that of our competitors continues to increase? Why do we have over-manning in our industries? Why is there so much moonlighting? Why is there so much tax fiddling? Why is there such a drift from productive manufacturing to the State bureaucracy, where there are index-related pensions? Why are so many of our best entrepreneurs going abroad? I speak with the knowledge that one of the foremost manufacturers in my constituency has packed up his bags and gone. Why are there so many demands to break the 10 per cent. pay limit?

The answer is not that there is a common desire to earn more money, but that people want to be able to keep more of the money that they earn. If we can ensure by our taxation policies that people hold on to the money that they earn, the cries will not be so strident for ever-increasing wage increases. As my hon. Friend the Member for Worcestershire, South said, we are too highly taxed. We are among the most highly taxed nations in the western world, whatever the economists may say. My hon. Friend explained that we have about 1 million more people paying tax than we should have. He said that the economists have not been taking into account employer contributions in making their assessments.

I shall remind the House how our taxation and national insurance contributions compare with those in other countries. A £5,000-a-year man in the United Kingdom retains £3,600. His opposite number in Germany retains £3,740. His opposite number in the United States of America retains £4,500. His opposite number in France retains £4,530.

Photo of Mr Max Madden Mr Max Madden , Sowerby

Do those figures include total deductions such as direct taxation and social security contributions?

Photo of Mr Ivan Lawrence Mr Ivan Lawrence , Burton

Yes, they are the figures that have been put in Hansard by the Minister. They take into account tax deductions, national insurance contributions and social security contributions, where applicable. They also take into account allowances.

The £10,000-a-year man in the United Kingdom retains £6,370. In Germany he retains £7,200. In France he retains £8,760 and in the United States the retention is £8,300.

The £15,000-a-year man in the United Kingdom retains £8,100. The German in the same bracket retains £10,380. The Frenchman retains £1 2,600 and the American retains £12,000.

The £20,000-a-year man in the United Kingdom retains £9,500. The German retains £13,200, the American retains £15,300 and the Frenchman retains £16,100.

Is it any wonder that people leave this country to go and work in those countries? It is no use saying that the cost of living in those countries is so much higher than in this country. It is high in France and in Germany, although we are moving in giant strides towards their cost of living, but the cost of living in the United States is the same as in this country. When we are talking about someone retaining the difference between £9,500 in this country and £13,000 in Germany, £16,000 in France, and £15,000 in the United States, we are talking about very realistic incentives.

It is not a question of economists saying that we are not the most highly taxed, or the CBI saying that we are the most highly taxed in the world. When we leave the House we shall go to see our constituents, and we can ask them whether they are too highly taxed. The belief is as important as the fact. If people believe that they are too highly taxed and that it is not worth their while working an extra one, two, three or four hours or being more productive, and thinking of new ways of increasing productivity, they will not work as hard, or be as productive. Whether it is fact that they are too highly taxed or merely belief, the answer is still that incentive is being drained from our society.

We must put back the incentive and make sure that people feel that they are keeping more of the money that they earn. The way in which we can do it has already been dealt with by my hon. Friends, particularly my hon. Friend the Member for Worcestershire, South in an excellent analysis. There is an equally excellent analysis in today's Daily Express, written by, and here summarised briefly and pungently by, my hon. Friend the Member for St. Marylebone (Mr. Baker) with his usual wit. But however we do it, and however the money is spent, it must be spent on a reduction of personal taxation. It is vital to do this if we are to stop our managers going abroad and if we are to restore to this country the incentive to work. It is also vital if we want to restore Britain to its foremost position amongst countries in Europe as a productive and a prosperous society.

I am delighted that a Conservative Government will give the proper priority to decreasing the burden of personal taxation. I am horrified that the Labour Party, if by some misfortune it won the next election, should have pressure exerted on it to implement the programme set out in the Labour programme for Britain.

1.42 p.m.

Photo of Sir John Cope Sir John Cope , Gloucestershire South

My hon. Friends, particularly my hon. Friends the Members for St. Marylebone (Mr. Baker) and Worcestershire, South (Mr. Spicer), have set out in some detail their preferred packages for taxation. I go along with the sort of proposals that they made, but I do not want to go over their figures or to propose an alternative package or variations on the packages that they suggested.

I say in passing that in all this talk about where the money will come from, which seems to cause a great deal of anxiety to Labour Members, people sometimes forget that Lord Barber, in his last year as Chancellor of the Exchequer, raised about £7,000 million in income tax. That compares with the Budget estimate this year, by the present Chancellor, that he would raise not £7 billion but £18 billion in income tax. There is some hangover from surtax in both figures. Some of that is accounted for by inflation, and since the Budget we have had to make other adjustments, both up and down, to get the correct figure.

We know from the General Subcommittee of the Expenditure Committee that income tax will have raised more than expected, and we also know that the Chancellor, in his jargon, has "given a bit back". Even allowing for that, and allowing for inflation, I estimate that at least £5 billion more is being collected in income tax than there was three or four years ago, when the Labour Government took office. That is the measure of the increases that have been imposed against which to set off the proposed decreases about which my hon. Friends have been speaking.

I do not want to get too involved in these figures today. I want, as it were, to make some additional notes in the margin on what my hon. Friends have said.

I believe that our direct taxation system is being gravely damaged by the colossal weight of tax that it is expected to raise. Any method of taxation, like any car or truck, for that matter, can carry a certain weight of taxation without break- ing down and without people losing faith in it. But if, with any system of taxation, we try to collect too much money, it becomes not merely unpopular but more and more complicated. It shows the strain in any number of ways. We can see this equally in the rates system, which in my view is expected to raise too much money for the basic operation of the system.

When we try to raise more money than a particular tax will stand, we damage the acceptability of that tax to the public. Acceptability of a tax is very important in making sure that there is not to much evasion and avoidance. It is important also in keeping the tax simple.

The hon. Member for Birmingham, Handsworth (Mr. Lee), who walked out almost immediately after making his speech, referred to the rate of evasion of tax as bring very high. I believe that he is right. It is not only high; it is increasing. Indeed, as things are, I believe that it will go on increasing. I am speaking not only of avoidance and evasion at high income levels—about which Labour Members often tend to speak—and of people going to great trouble and the expense of employing lawyers and accountants to help them to avoid tax; I am speaking about the whole range of income tax.

We all know about moonlighting. If people want small jobs round the house carried out, they know that they can get them done for cash by people who have other jobs. We know that that goes on, and it is increasing. Tax avoidance at that level is important. but it is also important from the point of view of simplicity at the higher levels. The more avoidance there is, the more the Inland Revenue and the Chancellor of the Exchequer of the day introduce anti-avoidance provisions. We have had pages and pages—volumes—of Finance Bills. Indeed, since my hon. Friend the Member for Worcestershire, South and I have been Members of this House, the volume of tax legislation has increased enormously because of the necessity to try to combat avoidance and because of the tremendous weight of tax that is being collected through the income tax system.

In addition to anti-avoidance, the complexity of the system, and increasing moonlighting, there is the considerable strain on the Inland Revenue. The strain on the revenue system must be getting almost to breaking point. That is not by any means entirely the fault of the officials. However, it remains a ridiculous fact that the vast majority of the millions of coding notices that are issued are still hand written. No business of any size producing documents for the public—whether they be invoices, pay slips or whatever—relies on handwritten records of the quantities that the Inland Revenue issues.

No one knows better than my hon. Friend the Member for St. Marylebone the history of putting computers into the Inland Revenue. Both Labour and Conservative Governments have changed decisions on creating, on the one hand, and on packing up, on the other, the tax credits scheme. That put back the computerisation of the Inland Revenue. But regardles of computerisation, the Revenue is tot even mechanised. When I was an articled clerk—that was 20 years ago—all my firm's large clients were at least mechanised, if not computerised. But the Inland Revenue still is not even mechanised for some of its basic handling and distribution of documents, such as notices of coding. These are important arguments for reducing, along the lines proposed by my hon. Friends, the tremendous weight of income tax.

The primary purpose of Parliament and Government is to get right the framework or the mechanics of the operation within which the energy of individuals can flourish and thereby create wealth. The Government are not very good at deciding which industries we should or should not be in. One of the major faults within the framework is the great weight and complexity of the tax system. The purpose of any tax system used to be the raising of money. Now, in addition, it involves a tremendous and muddled effort at economic and social engineering at different levels.

The Diamond Report, to which reference has been made, pointed out that the spread of income before tax between the richest and the poorest in this country was not as great as in many other countries, including America, Germany and Japan. The penal rates of tax at the top level are supposed to prevent cer- tain people from receiving very large incomes and to make those receiving small incomes feel better about it. In fact, it means that the paper incomes of the managing director of British Leyland, or some other great figure in industry, is put up much higher than it would otherwise need to be to give him a take-home pay substantially higher than that of more junior people in his own organisation. In that sense, it is counterproductive to have very high rates of tax. It means that the gross pay has to he much larger to bring in the incentive. such as it is, at that level.

The strength of this country remains in its people, their brains and their energy. That is what this motion is about. Our economic debates nearly always seem to be on the question whether there should be a touch on the brake, the accelerator, the steering, and so on, of demand management. They vary from time to time. Fashions change from discussing demand management to discussing money supply Hove ever, it is nearly all done by these relatively short-term measures of adjusting the steering and brakes of the economy. But all the time we ignore the engine of the economy—the energies of our people. That is what makes the difference and provides the money that the Government can spend on all the things that we want—hospitals, and so on—to which the hon. Member for Handsworth referred. There is also—this was implicit in the interventions by the hon. Member for Birmingham, Selly Oak (Mr. Litterick)— the ridiculous assumption that Sir Arnold Weinstock is the only man, or one of the very few, controlling the levels of production in this country. That is not only wrong in itself; it is a very peculiar and, in a sense, short-term view.

It is true that top management in the large firms controls the level of production in the short term. For example, Sir Arnold Weinstock and GEC were until very recently involved in one of the largest factories in my constituency, the British Aircraft Corporation factory. It has now been taken away from them and the Government are running it. But that is another matter which, perhaps, I should not discuss now. However, Sir Arnold used to be concerned in running the factory through GEC's half-share in BAC.

It should be remembered that production in an aircraft factory of that kind, or in any other factory, for that matter, depends primarily on the ability of the individuals within the factory to design better products—in this case, aeroplanes —making them more economically than people in other firms and other countries can make them. The question that matters is whether the chap on the drawing board designing new aeroplanes will give that hit of extra attention and will think that bit harder at his job than will his counterparts in Germany or elsewhere, and thus produce a better product.

That man on the drawing board will have the incentive to produce better work if proposals on the lines now being debated are implemented. The same goes for the chap further down, the man working on the lathe or milling machine who has his part in building the aeroplane. He needs that incentive to build aircraft more cheaply and better in competition with others in the world. That is what decides whether the BAC factory continues to produce aeroplanes and to sell them in world markets.>lb/> Moreover—this impinges somewhat on the next motion—not only are our large businesses important in all these matters; smaller and medium-size firms have their part to play. I do not want to steal any of the thunder of my hon. Friend the Member for Harwich (Mr. Ridsdale), who has just arrived in order to move the second motion, but I must add one comment. I have visited a number of small businesses throughout the country, and almost without exception I have found that management says "We could take on more people if it were worth while for our people and worth while for us, but by the time we have finished with the paper work and taken account of the extra amount we shall have to pay in tax, the incentive to do so is eliminated."

I think of a visit I paid in recent weeks to a paint firm near Bolton. This firm makes highly sophisticated paints for the legs of North Sea oil platforms and the like, and it has invented a marvellous method of painting under water which it has patented and is now beginning to sell throughout the world. That firm now employs about 30 people—a year ago it employed far fewer—and over the next few years it could employ many more if it felt it worth while to expand.

Again, I think of another small firm which I visited—an engineering firm on Merseyside employing a few more than 30, whose manager told me quite frankly "I do not know why I am going on. I am thinking of packing in and going to America." He had been in America earlier in his life. He is a very vigorous manager of about 40 years of age. He owns the factory, and he built it up on his own from nothing in a very short time.

Men of that sort could employ more people, produce more and sell more abroad, but they are tied down both by the restrictions upon them and by the lack of incentive for more effort—incentive not only for themselves but for their employees. The engineering employer to whom I referred told me that he is very conscious of the present weight of taxation. Others like him have said the same thing. They know that taxation has increased over the past few years, they want it to be diminished, and it certainly should be.

2.2 p.m.

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

I add my congratulations to my hon. Friend the Member for Worcestershire, South (Mr. Spicer). The House owes him a debt of gratitude for having opened up an important debate. Although the contributions to the debate may have been few, I like to think that the quality from both sides has been high.

I am old-fashioned enough to believe that this is one of the subjects which should be debated in the forum of the House of Commons. It should be brought first to the House and not be a matter of debate between the Labour Party and the Trades Union Congress before being presented to us. We have had some glimpses of what has been happening, but perhaps the Minister of State will tell us about the course of the debate in that liaison committee. I believe that the country would have been better served had the debate started here instead of in those rather esoteric circles.

We understand also that the normal harmony the Cabinet has been slightly disturbed by differences of view between the Chancellor of the Exchequer and the right hon. Member for Bristol, South-East (Mr. Benn). Perhaps the Minister of State will comment on that, too. If he does not, we shall, presumably, have to wait for some latter-day Crossman to tell us exactly what transpired in Cabinet.

Again, perhaps the Minister will tell us whether he has opened even tentative negotiations with the hon. Member for Cornwall, North (Mr. Pardoe). We should like to know how the Lib-Lab pact will be reconciled to the slightly differing objectives which we understand the two parties to have. I think it a pity that there is now no representative of the Liberal Party here to add his contribution to the debate. The hon. Member for Cardigan (Mr. Howells) was bold enough to make a short intervention in the speech of one of my hon. Friends, but we have had no sustained contribution and no substantial explanation of what the Liberal Party's view is on this important issue.

The debate is of special significance because it will serve to clarify and, indeed, sharpen the fundamental differences between the Government and the Conservative Opposition. Although the speeches from the Government side have been few, they have demonstrated the fundamental and, indeed, historic position of the Labour Party on such issues as these. It was put more moderately, perhaps, by the hon. Member for Fife, Central (Mr. Hamilton) and in rather more extreme form by the hon. Member for Birmingham, Handsworth (Mr. Lee). It will be interesting to know where the Minister of State falls in that spectrum. Will he, for instance, adhere to "Labour's Programme 1976"?

Hon. Members on the Government side pay us the tribute of reading with almost compulsive fascination policy documents, carefully thought out, carefully argued and carefully reasoned, issued by the Conservative Party. We understand that "The Right Approach to the Economy" is now both compulsory and compulsive reading for Government Front Bench spokesmen. I assure the Minister of State that I believe that "Labour's Programme 1976" ought to be compulsory—as it is certainly compulsive—reading for my right hon. and hon. Friends and myself. I see, for example, on page 17, that Labour says: We believe it is essential to set targets for the redistribution of income and wealth and to establish a firm programme for meeting them. To this end we shall present a major statement on wealth and income to the 1977 Conference. Regrettably, that major statement is yet to be forthcoming. Perhaps the Minister of State will take this occasion to present it to the House on behalf of the Labour Party. We shall want to know how far he and his Front Bench colleagues have adhered to a firm programme established for them by the members of their party.

We know that what the Government are now doing, dependent as they are on minority votes in the inevitable run-up to a General Election, must be different from the actions which they would announce were they, against the hope and expectation of the country, to win the next election and be returned with a working majority. But the Minister of State should take us into his confidence about their long-term intentions. I am sure that he will be emboldened to do so by the statements of Ron Hayward and Alex Kitson, and he knows that, although he may not carry the Opposition with him, he will have a measure of support if not from the Benches behind him today, since, regrettably, they are singularly deficient of occupants, at least from Transport House. I have no doubt that that will console the Minister of State in his lonely task when I sit down

Of course, we do not say that all the oil revenues should be totally devoted to cutting taxation. There is no disposition on this side of the House to embark on a binge—to use the words of the hon. Member for Fife, Central, who has a particular gift for phraseeology when debating this and other significant subjects—or even on a massive tax remission, as the hon. Member for Birmingham, Handsworth prophesied. We on the Opposition Benches are very conscious of the timely warnings offered by my hon. Friend the Member for Gosport (Mr. Viggers), who gave such a carefully thought out view of the energy implications. I am in no position to follow him in that detailed technical analysis. I shall leave that to others of my right hon. and hon. Friends. We are very conscious of that aspect, of the need to consider alternative sources of energy, but in the time available and with the expertise that I can command, which is negligible on this subject, I should be wrong to go far down that road.

The Conservative Party's views on how we should deploy our oil revenues were best set out in broad outline by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) in a carefully thought out speech to the Oxford Business School. He put almost as the first objective the reduction of public debt. Some slick and superficial observations have been offered on that, particularly on BBC radio this morning. I believe that it must be at least one of the priorities of any Government. Indeed" the Prime Minister, who is always quick to pick up a good Conservative idea, has been floating this idea a little gently, presumably to catch the echoes from Transport House and below the Gangway on the Government side of the House.

Perhaps the Minister will tell us how he feels about the load of public debt. It is trite to observe that a substantial debtor is not a free agent. I have no doubt that the hon. Gentleman is very conscious that an IMF delegation will soon be locked in conclave with him and his hon. Friends. I do not think that the delegation is here simply to distribute prizes and to pat him and his right hon. Friends on the back.

The second objective that my right hon. Friend and learned Friend stated, I am sure with the full approval of the Conservative Party, was that we should reduce the crushing weight of personal and capital taxes. Beyond that there are many other laudable objectives. I do not think that it is a question of all or nothing, of going overboard for any one objective. A balance must be maintained.

If time permitted—perhaps there will be another occasion—I should be happy to debate with the hon Member for Handsworth whether we should attempt to restore our investment position overseas. The Minister will be well aware that there is a commitment to the free movement of capital inside the Common Market. Shall we adhere to that objective? Will there be free movement in 12 months' time or less? The hon. Gentleman might take the House into his confidence on that.

The argument of the hon. Member for Handsworth on the question of overseas investment was most effectively demolished by the intervention of his right hon. Friend the Member for Battersea, North (Mr. Jay). I would only recall that our economic position in two world wars was maintained, perhaps even rendered viable, by the overseas investments that we had built up over the halcyon years before. It is a crude over-simplification to describe investment overseas as investment in our rivals. There are many aspects of industrial and commercial endeavour where the return may be better overseas and where we could not offer the same scope here.

My hon. Friend the Member for Worcestershire, South, ably backed by my hon. Friend the Member for St. Marylebone (Mr. Baker), produced some extremely imaginative proposals. I am sure that to those outside who follow our debates the concept of a 20 per cent. basic rate and 50 per cent. maximum is mouth-watering. I do not know whether my hon. Friends have their arithmetic precisely right. They approached the subject with becoming modesty, as I hope I do. At least they have set us some objectives. For three years we have been ground into the fiscal gutter by the Chancellor of the Exchequer. My hon. Friends have encouraged us to look at the fiscal stars. That must be a worthwhile exercise.

I wait anxiously and eagerly to hear what the Minister has to offer. I am conscious that he must have a brief carefully marked by his devoted civil servants "approach this topic cautiously". He must be conscious of the hot breath of Ron Hayward and Alex Kitson on his shoulders.

It is a pity that Mr. Kitson did not inquire about the levels of personal taxation in the Soviet Union when he went there. He might have discovered that differentials after tax are considerably wider there than they are here, or possibly than they are likely to be even with the benefit of North Sea oil revenues. The Minister, with access to better information from Mr. Kitson, may be able to correct me, but I believe that the highest rate of direct personal taxation in the Soviet Union is 20 per cent. That is indeed a challenge to the Conservative Party and the Government.

What clues are there in the statements from the Government so far? We had the Chancellor's statement of 26th October and his contribution to the debate on the Ways and Means Resolution. So far as we can gather—and I hope that the Minister comes with better news today—all that we can expect is possibly some marginal increases in the personal allowances and the introduction or reintroduction of some intermediate rate.

I should like to know—I put this question to the Financial Secretary in our debate last week—where the Government stand on the basic rate. I ventured to remind the House last week, and as I received no adequate explanation I hope that I shall be forgiven for reminding the hon. Gentleman and the House again, of a powerful and telling intervention by the Chief Secretary on 3rd March 1977. The right hon. Gentleman said then on the question of the basic rate, before he had lost that bruising encounter with his hon. Friends below the Gangway in our debates in the summer: I want to turn to the question of the erosion of differentials. I have said on numerous occasions that we recognise that the combination of the incomes policies of successive Governments, together with tax increases and inflation, has considerably eroded the differentials between the highest and the average paid, between the unskilled and the skilled, and between those in work and those out of it. I have never hidden the fact that I recognise that that is a problem with which we must deal ".— [Official Report, 3rd March 1977; Vol.927, c. 666.] The Government signally failed to deal with the problem in their thirteenth Budget and in their fourth Finance Bill, which was introduced only last week.

Although I was at the time disposed to demur, there may be some point in the encouragement that my hon. Friend the Member for Worcestershire, South appeared to be giving the Minister to introduce a fourteenth Budget and another Finance Bill before Christmas, though I doubt that time would permit that. Perhaps it would focus the Government's attention on the question of basic rate, if it has not already been focussed on it.

I ask the Minister these specific questions. What does he regard as a reasonable basic rate? Do the Government still believe in differentials, both before and after tax? Do they believe in a reward for skill, enterprise and responsibility? Do they believe in cutting taxes at all? What kind of hope can the Minister offer in the matter of capital taxation, which has not yet been touched on? Does he feel, for example, that a wealth tax can be reconciled with the investment income surcharge, capital gains tax, capital transfer tax, development gains tax and stamp duty? Does he adhere to the firm and categoric statement in the document "Labour's Programme 1976" that a wealth tax should be an urgent priority of a Labour Government?

I turn to some of the possibilities which would be in the minds of any Conservative Administration against the background of the oil revenues to which my hon. Friends have drawn attention. I stress that they can only be possibilities. We have not looked at the books, al-thought very often right hon. and hon. Members on the Government Front Bench affect to treat us as a Government, and I hope that we shall be in a matter of months. We do not and cannot accept responsibility for fiscal measures at this moment.

Let me sketch out some of the areas which deserve urgent consideration. I return to the question of the basic rate and remind the House that when the Conservative Government left office in 1974 the basic rate was 30 per cent. The cry of "Back to Barber" is not a bad one. I have no doubt that the noble Lord, had he continued at No. 11, would have moved on from that basic rate. I have no doubt that a Conservative Government will move on from that basic rate. Of course the timing, the circumstances, must be left to the moment when we take office. But a 30 per cent. rate is not bad for a start and I hope that my hon. Friends will recognise that it can only be a starting point. We take very much to heart the propositions that they have made so eloquently and with such practical backing.

No doubt there will be eloquent cries of protest from the Minister of State who will tell us that the cost of taking the basic rate to 30 per cent. will be £1,800 million and that the cost of taking it back to 25 per cent. would be about £4 billion. How is that against a total tax take of £36 billion? There may be a case, and it has been a case recognised from the Conservative Benches, for redressing the balance, for putting a little more of the weight on indirect taxes.

Another area which a Conservative Government would want to explore is the investment income surcharge, which I regard as a tax on savings. If we consider the area in which it falls it will be seen that it has also become a tax on the retired. I am in no position to say that our first measure would be to abolish the investment income surcharge. But let us see the scale of the problem. To eliminate it would cost, I understand, £300 million in a year. There is room for improvement there.

What about the higher rates of tax? There have been commitments given, with which I find myself totally in sympathy, that a highest rate of 60 per cent. is about all that could be considered reasonable in the prevailing climate. Can the Minister of State justify in his heart top rates of 98 per cent. and 83 per cent.? What do these marginal rates do for incentive, risk taking and endeavour? Can the Minister offer no hope of improvement on those rates whatever?

What about indexing the higher rate bands? No account has been taken of the impact of inflation there. To bring the starting point for the higher rates back to the real level at which it was left in 1973 would mean raising the threshold from £6,000 to £10,000. If all the higher rate bands were indexed to take account of what has happened that would cost £370 million. There is scope for considerable improvement there and I hope that the Minister has got something to offer, at least in that area.

Let us also consider capital transfer tax. The Government have, at last, begun to show a glimmering of appreciation of the damage which has been done to the industrial, agricultural and social fabric of the country by this ill-thought-out measure. They have started in a modest way with some proposals to draw the teeth of the tax in the next Finance Bill. I believe that it would be a Conservative Government's prime duty to go on from there.

The Minister of State will no doubt juggle with the figures and endeavour to demonstrate that there has hem a measure of irresponsibility on the Conservative Benches. Those charges are easily rebutted, as my hon. Friends have conclusively demonstrated.

No one would be so irresponsible as to say that the total oil revenues for the years to come should be pre-empted by tax cuts. That is not in anyone's mind and I reassure the hon. Member for Birmingham, Handsworth on this point. I listened to the hon. Member's speech with great attention and appreciated his genuine concern for the problems of those living in his constituency and in constituencies like it. In concluding I shall say why I believe that the solution which he is putting forward for tackling this problem is the wrong one. I do not believe that it is a question of a once-for all payment. It will, alas, in our lifetimes be a continuing problem.

There will always be some who can not cope with life. There will always be a deterioration in certain urban and, maybe, rural environments which will have to be met by the Government of the day, of whatever complexion. Such problems must be financed ultimately by the creation of greater prosperity in the country as a whole. We cannot meet the problems faced by the hon. Gentleman's constituents merely by flinging cash at the city centres.

I return to the subject of how these cuts might be financed. I ask the Minister to concentrate his mind once again on the question of VAT. Does he still adhere to the split rate? Does he think know that to consolidate the rate at 10 that the current rates of VAT are the final word on this subject? He will per cent. would give any Chancellor an additional £600 million.

I turn now to Government expenditure. In the time available to me I do not want to begin a fresh debate on the area in which cuts might possibly be made or in which redistributions could be made. All I will say to the Minister of State, before he feels that he has been let off the hook a little too lightly, is that I believe that with public expenditure running at the rate of £57 billion a year there must be some room for economy at the margin. There must be an element of waste. No public company with a budget of that order would be so complacent as to say that there was no waste, no fat to be cut out.

May I put a figure to the House? What if 2 per cent. of the waste were eliminated? I have no doubt that every right hon. and hon. Member—even the Under-Secretary of State for Industry, the hon. Member for Keighley (Mr. Cryer), whom I see on the Government Front Bench ready to take part in the next debate, with his experience of industry, which he has gleaned since he assumed Front Bench responsibility—will recognise that there is always a continuing need to reduce the amount of waste.

I do not believe that the Minister of State and his hon. Friends can go to their departmental colleagues when they review the departmental estimates and say "Well done. We recognise that you have done your best over the past 12 months. There is no scope for any improvement whatever in the 12 months to come." If the Minister of State did his job and if he could eliminate even 2 per cent. of waste there would he about an additional £1 billion for him to use on tax remissions.

Photo of Mr Max Madden Mr Max Madden , Sowerby

Since the hon. and learned Gentleman has attempted to lift the lid off Pandora's Box a little and tell us about Conservative policies on direct taxation, and since he is talking so airily about possible savings that could be made at the margin of public expenditure, may I ask him to say specifically whether it remains official Conservative policy to abolish the National Enterprise Board and to oppose the temporary employment subsidy? May we have a reply on that and will the hon. and learned Gentleman say whether he considers that that expenditure is on the margin?

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

I am grateful to the hon. Member. He tempts me to trespass on to the subject of the next debate to be instigated by my hon. Friend the Member for Harwich (Mr. Ridsdale). Perhaps he should wait and hear the views expressed in that debate. Before the hon. Gentleman feels that he has scored a cheap debating point, let me say that I shall come to the role of the National Enterprise Board before I finish but I shall do so in my own time and not as a result of the hon. Gentleman's intervention since I do not understand him to have contributed to this debate so far.

Photo of Mr Max Madden Mr Max Madden , Sowerby

I have been listening to the debate.

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

I congratulate the hon. Gentleman and hope that he has profited from the debate. I hope, too, that I shall profit from his contribution, if he makes it, on the next debate.

I come to the last and possibly the most important point to be taken into consideration when we contemplate how tax remissions can be funded. A point touched upon with considerable eloquence by some of my hon. Friends, particularly my hon. Friend the Member for Gloucestershire, South (Mr. Cope), is what I shall call the "buoyancy factor". I do not believe that the Government have any conception of the amount of enterprise, effort, capital and human resources that are diverted by the present weight of the tax system. I do not believe they have any conception of the number of young men of enterprise, drive and responsibility who. for instance, have for a period of time gone to make their living in the Persian Gulf because they have recognised that they will never be able to build up capital or even provide for their families in any reasonable sense on after-tax incomes in this country.

I do not expect that the Government will come forward with a serious programme of tax-cutting because we know that they are just not in the business of cutting taxes. But a serious programme of tax-cutting, such as my hon. Friends have outlined and such as I hope I have outlined in broad terms, would liberate an enormous amount of energy, enthusiasm and capital as well as even more income to be taxed. I believe that the law of diminishing returns has operated in the area of direct taxation for many years.

It is idle for "Labour's Programme 1976" to dwell once again on the question of tax avoidance and tax evasion. Of course, we all deprecate tax avoidance and tax evasion. But we cannot operate against the grain of human nature. We cannot expect people cheerfully to pay the amount of direct taxes imposed by this House against the background of inflation over the past three years.

What will the Government do? As we glean from the Press, but not so far from any ministerial statements, there is to be higher public spending and the regeneration of British industry. I do not want Labour Members to believe that we do not accept that the social wage is necessary and desirable. We can all argue about what its extent should be and in what areas it should be concentrated. We recognise that there must be a safety net, too. But a Government do not generate thrift, enterprise and risk-taking by taking our money and paying it back to us as a social wage less the very considerable costs of administration.

The "regeneration of British industry" are fine words. It is as though the Chancellor of the Exchequer were some kind of fiscal Voronoff who would only need to buy the most expensive monkey glands and implant them in British industry. We on this side know that this is not the way that industry is regenerated. We do not get a measurable return in output in terms of jobs and profit for a given input of public money. Perhaps the Minister, when winding up the next debate, will have a different point of view. I regret that convention win not allow me to reply to him.

But we have a different philosophy and a different approach. We believe that on the whole investment decisions are best left to the individual entrepreneur. We believe that money fructifies best in the pockets of the business man and private individual, leaving them to save, invest, take risks and take commercial decisions. We do not regenerate British industry by flinging millions, even billions. of pounds at the British Steel Corporation or putting it into the National Enterprise Board or in the profligate and partisan hands of the tight hon. Member for Bristol South-East.

I recall that there was once an hon. Member of this House—the then hon. Member for Buckingham, who, thank heavens, is no longer with us—who was described by a Board of Trade inspector at the end of an inquiry as not fit to hold office with a public company. I may not have repeated verbatim the words which the Board of Trade inspector used. I often feel that if the right hon. Member for Bristol, South-East were operating in the private sector a Board of Trade inspector would long ago have been put in to investigate his activities and that the verdict would have been "not only incompetent but highly partisan".

What we need is an enterprise and wealth-creating package. I believe that this is the choice before the country and this House. I believe that my hon. Friend the Member for Worcestershire, South has done a signal service to the House and to the country by opening up this great debate. I challenge the Government to declare their intentions and to give the House—not just the TUC or the Liberal Party—the opportunity and the time to debate them.

2.31 p.m.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

I add my congratulations to the hon. Member for Worcestershire, South (Mr. Spicer) for bringing forward a motion which raises a very important debate. Unfortunately, the contributions from Opposition Members, with one exception, have not really come up to the level demanded by the importance of this subject. As my hon. Friend the Member for Birmingham, Handsworth (Mr. Lee) said, we have had a kind of Poujadist level of debate from the Tory Party on this important issue.

The hon. Member for Worcestershire, South thrilled the Treasury mandarins a little, because we had assumed that he was not proposing a tax cut of almost £8 billion in the fiscal year 1978–79. We had assumed that he would have been slightly more modest, and would have perhaps argued for a programme of tax reductions on that scale over a period, but he has suggested tax cuts of between £7 billion and £8 billion in 1978–79.

This thought had not occurred to us, but I shall certainly pass it on to my right hon. Friend the Chancellor of the Exchequer, who, when he prepares his Budget in the spring of 1978, will no doubt take it into consideration. There were some difficulties with the hon. Gentleman's arithmetic, because he assumed that a large proportion of the VI billion would come from oil revenues. He should recognise that in 1978–79 oil revenues will be comparatively small. At this stage it is extremely difficult to forecast what the revenues will be from corporation tax, petroleum revenue tax and royalties in the fiscal year 1978–79. I would not like to give the House any figure under the pretence that it would be very accurate. As the House will appreciate, oil companies are allowed various deductions from the computing of petroleum revenue tax, in particular, and it is difficult at this stage to come up with a figure. But if one were to give a figure for 1978–79 revenue from royalties and taxation, it might not exceed £1 billion. Therefore, the hon. Member for Worcestershire, South is talking of a difference of almost £7 billion with regard to 1978–79.

I appreciate that the hon. Member raised this motion as a matter of general debate—

Photo of Michael Spicer Michael Spicer , Worcestershire South

May I ask the Minister two things? First, why does his office concur with my calculations of £7·5 billion? The Minister is £500 million out. Secondly, has he taken into account at all the revenues that will have been collected, modest though they are, before the period in question?

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

I do not want to pursue this, but the £7·5 billion of which the hon. Gentleman speaks does not deal with incomes between £25,000 and £30,000. That explains the difference between the figures that he mentioned. But even if it is £7·5 billion, the point that I am making is that the total oil revenue in 1978–79 will be small in comparison with that figure.

As for the accumulation of oil revenue up to the beginning of the fiscal year 1978–79, there is no way in which the Government can use that money for the 1978–79 fiscal year. We have to have ad accounting year, unfortunately, and the fiscal year must come to an end. I make that point so that hon. Members can appreciate the enormity of what the motion seeks.

Again, one should appreciate that from 1980 onwards the total revenue from North Sea oil, by which I mean tax and royalties, is likely to be, at 1976 prices, about £3·5 billion in one year. The hon. Member for Worcestershire, South is asking for a tax reduction of £7·5 billion. I mention those figures to show what he is seeking.

The hon. and learned Member for Dover and Deal (Mr. Rees) sought at the beginning and at the end of his speech to make the point that the Conservative Party was not asking for a binge and was not saying that we should spend all this money on taxation. However, his hon. Friends and he himself, in three-quarters of his speech, went along with the binge. We heard only one speech from the Conservative Benches that sought to look at this issue in slightly more profound terms than the kind of Poujadist terms that we got from other Opposition Members.

The hon. Member for Gosport (Mr. Viggers) made a very important point when he said that we were discussing spending these revenues but that here we had what in lawyers' terms was known as a wasting capital asset. He made the very important point that we should not think in terms of spending income from a wasting capital asset and that something had to be put back to replace the depreciating value of that asset.

Photo of Peter Viggers Peter Viggers , Gosport

The hon. Gentleman is very flattering to me. If I have managed to reach that conclusion by myself, what have the Government been doing for four years?

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

There are some members of the Government and of the bureaucracy who think about these matters from time to time. I am sorry if I was very flattering to the hon. Gentleman. I did not mean to harm his chances of advancement in his party. But he made a very important point. I am glad that he made it, because none of his colleagues seems to have taken it up.

In response to the question put to me by the hon. Member for Gosport, I turn to some suggestions about the way in which the Government view this issue and how best to use these benefits from the North Sea. However, perhaps I ought first to say that we should not forget that the resources of the North Sea benefit us in two ways. Revenues flow to the Government through taxation and royalties, and the balance of payments is improved. In some respects, these are two separate issues.

The benefits to the economy from the North Sea sector will build up rapidly from now on. Oil has only just begun to come ashore but, during 1977, the output of the North Sea fields will amount to nearly half the nation's requirements and, on present forecasts, we should have eliminated our net oil import bill by 1980. If, for example, the real price of oil were to remain at its current level, the addition to the gross national product arising directly from oil production should be between £3 billion and £4 billion in 1980, again measured in 1976 prices, and around £5 billion in 1985. These figures are roughly the equivalent of 3–4 per cent. and 5 per cent., respectively, of our gross national product in 1976.

Our underlying balance of payments position is likely to be improved as a result of the oil programme by about £5 billion in 1980, rising to £7 billion-£8 billion in 1985. These figures are expressed in 1976 prices and again assume that the real price of oil remains constant.

Another important aspect is that the greater part of the benefits will accrue as additional tax revenue paid to the Government. During the early years of oil production, companies will be able to set off their development costs against profits. Government receipts in the form of corporation tax, petroleum revenue tax and royalties from the North Sea sector will be comparatively small.

The total amount which may come in from that source over the period 1976–80 will be perhaps £5 billion. That is the total that we expect in receipts up until 1980 on present estimates. Once we get to the 1980s, we can expect, again at 1976 prices and in present circumstances, about £3·5 billion to come in annually.

There is considerable uncertainty about the future course of oil prices. If oil prices were to rise faster than prices generally, the income from oil production would be higher. But this would benefit us only to the extent that we were able and willing to become net exporters of oil. Higher oil prices might adversely affect economic growth in other countries, and thereby worsen the outlook for our non-oil exports. What is more, North Sea oil does not represent a permanent annual addition to the nation's resources. Within about 15 years or so, on present assumptions, the oil trade balance could once more be in deficit.

With better prospects for the balance of payments, the economy should be able to grow faster than would otherwise have been possible. And the additional resources which that extra growth will make available could be considerably greater than the resources directly attributable to the North Sea. So the benefits of North Sea oil depend not just on how the additional Government revenues are used but on how we manage the economy and how the economy responds to the changed circumstances which the oil creates. The choices facing us are, therefore, bound up with the overall management of the economy in the years ahead.

The second reason why there can be no simple choice, even if we focus exclusively on Government revenues, is that it would make nonsense to decide now how the extra revenues were to be used for a period which can and will extend to the end of the century. Looked at in this light, the motion is too short-sighted and simplistic, and I do not think that these matters can be decided on a once-for-all basis in the way that the hon. Member for Worcestershire, South suggests.

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

In the light of what the hon. Gentleman has just said, are we to expect a Green Paper on this subject? If so, when?

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

My right hon. Friend the Prime Minister made clear in his speech at Aberystwyth that the Government would he publishing a discussion document on the subject. We shall do our utmost to produce it as soon as we can.

Photo of Michael Spicer Michael Spicer , Worcestershire South

Why should it be long-sighted of the Government to initiate discussions but short-sighted of the Opposition to do so?

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

It certainly is not short-sighted to do that, and I have commended the hon. Gentleman on his motion. What I criticised was the sort-sighted way in which he tried to deal with this fundamental problem.

As is their wont, Opposition Members have concentrated mainly on taxation, which is always an obsession with the Conservative Party. Let me again make it clear that this Government believe that the levels of direct taxation and certainly the marginal rates at every level of income are too high and that it is our intention to reduce the level of taxation in that regard. I believe that the tax profile, if I may put it in that shorthand way, is not a very sensible one in the light of our needs as a country, our need to attract foreign investment and our need for the economy to grow.

But marginal rates affect people at the top and people at the bottom. The hon. and learned Member for Dover and Deal sought some kind of ex cathedra statement from me about the basic rate of tax. I do not know why he keeps going on about it. Everyone agrees that the point at which people come into tax is too high.

However, there are competing claims on resources, and there are other areas of the income tax profile which also are not entirely equitable and just. There is a case for raising personal allowances. There is a case for introducing a reduced rate band so that many people do not come into tax at the point of 35 per cent. There have been discussions regarding a reduced rate band, and many views have been expressed. If one were to introduce a reduced rate band of £1,000 at 25 per cent. —that is, the first £1,000 of taxable income being taxed at the rate of 25 per cent. —the cost in terms of loss of revenue to the Government would be about £2 billion.

Mention has been made of reducing the basic rate by 4 per cent. The cost of that, as the hon. and learned Member for Dover and Deal rightly said, would be £1,800 million or more, getting closer to £2 billion. There are many claims on resources and there are many aspects of our tax system which are not fair. We shall do our utmost to try to improve the profile and the system.

We have speeches from time to time from Opposition Members about comparisons with other countries. I do not know how valid those comparisons are. However, leaving aside the position in other countries, I sought the other day to find out how much tax was paid by a person earning £20,000 a year—perhaps not a typical manager, but a person working for a multinational company, with two children. I made the assumption that he had a mortgage of £25,000, which I think it fair to assume, and that he paid between 9 per cent. and 10 per cent. interest on that mortgage. His effective tax rate, assuming allowances and mortgage interest relief, would be about 38 per cent. I am not saying that that is not too high, but we tend to concentrate, for political reasons—the Conservative Party particularly tends to do this—on the high marginal rates. I took into account the allowances and especially the generous provision in respect of mortgage interest.

The hon. Gentleman has been to the United States. He will know very well that—unless the law has been changed recently—a manager in the United States cannot deduct mortgage interest, for instance. All I am saying is that to try and compare the tax systems of different countries is extremely hazardous. But we accept that at the margin the rates are too high.

The hon. Member for Worcestershire, South, in bringing the motion to the House indicated that his main prerogative was the reduction of taxation to the exclusion of other uses, if that is the right way of putting it, of North Sea oil. Perhaps the House will bear with me if I do not go into any detail on the various uses of North Sea oil, but I shall deal with one or two aspects.

Not all the choices that are relevant to the benefits of North Sea oil are choices about the direct use of revenues. For example, it does not make any sense to speak in this debate about overseas investment being a direct call on North Sea revenues. As my right hon. Friend the Chancellor of the Exchequer has made clear, the Government intend that North Sea oil should be used to the benefit of the United Kingdom economy. If North Sea oil were to be used partly to expand overseas investment it would be a call on the balance of payments and on domestic resources generally, and not on Government revenues.

It never ceases to surprise me, having been in the House for about seven years, that whenever there is any money about, the Conservative Party and the forces behind it always seek to invest it outside this country. I do not know why that is so, but the cry of "overseas investment" is there immediately. Perhaps it is the bankers and the stockbrokers behind them who seek this. There certainly seems to be—I do not understand why—considerable keenness on the part of the Tory Party to invest the money abroad.

I accept entirely that there may be cases where overseas investment is justified, but I suggest to the Conservative Party that in view of the fact that this country's productivity and productive capacity at the moment, especially its productivity, is very much worse than that of many other countries, it should first consider whether we can afford the amount of overseas investment which it seems so eager to have.

Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal

The Minister of State has made a very partisan and only partially accurate statement. Does he not recognise that a great proportion of our overseas investments derives from the reinvestment of the profits earned overseas and does not represent a direct outflow of money from this country?

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

Of course, I never suggested otherwise for a moment. Indeed, I know as well as the hon. and learned Member does that we have an Exchange Control Act. I am perfectly aware how this investment can be financed. I did not say that the overseas investment that has been financed abroad was necessarily a bad thing. What I said was that whenever there is a bit of money around—here we have a bit from the North Sea—the immediate cry from the Tory Party is "Let us invest it overseas". That seems to me to be a very irresponsible way of reacting.

Photo of Peter Viggers Peter Viggers , Gosport

In all humility, perhaps I may say that that may be a valid point to put to the Merthyr Tydfil annual Labour Party rally but it is not a point that a Treasury Minister should make at the Dispatch Box.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

The hon. Gentleman made a good speech, but he is now becoming pompous. I suspect that the Merthyr Tydfil Labour Party and the Llanelli Labour Party understand these matters very well—sometimes better than the collection of stockbrokers and bankers who sometimes pronounce on these matters in the City of London.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

Make a Treasury Minister's speech. Come on.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

The hon. Gentleman is enjoying my speech.

I shall now deal with the question of overseas debt repayment and say, as my brief says, that here we have much less of a choice. The loans that we have incurred will all have to be repaid on schedule. The only question is whether some of these repayments might be financed by raising new loans. In order to do that, we shall have to convince the international capital markets of our sustained creditworthiness over the period of the new loans. Once our balance of payments is receiving substantial benefits from North Sea oil, the markets are likely to expect us to begin to make significant progress with net repayment of our external debt, year by year. Therefore, we should try to avoid confusing the balance of payments implications of North Sea production with the revenues paid to the Government.

Secondly, some of those areas that are likely to have some claim on North Sea revenues—investment in manufacturing industry and energy production—represents claims on revenues only to the extent to which they are publicly financed and supported, although the Government provide major support to manufacturing industry and, of course, energy production.

Thirdly, and perhaps most important, the options for the use of the revenues, and the benefits from North Sea oil more widely, are not mutually exclusive choices. Indeed, to a large extent they are interdependent and mutually supporting. For example, a controlled expansion of the economy is vital to revive industrial confidence and investment, and tax reductions will almost certainly be needed to bring this about. Yet at the same time, the Government can help industry to invest both directly and through the National Enterprise Board and the regional agencies, and investment by the nationalised industries will continue to be vitally important. Both my hon. Friends mentioned the coal industry, which is vitally important in replacing the energy that will run out in the North Sea towards the end of the century.

In this way, there can be little doubt that part of the North Sea revenues will need to be set aside for rebuilding our industrial base. Again, there would be no point in rebuilding our industrial base unless we ensured that we had adequate and secure supplies of energy when the oil ran out. None of our objectives will be achieved unless our external position is secured.

If we were to embark upon the kind of tax cutting exercise proposed in the motion—I take it that the official Opposition are not endorsing it—my fear, apart from the social consequences, would be that there would be no guarantee that the money would go into industrial investment. There would be no guarantee that it would not go into imports. That has happened before in the British economy. There is no way of knowing that we would not be flooding our country with consumer goods not even produced in this country.

Hon. Members have talked about public expenditure. Frankly, if the choice were between capital public expenditure projects, such as new hospitals and roads, and improving infrastructure—I am not saying that that is the choice, because it is not as simple as that—and greater imports of German washing machines and Japanese motor cars, or whatever else, it would be very irresponsible for us to embark upon a tax cutting exercise that would turn our balance of payments again into deficit and one that would ensure that Britain was flooded with imports of consumer goods. That is what could happen if we had the kind of reduction in taxation that the hon. Gentleman requests.

The hon. Member for St. Marylebone (Mr. Baker) keeps muttering. If he has anything to say, perhaps he will get up and say it.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

We have just been hearing the sort of brief that Treasury Ministers have always been given. The Minister has not told us anything new about the Government's thinking on North Sea oil. He has used phrases such as "the regeneration of British industry" and "restructuring our industrial base". How will he set about this, and where? In which industries will he set about it, and how will he establish the wealth-creating industries here? We believe, as we have expounded in our speeches, that the philosophy should be to give the people the choice so that they can do it. To some extent it would find its own level. However, the hon. Gentleman has not been specific at all as to how this money should be used.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

The hon. Gentleman said quite clearly that he wishes, through reduced taxation, to give people the choice. I am saying that we shall have to be sure that that choice is a sensible choice, because we are dealing with a capital asset that will depreciate over 15 or 20 years. I was merely wondering whether that would be a sensible thing to do or a sensible choice if most of the money Were to go into imports of consumer durables, for example.

In conclusion, we consider that the choices that the North Sea offers and the policy that will draw the greatest benefit from North Sea oil will involve a mix of options rather than one panacea for all the economy's ills, such as that proposed by most Conservative Members who have spoken in the debate today. As I have said, the laying down of guidelines for using the oil benefits within the framework of economic policy generally must await the outcome of the debate on the issues involved.

I again congratulate the hon. Member for Worcestershire, South on bringing forward the motion before us. It concerns an important matter which will no doubt be debated very often in the House over the next few months.

2.56 p.m.

Photo of Michael Spicer Michael Spicer , Worcestershire South

I should like to exercise my right of reply to the debate, but I shall do so briefly because several hon. Members wish to take part in the debate on the second motion before the House today.

My hon. Friend the Member for St. Marylebone (Mr. Baker), in a superb speech, reminded me that we have been breaking virgin territory in this debate in as much as we have been discussing for the first time specifically how we might use the revenues from North Sea oil.

As my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) mentioned, one of the most interesting things that has come out of the debate is the very deep philosophical divide and the division between objectives that exists between Opposition Members—whether or not they would agree with the specifics of the motion—and Labour Members. The hon. Member for Fife, Central (Mr. Hamilton), for instance, raised the whole question of the use of North Sea oil in a massive regeneration of British industry. That kind of philosophy was supported by the Minister of State. That is one point of view. Our point of view is diametrically opposed to it. The role of Government is not massively to invest in industry but, to use the phrase of my hon. Friend the Member for St. Marylebone, to act as a catalyst and a spur and to provide the right environment in which people will invest and work.

We all recognise that on the Labour benches there is a fundamental mistrust of human beings. They do not trust people to spend their wage packets as they wish, or to invest them if given the right kind of environment. There is that gap that exists.

Another theme running through the debate advanced by Labour Members is that we should continue to spend our depleting national resources. We on the Conservative Benches tend to take the view that we should do whatever we can to increase the national resources, so that at a later stage we shall have more resources to spend when we need them.

The Minister of State predictably supported and encouraged the prejudices on his own side of the House. He did not answer the specific point relating to the rates of personal taxation. He was asked about that matter by my hon. and learned Friend the Member for Dover and Deal not only on this occasion but last week. It is no good the Minister repeating today that the Government intend to reduce taxation. As early as April this year in the Finance Bill proceedings they said that they intended to reduce personal taxes from 35 to 33 per cent. but we still have not had that promise implemented. Therefore, statements of intent do not carry much weight.

In deciding whether to press the motion I am guided by the modest words and statesmanlike manner of my hon. and learned Fried the Member for Dover and Deal. I am willing to enter into negotiations with the Government on how we might finely-tune the motion—another phrase that is used these days—but 1 do not intend to withdraw the spirit behind the motion because the intention is clear.

My hon. Friends the Members for Burton (Mr. Lawrence), Gloucestershire, South (Mr. Cope) and Gosport (Mr. Viggers) all stressed the fact that we in this country are heavily taxed, and there is no doubt about that. Since we as a nation have tried a basic Socialist approach involving high rates of taxation, which are political taxes, and since that activity has not been accompanied by any singularly obvious economic success, why do we not adopt the other approach of applying some of the lower tax levels that exist in the world?

Over a period of time we should use our resources and seek to have a system involving relatively low taxation. We should leave the matter to the good sense of the people and should try to restore faith in human capacity. The advent of North Sea oil provides the opportunity to do something about the situation, and that is one of the purposes of this motion.

Question put and negatived.