Orders of the Day — Taxation

Part of the debate – in the House of Commons at 12:00 am on 21st February 1978.

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Photo of Mr Terence Higgins Mr Terence Higgins , Worthing 12:00 am, 21st February 1978

I understand that point. It is the main issue that I want to deal with in my speech, but I have one or two preliminary remarks to make about the structure of taxation before I come to that.

If one considers the end of our period of office and the beginning of that of the Government it is necessary to remember one necessary element, namely, that the danger that the stop that took place in the spring and summer of 1974 was taken by industry in particular and those concerned with investment decisions as a stop of the traditional sort. I do not believe that that is so, I believe that it was due to the oil crisis and the effects of the miners' strike. Hon. Members on both sides of the House do themselves no service if they believe that stops of that sort are inevitable, because if they do that they may formulate policy in the wrong way for the future.

My final point on that aspect of the Financial Secretary's speech is that the inflation from which we suffered from October 1974 on was due to a tremendous extent to the wild wage explosion which the Labour Government permitted to take place on their coming into office, and particularly between the two elections in 1974, when there was no need for them to do that. If they had taken the correct action and if the present Leader of the House had not extended to surface workers the excessive wage claim settlement by the miners, with all the repercussions that that involved, the situation would have been a great deal better than it was. We are still suffering from that gross irresponsibility by the Government.

I want to turn now to one or two aspects of taxation, and in particular its structure. It is right that we should get back to a single rate of VAT, and I believe that the 10 per cent. rate that we originally introduced has a tremendous amount to recommend it. It is simple and furthermore it would give the Chancellor more scope for reducing direct taxation in the Budget. The hon, Member for Perry Barr surprised me, because he seemed to take the case of a particular individual with an income of about £13,000, allow for a change in his income and tax, and then make no allowance for the effect of inflation on the rest of his income. In absolute terms that would substantially reduce the real figure.

I am surprised that there has been no reference by the Financial Secretary or anyone else to Professor Meade's committee dealing with a change in the taxation system. Perhaps the Minister of State will refer to it later. I had the advantage of attending the professor's first lectures when he became professor of political economy at Cambridge. One cannot dispute the record of his analysis and the interest which the structure generates from an academic point of view. Although there are advantages in improving the position of the Stock Exchange and the mobility of capital, I have considerable doubts about the way in which Professor Meade seems to envisage exchange control as a permanent feature of our economy. The prospect of a planned 10-year period of tax reform is not one that I view with a great deal of equanimity. I doubt whether the Financial Secretary would disagree with me.

Looking at the overall structure, however I think that we can all agree on the paramount need to reduce direct taxation. I was surprised that there was no reference by the Minister in his opening remarks to the successful CBI conference which I attended as a delegate a few months ago, or to the pleas by the CBI for a reduction in the level of direct taxation, particularly for middle management, where differentials have been squeezed disastrously. Even the hon. Member for Coventry, South-West would be prepared to accept that this might have serious effects on the general level of incentive for management and the carrying of responsibility

I turn now to the more technical question of what scope there is for tax reductions. I have suggested that a change in the VAT rate should give more scope for dealing with direct taxation, but we have to consider carefully the high level of unemploymentßžI think everyone will agree that it is unacceptably highßžand the waste of resources that that involves, and the danger of a resurgence of inflation, which in time would endanger employment even more.

I believe that a difficult technical debate has been taking place between the so-called monetarists on the one hand and the so-called neo-Keynesians on the other. It is puzzling that so many of those engaged in this debate seem unable to understandßžI think that Patrick Hutber, in the Sunday Telegraph is a classic caseßžthat it may be possible to use the two methods to fight inflation and reduce unemployment and even to raise the general standard of living. I consider myself, matters. I have always believed that both monetary and fiscal policy are useful tools for helping to manage the economy. It is on that point that I want my concluding remarks.

It seems that in this technical debate a false dichotomy has been created which is crucial to our management of the economy. False dichotomies have existed between those who draw a sharp distinction between monetary policy and demand management. Both of those dichotomies are extremely dangerous if we are to get the right answer and establish what scope there is for reducing taxation. This is, after all a, crucial question at present. I disregard completely the rash and wild statement of the Liberal spokesman in this respect.

Both monetary and incomes policies have a role to play but it all depends on what is meant by "incomes policy". I feel that there is no way in which one can govern and run the British economy without having an incomes policy for the public sector, including the nationalised industries. That is so whatever one may say about free collective bargaining, and that can mean a great many different things, as we all know. But it is essential that the Government should take a lead in setting the level of pay settlements, preferably by the system of de-escalation employed by the Conservative Government, which reduced the rate of wage and price inflation by more than half over the first 11 month that we were in office. If one does that, it goes hand in hand with sensible fiscal and monetary policy, and one needs to use all three if one is to succeed.

I accept that if the present Government had not taken the line they did, after the wild wage explosion when they came into office we would long since have been in a quite disastrous situation. In spite of the stringent monetary policy that the Government have been pursuing in recent month, at the instigation particularly of the IMF I do not believe that that policy alone would have been sufficient to reduce the level of wage claims in a number of specific cases in the public sector where it has been necessary for the Government to stand firm. The Government have a responsibility to stand firm, though I do not accept the constitutional impropriety of the present system of black lists.

I still believe that it is wrong that in some areas, such as the hotel industry, the Government should have allowed wage increases of between 15 per cent. and 19½ per cent. That is completely unfair. The monetary and income policy side taken together give scope for sensible management of the economy.

This brings me to the other dichotomy, between monetary policy and demand management. Here the matter becomes rather more technical and raise the extremely important question of when it is safe to reflate. In some quarters "reflation" has become something of a dirty word, and synonymous with inflation. That is a dangerous idea. It is dangerous for us to get into this semantic jungle.

I do not believe that reflation is necessarily identical with inflation. There are differences between the situation with regard to supply and demand—I have great faith in supply and demand—in an individual market and supply and demand in the economy as a whole. If there is excess capacity in the economy as a whole and one increases aggregate demand, there is initially an increase in output rather than in prices. Gradually both go up together, and finally prices alone go up. This means that there is some scope for reflation in certain circumstances. The crucial question now is whether the circumstances are such that there is that scope.

Here we need to rethink our views about economic management. I was very impressed by an article by Mr. David Kern some while ago, in the National Westminster Review, headed: An assessment of Britain's medium-term financial prospects". Mr. Kern suggested that we should have to accept quite explicitly that the existence or otherwise of spare physical capacity, however significant at the level of the industrial plant or even the industrial sector, cannot be a useful operational concept against which to formulate national policies. He also suggested that in a sense there was some kind of monetary sub-ceiling, below the capacity ceiling, through which it was dangerous for one to go.

If that is so, we must consider what would be the effect of tax reductions on the public sector borrowing requirement and, in turn, on the money supply. What worries me is that during the past four years we have had a virtual stagnation in GNP and presumably—although it is always difficult to establish this—a significant increase in productive potential within the economy. Therefore, the question is whether it is safe for the Chancellor to reflate without running the danger of inflation and unemployment again, whether a reduction in taxation of the order that has been suggested—of about £1.500 million, which would virtu- ally take us back to the position of about a year ago, allowing for fiscal drag—would run us through the monetary guidelines that have been laid down.

If it is at about that point that we run through the monetary guidelines, we are effectively saying that the limits, because of the restraints on the money supply that the Government have annouced, are such that there is no prospect of reducing the level of unemployment below present levels and no real prospect of achieving further economic growth in real terms. I hope that the Minister of State will say whether he believes that a reduction of that order—I am not asking him to say whether he will make it; he knows that I am not so naive as to do that—would be consistent with the maintenance of the present monetary guidelines.

My belief is that it probably is at about that level of tax reduction that one runs into problems with the monetary guidelines. The crucial question then is to what extent the Government can finance the deficit and avoid an increase in the money supply by selling debt to the on-bank public. This, in turn, has crucial implications for interest rates. We are in an extremely difficult position if we are to have restraints placed on the money supply which restrict reductions in taxation in such a way that there can be no real increase in aggregate demand and no real growth in the economy. This is the crucial matter that we must face.

It is sometimes said that money supply should be neutral from now on. There were certain Press comments over the weeked suggesting that the increase in money supply should be sufficient to be neutral and finance the increase in wages plus growth at, say, 3 per cent. The problem then always is: how is it possible to ensure that it goes to real growth in output rather than bigger than expected increases in money wages? That is always a dilemma. I hope that we shall have from the Minister of State tonight an indication of the prospects that he sees for real growth in the economy and whether he believes that it can be achieved consistent with his monetary targets.

The Financial Secretary made a remarkable statement towards the end of his speech. He said that democracy could succeed only in a country with positive economic growth. I believe that that is an exact quotation from what he said.