Orders of the Day — Finance Bill

– in the House of Commons at 12:00 am on 27th April 1978.

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Order for Second Reading read.

Photo of Mr George Thomas Mr George Thomas , Cardiff West

Before I call the Chief Secretary may I inform the House that there is a long list of right hon. and hon. Members who hope to catch my eye? There are five Privy Councillors on one side of the House who hope to catch my eye. I intend to follow the same practice as my predecessor, Mr. Speaker Selwyn Lloyd, and not call two Privy Councillors from the same party following each other.

3.55 p.m.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

I beg to move, That the Bill be now read a Second time.

Before I turn to some of the major parts of the Bill I wish to say a few words about the general shape of the tax measures. The Shadow Chancellor, the right hon. and learned Member for Surrey, East (Sir G. Howe), has said that for most wage earners the income tax cuts in the Budget will mean very little. Some newspapers took their lead from him and said the same thing. I have one here which said: For most wage earners—or at least, for most of those who read this paper—the income tax changes introduced by the Chancellor last Tuesday are not going to make all that much difference. That was the Financial Times of 15th April. I should imagine that that statement may well be correct, that not too many readers of the Financial Times got a great deal out of the Budget. But they would have got something, most of them quite a bit. On the whole, for most average taxpayers—the lower-paid taxpayer in particular—the Budget gave rather more than the somewhat crude arithmetic that the right hon. and learned Member felt it necessary to use to prove that the actual benefit to an average man was 14p. They were his words—

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

The right hon. and learned Gentleman said £14.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

He changed that, following my hon. Friend's intervention, to 14p. We can understand the reasons why the right hon. and learned Gentleman felt it necessary to try to prove his crude arithmetic in this way. When the Shadow Chancellor is under pressure to prove that what has been called a soft, cuddly exterior hides a tough Tory heart, the arithmetic cannot come much cruder. It was certainly crude on that occasion.

If the tax reliefs on the reduced rate band and the threshold had been doubled by another £2,100 million of relief I assume that the right hon. and learned Gentleman is not suggesting that that would have meant only another 14p. That point exposes the right hon. and learned Gentleman's arithmetic pretty well. His calculations—this is clear—counted the reduction in the child tax allowance, ignored the increase in family income from child benefit this April and in November, and deducted the increase in national insurance contributions which is a contribution to provide a benefit for the taxpayer through a supplementary earnings related pension. The real benefit to the average man and his family, as a result of the decisions affecting income tax and child benefits, will be £3·64 a week and not the bogus 14p the right hon. and learned Gentleman tried so hard to prove with his pretty crude arithmetic.

I willingly concede that we could have spread the reliefs less thinly. We could, to use the right hon. and learned Gentleman's method of calculation, have done everything by way of putting half on the basic rate—2p—and half on the threshold. The consequence of that, using the right hon. and learned Gentleman's calculations, would have been that for a man on £10,000 a year there would be extra relief of £2·09 a week. However, for a man on £40 a week it would have meant an extra 3p while a man on £60 a week would have lost 28p.

We could have done even more and done what the right hon. and learned Gentleman seemed to be implying and put it all on the basic rate, having a 30p basic rate for the amount that we have used in the Budget. The result of that, again using the right hon. and learned Gentleman's calculations, would have been, for this "average" man with two children under 11 on, say, £10,000 a year, an increase in weekly net take-home pay of £4·50. For a married man with the same responsibilities on £40 a week there would have been a loss of about £1 and for a man on £60 a week a loss of about 40p a week. I do not think that the Tory style of spreading the tax relief would appeal to the country at large. It would be pretty thin for those earning £40 or £60 a week.

On the other hand, we could have done what seems now to be being proposed by the Opposition—cut the basic rate in addition to the present reliefs. We do not know yet exactly what the Opposition will propose. A cut in the basic rate of 1p would provide nothing for the 4 million lower paid now in the 25 per cent. reduced rate band. Even the average man put forward by the right hon. and learned Gentleman would get only 32p a week. That is what would happen for 1p off the basic rate in addition to what we have in the Bill.

All of this is to be offset by increasing the rate of indirect taxation. There is some confusion in the minds of the people about what is meant by the indirect taxes which would be increased. Many would not mind increases in indirect taxation on jewellery, furs and so on. However, the Opposition are proposing to reduce tax on those and increase it on ordinary clothing, bedding and furniture. Those are the offsetting savings that the Opposition would have us make.

I read the Press carefully and I know that there is a serious debate in the Shadow Cabinet about how irresponsible it should be. I am told that the hawks and the doves have been battling it out. I must say that from where I stand I would have thought of other kinds of animal to talk about.

But we are now told, according to the Press, that the doves have won. The Shadow Chancellor is a strange looking dove. The Conservative Party has said that the borrowing requirement is too high. It now seems that if the Conservative Party reduced the basic rate by 1p and did something about the top rates of income tax and investment income, it might add only £½ billion to the borrowing requirement instead of some of the more extravagant propositions being bandied about of over £1 billion.

According to what I read, there are some right hon. and hon. Gentlemen on the Tory Front Benches, and even in the Shadow Cabinet, whose consciences twinged a little at the prospect of adding £½ billion. They thought that that might be a little bit irresponsible. However, they thought that they would relieve their consciences by saying "We voted against the public expenditure White Paper. That is a sufficient offset." Few people would accept that voting against the public expenditure White Paper is a substitute for spelling out where the expenditure cuts would fall. Even if the Shadow Chancellor were to tell us exactly where he would cut public expenditure, that would not be enough to compensate for adding the £½ billion to the borrowing requirement. He knows that it would be wholly impracticable to make those cuts effective in 1978–79.

No doubt the Shadow Chancellor will spell out where he would make the cuts. He has told us in which areas he would cut public expenditure. He talked about £3 billion in industrial transfer payments. I would be interested to know how we could make the major elements in that sum effective in 1978–79. One of the biggest sums—£510 million—is for regional development grants. Does the right hon. and learned Gentleman seriously suggest that the Conservative Party would cut the regional development grants? Even if it did, is it suggested that those cuts would be effective in 1978–79? The answer is that even if the Conservative Party cut them from next week, most payments made in 1978–79 will be in respect of grants agreed previously.

Another of the big items is the £475 million for special employment measures. Even if it were the policy of the Opposition to remove those altogether—and they have not told us that it is—it would not be practicable to do it this year. Another of the large items is £340 million for training, including, TOPS and expenditure by industrial training boards. Is it suggested that even if the Tory Party were willing to reduce that sum, such a cut could be made effective and practicable in 1978–79? Nobody on the Opposition Front Bench is prepared to tell us that such a step is practicable. That is because they know that it is not. That is why the talk of adding to the borrowing requirement is irresponsible.

The hon. Member for Owestry (Mr. Biffen), according to a report in The Daily Telegraph, said that public expenditure cuts were essential pre-condition for reductions in taxation. I see the hon. Gentleman nodding. He would not dispute that that is what he said. The Conservative Party could not do that in 1978–79. There is no way in which the Conservative Party can wriggle out of the charge of financial irresponsibility which, I believe rightly, is laid at its door. This is a point that is troubling many Conservative Members. They must be concerned, together with many former Conservative statesmen, who must look with anguish as their successors recklessly disregard the national interest, as they define it.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

The Chief Secretary may have heard that the Liberal Party wishes to cut direct taxation and to increase indirect taxation, particularly on alcohol, tobacco and, possibly VAT. If all 13 Members of the Liberal Party were to prevail against the Government in the Division Lobby on the cuts in direct taxation, would the Government facilitate them by increasing indirect taxes in view of the very strong plea that the Chief Secretary has made to preserve the borrowing requirement intact?

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

That is, not surprisingly, typically irresponsible of the hon. Gentleman. It is a hypothetical question whether we shall lose the vote. As the hon. Member for Cornwall, North (Mr. Pardoe) constantly tells me in the House, there are only 13 Members of the Liberal Party. They do not command a majority.

If there is a majority of responsible hon. Gentlemen opposite, I hope that that hypothetical question asked by the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) will not arise, because I hope that there will be no question of carrying the kind of amendment that the hon. Gentleman had in mind.

Photo of Mr Norman Tebbit Mr Norman Tebbit , Waltham Forest Chingford

Will the right hon. Gentleman give us a hypothetical answer?

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

I do not mind answering all kinds of questions from the hon. Gentleman, but I prefer not to answer hypothetical questions.

I should like to deal with some of the major reliefs proposed in the Bill. Throughout the Bill we have concentrated, whether on individuals or firms, on giving relief to those with modest incomes. As to investment income, there are some people who do not have very large savings, who will be paying a 10 per cent., or, in some cases, a 15 per cent. surcharge on part of that investment income. It should be clear to the House that 91 per cent. of all taxpayers with investment income of any kind will not be paying the investment income surcharge after the relief provided in the Bill. Only 2 per cent. will be liable to pay 10 per cent. surcharge and 7 per cent. only will be liable to pay 15 per cent.

Pensioners over the age of 65 will need a capital sum of £30,000—taking the average of the gross building society interest rate—before they start paying investment income surcharge at the lowest rate of 10 per cent. Those who are not 65 years of age—taking the equivalent interest rate—will need a capital sum of £20,000. For the majority of people those are large sums of money. Even those with somewhat higher sums than that—I would not suggest that one could call them wealthy—would accept that we have ensured that those with modest savings will either not pay the investment income surcharge or will pay a very small amount. I hope that the House will accept and that fair-minded people will agree that people who have retired and who are living off the income from their capital do have something to thank the Chancellor for. I am obliged to the Financial Times for saying that that is its view, and I hope that the House will agree.

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

The Chief Secretary said that £30,000 was a lot of money. Many of us would agree with that, but many people who owned a home valued at about £30,000, who have sold that house and occupied rented accommodation and rely on the income from the investment built up over a lifetime, cannot be regarded as wealthy people, because they have no other capital assets.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

The hon. Gentleman could not have been listening, because that is exactly what I said. I went on to say that people over the age of 65 with £30,000-worth of capital would not pay any investment surcharge. I am glad to have the hon. Gentleman's agreement.

Our profit-sharing proposals are set out in Clauses 41 to 48 of the Bill. We shall have ample opportunity to discuss those proposals in some detail during the odd hours that we shall be sitting in Committee. The purpose of these clauses and the schedule is to help all employees of a company, no matter how lowly paid they may be, and not just, as was frequently the case under past schemes, to help a small number of people, including directors, in a company.

The allocation of shares up to a maximum of £500 a year will not be liable to income tax at that stage. As a general rule, they will not be able to be sold within five years, with exceptions for where an employee dies or loses his job through injury, disability or redundancy. I shall return in a moment to the length of this locking-in period.

I have no wish to overstate the benefits that the scheme may achieve, but I hope that in the long run it will help to improve efficiency and productivity and, therefore, the effectiveness of the corporate sector as a whole. Few would doubt the need for such an improvement.

I want to make clear that while I see profit-sharing schemes as an important recognition of employee rights, I do not envisage that they will ever become a substitute for other forms of industrial participation. It is impossible to say what impact new profit-sharing schemes will have because we cannot know how many companies will take advantage of the new proposals.

However, in the context of the economy as a whole, at least for some time, such schemes cannot have more than a marginal impact. We know that existing schemes, without the benefit of the special tax reliefs in the Bill, affect only 500,000 employees—2 per cent. to 3 per cent. of the total work force. If, for the sake of argument, the number of employees covered in the next few years trebles or even quadruples and the average annual shareholding is about £250, the shares acquired under the scheme would represent less than one-tenth of the amount currently saved through pension funds and about 3 per cent. of the total saved by the personal sector each year, although one hopes that there will be a greater sense of participation among those in profit-sharing schemes.

To provide encouragement for growth in the long term, while not undermining stability in the short term, the legislation is designed so that companies will be free to maintain their cash flow by issuing new shares rather than using the allocated funds to buy up existing shares. A company's tax position will be the same whichever course it adopts.

It will be recognised, when all these factors are taken into consideration, particularly the need to create a genuine sense of participation, that a locking-in period of five years is reasonable. Such a time span would also help to avoid disturbance in the capital markets and, while I do not pretend that profit-sharing schemes will bring about immediate and dramatic changes in share ownership, I hope that they will make a contribution to a much-needed improvement in our general industrial performance.

I gather from the Opposition and the Order Paper that we may have an opportunity on the Floor of the House to discuss the possibility of tapering or indexation of capital gains tax. We decided against the complex schemes that would be involved in indexation and tapering and decided instead to help the small individual taxpayer again. We have done it to such good effect that few individual investors will end up paying much capital gains tax.

Our proposals will not only help the small investor but will provide much-needed simplification. The elderly who have to realise small sums of savings accumulated during their working lives will be specially helped. Exemptions for individuals whose gains do not exceed £1,000 a year will eliminate almost half the current 300,000 assessments. The cost will be limited to £15 million—compared with the cost of indexation, which would amount to £350 million. The marginal relief will enable us to repeal the complex and much misunderstood alternative basis of charge at a modest cost of £10 million in a full year.

The other major section of the Bill that I hope will help with our industrial performance is the relief being provided for small firms. Let me give an example of the sort that many hon. Members have, no doubt, had brought to their attention. It is certainly not untypical.

The managing director of a small manufacturing firm came to see me and said that there was good demand for the firm's products and that he could increase output and take on more staff, but he did not think that it was worth the risk and he did not propose to do so. I asked him why and he said that the tax system meant that it was not worth it for himself or his firm. I pursued that line of questioning and said that if he increased his output as he said he could, his firm, which was a close company, would not have to pay dividends at all. Indeed, the high taxes that he talked about would be non-existent if he was expanding as he said he could. I told him that it was likely that there would be no necessity to pay dividends and that his tax liability would be very small.

Of course, he then changed his tack and said that he could not get much out of it personally. I pointed out some of the tax advantages available to a successful small family company, not least the substantial tax-free lump sums and large pensions that were possible—even before this Budget. I pointed out the lifelong advantages that were available, especially to the self-employed, which he had apparently not heard about.

I was, of course, simply quoting from a full-page advertisement in the Sunday Telegraph of 16th April. It was headed: If you are self-employed, a pension plan offers you lifelong advantages. The advertisement said: From the moment you take out —let us call it an X pension plan; we do not want to give them an advertisement when the House is being broadcast— your contributions qualify for tax relief at the highest rate of pay.You can also vary your contributions each year which gives you the flexibility the self-employed need.While you are still working your investment grows completely free of capital gains or income tax.And when you retire you will receive a large tax-free lump sum and an income for the rest of your life. That is what is available to that sort of gentleman and it is information that is not supplied by Conservative Members when they receive the sort of complaints to which I have referred.

Photo of Mr Kenneth Baker Mr Kenneth Baker , St Marylebone

The right hon. Gentleman is talking about rewards for business. May I ask him a question that was asked of one of his colleagues earlier by my hon. Friend the Member for Oswestry (Mr. Biffen) about the Government's intention on dividend control? We did not have a clear answer earlier.

Is it the Government's intention, when the powers of dividend control expire in July this year, to bring in substantive legislation to continue dividend control? The right hon. Gentleman will appreciate that, as a result of a Left-wing amendment two years ago, the powers expire in July and a Bill, and not just an order, is required. What are the Government's intentions in this matter?

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

My intention is to continue speaking about small firms, which are what I was talking about. There is no problem over dividends in the case of an expanding small firm—whether the firm wants to pay dividends or not. My right hon. Friend the Minister of State dealt with this matter very well at Question Time and I advise the hon. Member for St. Marylebone (Mr. Baker) to reread the answer in Hansard.

When people are told that income tax and corporation tax are not the excessive burdens for small firms in general that we are led to believe, the complaint naturally switches to capital taxation and we are told, as the hon. Member for Blaby (Mr. Lawson) told us in his Budget speech, that we have a crippling total burden of capital taxation". When the hon. Gentleman talks like that, he exposes his own crippling ignorance of the subject, if he does not mind my saying so. Even if he does mind, I shall say it. The hon. Gentleman went on to talk about the crippling interaction of capital transfer tax and capital gains tax".—[Official Report, 17th April 1978; Vol. 948, c. 49–50.] One thing about the hon. Gentleman is that when he gets hold of one word, he sticks to it. He has a sort of obsession with words. He even had an obsession, almost to the extent of monomania, with me. He called me Sancho Panza five times. If it gives him relief from whatever he is suffering, he is welcome to it. I do not mind. I am happy to oblige the hon. Member.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

The Chief Secretary must learn to be a little less sensitive. If he thinks that the burden of capital taxation is not a heavy one, will he tell us which of our major competitors in Europe has a heavier burden of capital taxation than we do?

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

It is funny that the hon. Member should ask that, because I am about to give some facts and figures about this. I do not think that the hon. Member would do very well on the Government Benches. He would do better to stay where he is. When it comes to sensitivity—and I notice that he is looking very grim now—I have never yet called him a name. However, he calls me names and then, when I say that if it is his pleasure to do so he is welcome to do it, he accuses me of being sensitive. But I do not mind. In the past four years, during the passage of many Finance Bills, I have been called many names, but never before the same name five times in one speech. However, obviously it gives the hon. Member pleasure, and it is my purpose in life to give him pleasure. That is what life is all about.

I want to indicate from some of the facts about capital taxation why I talk about the crippling ignorance of the hon. Member for Blaby, and I see another Member of the Gang of Four laughing with him, so perhaps I can apply that epithet to him as well.

I take the simple case of a small business worth, say, £200,000, all the shares being owned by one man. In March 1974, under estate duty, if the owner of that firm died and left it to his widow, even assuming that the business qualified for two-thirds estate duty relief, which is quite generous by the standards applying at that time, the estate duty was £60,811. Under capital transfer tax, the widow pays nothing. If that business were left to the man's son and again qualified for two-thirds business relief, which, as I say, was generous at that time, the estate duty would have been £69,825. Under capital transfer tax, with the 30 per cent. business relief before this Finance Bill, it would have been £49,250 and, with the 50 per cent. relief £23,750.

The hon. Member for Blaby talks about the crippling interaction of capital taxation when in March 1974 there was both estate duty at higher rates and capital gains tax. But he says that it is crippling now. I am not sure whom it is crippling. The trouble is that the hon. Member for Blaby does not understand the problem.

I know what the situation was under estate duty. The sophisticated, the well-advised and the wealthy were able to avoid it. I used to advise about it. It was a very interesting and useful experience. But we are always told that small business men were too busy to be bothered with seeking to avoid capital taxation in this way, and the Opposition instead have sought constantly to mislead small business men for years.

The Shadow Chancellor was at it again recently when he took part in a very interesting radio programme called "The Jimmy Young Show" and said: If you're running a business, you begin making profits and you very quickly begin paying tax on your own income at 83p in the pound. The kindest comment about that statement is that it was made in total ignorance. In practice, it is dangerous mischief, and it is totally untrue. It does serious damage to individuals and to the national interest.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

Reverting to the Chief Secretary's period as an adviser on tax avoidance, will he say whether he was able to give retrospective advice on tax avoidance?

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

The right hon. Member is getting a bit sensitive now. In Committee upstairs we shall come to the retrospective tax avoidance legislation which is contained in the Bill, and I welcome the prospect of having the right hon. Member for Down, South (Mr. Powell) with us then. I know that if I can persuade the right hon. Gentleman, I shall know that I am doing very well, and I hope to be able to persuade even him when I take up his question.

If we do not achieve what the Bill sets out to do, there will be people using the tax system to benefit a comparatively small number of people for the foreseeable future. They will build up an industry to help a few people with very large sums of money at the expense of other taxpayers. I hope that the House will treat that problem seriously, as I know the right hon. Member for Down, South will, and I look forward to coming to that topic in due course during the passage of the Bill.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

No, I shall not give way to the hon. Member. I know that he advises the Leader of the Opposition and that he is not doing very well at it, but I do not think that the Shadow Chancellor needs any help from him.

I was talking about the problem of small firms and the mischievous ignorance of the Opposition Front Bench, especially of the Shadow Chancellor. My advice to small business men would be to ignore what the Opposition tell them about the crippling burden of taxation and to seek out the facts. Under this Bill they are provided with new and generous reliefs, and they will find that every incentive exists to expand to the benefit of them, their firms and the country. I hope that from now on even the Opposition Front Bench will stop misleading them in this respect.

Photo of Mr Norman Tebbit Mr Norman Tebbit , Waltham Forest Chingford

The Chief Secretary could help us enormously over this business of retroactivity and the tax avoidance schemes which he deplores by saying whether, either in the past or in the future, in his role as a tax avoidance expert he advised or would advise his clients that they should not take advantage of such schemes because they are immoral, unnatural or harmful to the national interest or even to those people about whom he keeps talking so self-consciously, the small business men.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

I can give the hon. Member a straight answer. I would not advise anyone to use these schemes. Indeed, I hope to persuade the House to legislate to ensure that it will not be possible in the future for those industries to continue. I cannot be straighter than that with the House, and it may be that on another occasion the hon. Member for Chingford (Mr. Tebbit) will address the question to his own Front Bench, when I hope that he will get the same answer.

What we have done in this Finance Bill for small firms applies equally to the benefits that we have provided in the Bill to most taxpayers. Most people with modest incomes will benefit from the Bill.

I said at the outset that that was what we had done. We have given the largest percentage benefit, rightly in my view—though the Opposition consider that we have spread it too thin—to the low and average paid. I doubt whether the average taxpayer would have preferred us to do it the way that the Opposition apparently prefer, judging from the figures which I gave in my opening remarks.

I believe that what we have done in this Bill and in the Budget generally is to help the majority of people. We have sought to help those with modest incomes, and we have given quite a bit of relief to those with bigger incomes as well. We have given that help in this Finance Bill and, therefore, I commend it to the House.

4.29 p.m.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

To have to sit and listen to a lecture on irresponsibility from the Chief Secretary, of all people, is an experience that we could all well be spared. He has held his distinguished office for a number of years now, but he capped his own record for irresponsibility when we were debating the Budget only a couple of weeks ago. When the ink was still not dry on the print of the Chancellor's speech, and the nation was beginning to absorb what had just been uttered, the Chief Secretary, at that Dispatch Box, began talking about another Budget coming within weeks. I do not know what kind of animal qualities the Chief Secretary reckons to be enjoying in that respect—the chirpy disregard of responsibility—but the whole record of the present Government in relation to responsibility has been of the same quality.

If we cast our minds back, for example, to the decision by the Chancellor in the summer of 1974 to come to the House in July and, with a view to influencing the outcome of the next election, with a view to influencing the retail price index, then announcing a reduction in value added tax of 2 per cent.—some of my hon. Friends voted against that—with a view to securing his re-election never mind what happened to the economy, and if we recollect the experience of the present Government in presiding, during the 12 months that followed that, over a dramatic explosion of public spending and public wages, we realise that we need no lectures from the Chief Secretary about responsibility and irresponsibility.

The Chief Secretary also sought to imply that for this House even to address itself to the shape of the Budget, even to dare to lay a finger upon the balance of the Budget upon any aspect of the taxes, was in itself irresponsible. That is to speak as though it came down like a series of Mosaic tablets which we touched at our peril.

Let me remind the Chief Secretary that any Government exist, and the present Government survive, only upon the authority of this House. Government impose taxes, change the burden of taxes or increase taxes only by the authority of this House. If that is true of any Government, it is even more true of the present Government, now standing in a minority in face of all the other parties, having lost an almost endless series of by-elections to lose the majority that they once held.

So Parliament not only has the right but it has the duty to scrutinise this Finance Bill, to propose changes in it, and to refuse to approve certain aspects of it. The Government, if they are unable to repel those changes proposed by the House, then have a duty to respond to what is done. The Government should look a little at their own responsibilities. They have a duty to respond to the changes made by this House either, as we would urge, by reducing public spending—I shall return to that in a moment—or by changing the proposals they put before the House for the tax system as a whole.

If the Government are unable or unwilling to do that, they have one perfectly clear option open to them. They can invite the electorate either to renew their authority or to replace them with a Government with fresh authority.

How do we approach the Bill on that basis? Her Majesty's Opposition have not only the right but the duty to propose changes in the Finance Bill contents if we judge that to be correct. It is only proposals that are tabled or supported by the Conservative Party that have any practical importance in the debates that will take place. The minority parties will no doubt consider them as carefully as they should—the 11 Scottish National Party Members, the 12 Members from Ulster, the three Members of the Welsh National Party, and the 13 other Members from fringes around the country who march under the banner of the Liberal Party. If all those come together and support the official Opposition and carry changes in the Finance Bill, it becomes the duty of the Government to respond to those changes.

Of course, we, in contrast to some hon. Members, in the proposals that we put forward must take account of the reality that we could very shortly be called upon to form the Government of the country, and we must make proposals that have regard to that reality. We shall not, therefore, engage in any kind of Dutch auction with the hon. Member for Cornwall, North (Mr. Pardoe). He may have his own interests for advancing proposals which go beyond those which we regard as wise.

The hon. Member for Cornwall, North and the Chief Secretary apparently conduct a dialogue together. I have some sympathy with the Chief Secretary, because he seems to remain mute in relation to these exchanges, but no sooner does the hon. Member for Cornwall, North emerge from his office than all sorts of versions are blurted out to the Press. The Chief Secretary must look back with envy to the days when he had only Richard Crossman to contend with in his contemporary diaries. But I can well understand the hon. Member for Cornwall, North and, indeed, even the Chief Secretary, because as their divorce draws closer, so they must compete with increasing frenzy for such electoral alimony as is to be gained.

We do not approach the matter in that way. We shall put forward our own proposals, and each party in the rest of the House will have to form its view about them. Nor is it possible for us to rewrite this Budget, however much we may like to do so. It is a Labour Budget, put forward by a Labour Government, and it is not possible for us, within the limits that I have described, to do more than make modest changes in it.

The Chief Secretary dwelt with some relish—which was surprising, having regard to his antecedents—on the quality of the retrospective proposals contained in the Finance Bill. Although I understand the difficulties to which he is addressing himself, I must warn him that to march down the road of introducing retrospective legislation is to make a very fundamental and important change of principle, which we shall challenge and scrutinise very closely.

It is all very well talking about taxpayers "using the tax system", as the Chief Secretary did. But what is this to mean if they are doing no more than relying upon the law of the land as it is enacted on the statute book and as it is, in some of these cases, still being tested through the courts?

When the Chief Secretary—as I imagine he did and, indeed, he confessed as much; the confessions of a previously practising tax avoidance adviser—[HON. MEMBERS: "No."] Yes. If the Chief Secretary has no modesty about that, he is not merely a confessing tax avoidance adviser—

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

The right hon. and learned Gentleman's understanding of the tax system seems to be almost as bad as his understanding of accountants. Accountants do something more. I have never denied that I have advised on tax avoidance. But one does a little more than that as an accountant.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I do not doubt that the Chief Secretary did a little more than that, but he is a self-confessed tax avoidance expert, and there is nothing to be ashamed of about that. But when he spoke about people "using the tax system", did he or did he not tell pepole to take advantage of the seven-year rule under estate duty? Of course he did. Was that "using the tax system" or being well advised on the state of the law as it was? When the right hon. Gentleman talks about his intention to stamp out "those schemes", which he talked about at large and in general, we must ask, which schemes? How grand are his intentions? How uncertain will the law be? Is it anything for which he hopes he can command a majority to reverse the law retrospectively?

This is a serious path down which to march and we shall challenge the Government on it, because it is dangerous to overturn this principle. Beyond that, we cannot, as I say, transform this Budget.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

Is my right hon. and learned Friend aware that the biggest form of tax avoidance is simply going away, outside the Chief Secretary's net, to foreign shores? Does he think that the Chief Secretary intends to stop that retrospectively, too?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I am sure that it would not be beyond the Chief Secretary's ambitions. Indeed, he is widely regarded as considering death to be nothing more than a loophole in the system that he seeks to impose.

However, it will not be possible for us to change this sow's ear of a Labour Budget into a silk purse. There is a widespread realisation that we need very substantial changes in the whole approach of our economic policy across a very wide front, a whole series of changes which we cannot expect from the present Government—to encourage the creation of wealth, to encourage the spreading of wealth and to encourage the wider ownership of wealth, and so to encourage the extension of job opportunities.

As my right hon. Friend the Member for Chipping Barnet (Mr. Maudling) has said many times, we need to do those things that will improve the performance of the supply side of the economy. That must involve making substantial reductions in taxes on income, on income from work and from savings, and on capital, going far further when the opportunity comes than it is possible to propose today. Of course it will involve being prepared to hold public expenditure steady. Of course it will involve being prepared to switch from taxes on income to taxes on spending. There is nothing novel about that. There is nothing shattering about the proposal that we should hold public spending steady and seek to reduce it where we can.

When he talks about public spending, the Chief Secretary tries to address himself to the argument in two contradictory ways at the same time. At one moment he says that the Opposition have not spelt out where they propose to cut and then in the next breath he says "But of course they have said that they will scrutinise the £3,000 million spending on trade, industry and employment, but they have not told us where and when they will do it."

The Chief Secretary knows perfectly well that it is possible, as he reduced public spending by £4,000 million in the two years since we first urged him to do it, to set out again on the same course. He knows perfectly well that it is sensible and responsible to propose switching the tax burden from taxes on income to taxes on spending, because his right hon. Friend the Financial Secretary said during Question Time earlier this afternoon that the Chancellor himself had proposed that and advocated it on many occasions. That switch and those changes must take place.

The Chief Secretary referred to one or two changes in this Finance Bill which begin to move in the right direction. The proposals for the introduction of profit-sharing schemes are a modest recognition of the damage done by this Government when they sought to stop in its tracks the 1973 save-as-you-earn scheme which we introduced. There is a long way further to go on that.

Similar changes, on which this Government have begun to embark in a repentant fashion, are necessary in the whole matter of small businesses. It is remarkable to listen to the Chief Secretary discussing the wicked untruths that we tell about the taxation of small businesses, describing the Elysian fields in which small business men should now regard themselves as entitled to prance and enjoy themselves under the beneficent taxes introduced by this Government. But the right hon. Gentleman seems to forget that when we were discussing capital transfer tax in its original form in the Standing Committee in 1976 he said: The fact is that the small business man does very well out of capital transfer tax".[Official Report, Standing Committee E, 24th June 1976; c. 1233.] In the past six months the land has been filled with speeches by the Chancellor of the Duchy of Lancaster saying how dreadfully the small business man does under the same tax. The Chancellor of the Duchy has been making speech after speech to small business men saying "I have discovered these terrible things, and I shall give you a chance to change these taxes that the Chief Secretary introduced only two years ago." So the House will not listen very attentively to the Chief Secretary when he describes the blissful condition of small businesses.

The right hon. Gentleman knows perfectly well that the total burden of taxation on the small business man is substantial. If he does not, he does not deserve to hold his present job. He cannot go to any gathering of small business men without recognising the extent to which they are oppressed—deeply oppressed, indeed, exposed to a crippling burden, in the words used by my hon. Friend the Member for Blaby (Mr. Lawson).

These are the representations to which the Chancellor of the Duchy of Lancaster has been hastening to respond. The Chief Secretary may think that all this is over, but his right hon. Friend is still stalking the land saying "More good things are to come. I haven't finished yet with the dreadful taxes the Chief Secretary has imposed upon you." Both right hon. Gentlemen represent constituencies in Manchester. One would expect that there would be greater communion between them and that the Chief Secretary might have spoken to the Chancellor of the Duchy to find out the damage he was doing before he did it.

There are these major changes that must be made. We cannot make them all in this Bill in this House. Today, on this Bill, we can only propose to make a very modest start, to set out as an earnest of our intention when we come into government. I shall set out the main proposals that we shall lay before the House and indicate what their cost would be.

I make two preliminary points. Our first contention is that the changes that we propose should be and can be paid for by savings in public expenditure during the year that has just started. The Chief Secretary drew attention to the fact that the year was under way and said that this high spending public sector juggernaut was irreversible and unstoppable in relation to £67,000 million of public spending. I do not believe it.

If we look at the changes that have been taking place in public spending, we can see the reality. The cost of the proposals I shall lay before the House will be very modest in their first year of operation. The House knows very well that the first year cost of changes is much less than the full year cost. It should be perfectly easy for the Government to accept the consequences of changes in public spending.

Consider the sheer scale of public spending, Mr. Deputy Speaker—£67,000 million projected in the coming year. The increase in the coming year is £4,000 million, or 6 per cent. That is the increase in actual money terms.

The Chief Secretary came before the House time after time in the past two years showing how eventually he was able to respond to our advice to save £4,000 million in two years. That is what he did. It having been saved, exactly the same amount is now to be cast away by an expansion in public expenditure. We voted against that. We are entitled to rely on that. We voted against the public expenditure White Paper, because we said that the increase should not be happening. Unhappily, the Liberals voted for the increase that is now taking place.

The scale of the proposals for reducing taxation should be seen in perspective. If £100 million is cut off public spending in order to reduce taxes, that represents one-fortieth of the increase on which the Government have embarked in the current year, or one-seventh of 1 per cent. of total public spending. Is it really to be believed that the Chief Secretary, with all his experience of cutting back public spending, cannot make a change of that kind in the 11 months that lie ahead?

If we went as far as £500 million of tax cuts, that would involve cutting the increased spending plans for the current year by one-eighth. It would involve saving three-quarters of 1p in the pound in the totality of public spending. Can anyone believe that it is impossible for this Government to save three-quarters of 1p in the pound in the year that lies ahead?

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

I am sure that if the right hon. and learned Gentleman is now going to show us how it is possible—

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

—he will spell out where the £500 million can be cut and, what is more, how it can be cut in 1978–79. I look forward to hearing that.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I simply address myself to the general proposition. It is absurd to have the Chief Secretary advancing in a state of helplessness, saying that he presides over £67,000 million of spending in the year ahead and that it is not possible for him to save three-quarters of 1p in each of those pounds.

Let us compare the position with that of any family in the country. Over the past four years every family have had to make far larger cuts in their own spending. The living standards of the average family in Britain last year were 8p in the pound down on their living standards four years before. Families above the average had their living standards cut by 20p or 30p in the pound. If the average family can do that, they know that it can be done, and they cannot begin to understand a Government who refuse to contemplate savings on one-fiftieth of the scale.

I come to what we propose. First, we believe that the changes proposed by the Government in the investment income surcharge do not go far enough. We believe that there should be further reliefs in the investment income surcharge imposition on those with smaller incomes. The Government know that investment income of this kind is useful for the ownership and expansion of industry. Indeed, in the Budget debate the Chancellor of the Duchy was positively euphoric about it. I quite agree with what he said, which was: in general it is better that there should be hundreds of thousands of shrewd investors bringing their brains and money to small business than a handful of civil servants presiding over a fund, however generous."—[Official Report, 17th April 1978; Vol. 948, c. 38.] We agree. That is why we want to see further reductions in the burden of investment income surcharge. We want to see reliefs for all those who have saved their money in the past and who do not have the advantage of retirement on inflation-proof pensions, and who have the disadvantage of retiring to live on the proceeds of their savings income. These people have had to pay up to 98p in the pound. Even the elderly have been paying at 49p in the pound on incomes of little more than £40 a week.

We propose that the threshold for the payment for investment income surcharge should be raised to £2,000 for the generality of taxpayers, that for those over the age of 65 it should be raised to £3,000, and that the band over which it is payable at 10 per cent., rather than 15 per cent., should be £500 in each case.

The cost of that change in this year is no more than £5 million. The cost in a full year would, of course, be more than that. I do not know how it could be said that it is not possible to make that change, at a cost of £5 million. The Financial Secretary looks mystified. The changes already proposed by the Government would cost £31 million in a full year, and £3 million in the first year. The changes that I propose are of the same scale. The first year cost would be £5 million, which is rather less—if we are looking for public expenditure savings—than is being given in aid and comfort by the Government to the forces and countrymen of the so-called front-line Presidents in Southern Rhodesia. Surely that is a change that we could afford to make. It is a modest cut for a modest proposal of some significance. The Chief Secretary may say "Tut, tut" and shake his head, but it is a sensible change.

The second change would be in the rate at which higher rate income tax begins to be paid. The higher rate of 40p, or 40 per cent., in the pound, currently starts at £7,000 of taxable earnings, which is one and a half times the average earnings in the country. This is at the very level, as has been pointed out by the British Institute of Management and by the CBI, of the skilled workers and middle management to whom the Prime Minister and almost every member of the Government are glad to pay tribute when they go out to dine with them, but for whom they are prepared to do very little when it comes to the point.

The Prime Minister, speaking at the annual dinner of the British Institute of Management, said: Without their efforts we will not succeed in the central task before this country—to regenerate British industry and to reverse the relative decline in our industial performance of the last 30 years. Earlier he said: They will be the men who will have to sell the case for higher productivity, for better working methods arnd for more output. I well understand the comment made by the CBI in a letter it wrote to the Chancellor of the Exchequer yesterday: If you had been seeking a way to demoralise the skilled workers and managers of British business you could not have found a better way than a Budget which delivered so little for these people after public statements by Ministers had led them to expect some truly tangible recognition of their importance to industrial performance. Your message to this sector of the work force seems now to be 'you don't really matter'". That is a fair comment.

We propose that the starting point should be raised from £7,000 to £8,000, and the cost of that proposal in the current year would be £50 million. In other words, people should be able to enjoy a further £20 a week before they move into the position of being surtax payers. Incidentally, this is exactly the change that we proposed last year—that that threshold should be moved to £8,000. Be it noted that last year the Liberal Party voted with the Government against such a change.

The third proposal is that the higher rates of income tax should be changed in their structure so as to arrive at a top level of income tax payable on earned income of 70p in the pound at the figure of £21,000 a year. The proposals are that the rate should be at 40 per cent. in that pound between £8,000 and £10,000; at 50 per cent. in the pound between £10,000 and £14,000; at 60 per cent. in the pound between £14,000 and £21,000; and at the top rate of 70p in the pound above £21,000 a year.

The cost of that change this year would be £130 million. I invite the House to consider the fact that the cost of municipalisation in this year's public spending programme—the public acquisition of houses from the private sector—runs at £92 million a year. We could well save that. But the cost of selective assistance to industry in the current year is running at £166 million. If we saved one quarter of that we should have enough money with which to find the £130 million to get back to sensible rates of tax on higher incomes.

Since the Government came to office, the growth in the number of people employed by the Inland Revenue and Customs and Excise has been 20,000. If we were to remove that excess growth in tax collectors which has arisen from the complexity of the changes introduced by the Government, we should in that change alone have more than enough to pay for the reduction in higher rate taxes that I have proposed. Surely that would be a sensible change to make.

Does anyone in the country really doubt the folly of continuing to impose these stratospheric rates of taxation on those with high incomes? Does anyone who follows as a child the world of pop stars and entertainers doubt the extent to which talent drains out of the country because of the high rates of tax? That is quite apart from talent of the kind employed by managers, technologists, scientists and entrepreneurs.

We have highly qualified people. They are qualified additionally by having the most exportable language in the world, so that they are more likely than others to be taken away by better offers of employment from other countries. I wonder where members of the Government go when they go out of town and around the country. Do they ever meet a company which is not complaining to them directly and personally of the loss, recent or imminent, of one of its senior executives because of high taxation? Every company that I visit has that complaint to make. Do the members of the Government never come across companies saying that they wish they could get back to this country people who left to get experience and who are now unwilling to return because of the high rates of taxation they would face?

When the Government complain, as no doubt they will, about the effect of reducing the high taxes on higher incomes, they will no doubt draw attention to the fact that a director of one of the Shell companies is paid £200,000 a year because he is an American and is said to need that money to get him to come to this country. In order to achieve anything like comparable post-tax levels, he has to be paid at that high rate, which is twice the amount paid to his counterparts in this country.

These are the reasons that companies such as British Leyland lose managerial talent and cannot bring it back. It is for that reason that we regard the third proposed change as of such importance.

The fourth proposed change is to the basic rate of income tax. Of course, there is a case to be made for further improvements in the thresholds. Some change was made in that last year, but it was not much, because the House may have seen that after this Budget there will be 900,000 more people paying income tax than there were before the Budget. After this Budget there will be 2,250,000 more people paying income tax than in 1973–4. There is a lot to be done, therefore, on the thresholds.

We believe that the change in the basic rate is important among the quartet of measures that I am proposing, and the House should know how the cost of that has also been altered. Because of the introduction of the reduced rate band, the cost of knocking 1p off the basic rate is now much less than it was. It used to be about £500 million or £600 million to knock 1p off the basic rate. Now, because of the reduced rate band, with 34 per cent. payable on a much smaller chunk of income, the full-year cost of changing the basic rate by 1p would be £370 million.

This is clearly an area in which there is a major need for change. When we left office, the combined standard rate of impost on earnings stood at 30p basic rate and 5p national insurance contribution, making altogether 35p in the pound. It now stands, for most pounds earned by most people, at 34p tax in the pound and 6½p national insurance contribution. The combined figure has therefore risen from 35p in the pound to 40½p in the pound.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

Will the right hon. and learned Gentleman comment on the fact that it would be perfectly possible to reduce the standard rate of income tax back to what it was when his party was last in Government if the Government simply raised the present borrowing requirement to the same proportion of the gross national product that it was when he left office? Does he think that that would be a satisfactory way to pay for the reduction in income tax? The figure that he was looking for was 6·1 per cent. in 1973, and it is now about 5·25 per cent.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

Oddly enough, that was not the figure that I was looking for. I have become rather tired of receiving lectures from the hon. Gentleman about the size of the borrowing requirement and about monetary confidence. I took the oportunity of looking at what the hon. Gentleman said in the debate on the 1973 Budget, which led to the borrowing requirement of which he complained. He said: I believe that it is an over-cautious Budget. … The Budget was introduced in a situation in which business confidence was returning after a period of almost total collapse over a great many years. The essential need of the Budget was to bolster that confidence. I fear that the Chancellor is already giving signs that he may yield to the conservative and over-cautious voices behind him."—[Official Report, 12th March 1973; Vol. 852, c. 953.] If that is the foundation on which the hon. Gentleman stood then, I shall take no lectures from him now. That is why we are not proposing the kind of increase in the borrowing requirement which the hon. Gentleman is proposing.

We are proposing changes which we think are managable. We see that the actual rate of tax and national insurance payable this year is ¾p more than it was last year. We see the fact that some single people, even taking account of every switch of benefits, are actually worse off in money terms. We see the reality that the average family's pay packet—I choose the words carefully—is increased by only 14p. The Chief Secretary nods his head wisely.

We are not opposed to the introduction of child benefits. What we criticise is introducing them in a tax environment which leaves so little benefit—in some cases disadvantage—for the wage earner in his pay packet. We support the idea of moving to child benefits as a means of bridging the poverty trap and bridging the "why work?" problem, but it ought to be accompanied by reductions in the rate of tax on the pay packet. That is why we complain as we do.

If all the normal taxpayers now look at the proportion of their pay packet going in tax and national insurance, they will find that it has actually risen this year compared with last year. For the average family with two children the percentage going in tax and national insurance last year was 24·4 per cent. This year it is 25 per cent. At twice the average the figure has risen from 30·4 per cent. to 30·8 per cent. There is a similar increase at three times the average.

That is why we believe it is right to make this fourth change that I have proposed and to reduce the basic rate of income tax by 1p. Of course, these changes are limited in scope, because we are trying with limited room for manoeuvre to fillet some sense out of a Labour Budget, the borrowing requirement of which is already up against the limit. That is why it would not be right for Parliament to place upon a reluctant and intransigent Government any larger increase in their borrowing requirement.

We propose only the modest change of a reduction from 34 per cent. to 33 per cent., the cost of which this year would be £300 million. That could readily be saved if the Government were to decide that the National Enterprise Board should not spend the £300 million which it asked the House to vote for it only about a fortnight ago. It has nothing to do with British Leyland. It is money which could well be saved.

The cost this year of 1p off the basic rate of tax would be £300 million. If the higher rate threshold were raised to £8,000, the cost this year would be £50 million. Changes in investment income surcharge would cost £5 million this year. Reductions in the higher rates of tax would cost £130 million this year. The total cost this year of the measures that I am proposing would be £485 million—less than ¾p in the pound over the whole of the £67,000 million which the Government are spending. If the Government decline even to do that, then, as we have said many times before, by switching away from the multi-rate VAT nonsense to a flat rate of 10 per cent., they could gather in a full year far more than that—£700 million. If they did it tomorrow they could gather £600 million by using the regulator as they could.

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

Has not the right hon. and learned Gentleman left out one part of the equation, which is the increases in Government expenditure which the Conservative Party today recommended at Question Time? Has the right hon. and learned Gentleman, for instance, costed the increase in defence pay proposals which were made by the Conservative Party last week?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The right hon. Gentleman will remember that we had a debate on the public expenditure White Paper, which we went through quite extensively. If the right hon. Gentleman will read again the reports of it he will find clearly identified the areas in which we argued for cuts. Indeed, it is high time that the Labour Party stopped trying to ride both horses at the same time. On the one hand, it says "You have not told us where you are going to cut" and, on the other, it says "Oh, you have told us. Isn't it dreadful?"

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

The right hon. and learned Gentleman promised to tell us where he would find the public expenditure savings. He has mentioned one item—the National Enterprise Board—the bulk of whose money goes to Rolls-Royce and British Leyland. Is he now saying that he would not provide that money?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Chief Secretary was talking so busily to his hon. Friends that he did not hear what I said. I said that 1p off the basic rate would cost £300 million this year. In the debate a few weeks ago, we voted against the proposed increase in funds for the National Enterprise Board. That had nothing whatever to do with British Leyland. It was expressely stated not to be related to British Leyland. The amount of money was £300 million.

The cost of raising the higher rate threshold from £7,000 to £8,000 would cost £50 million. That could be saved by discontinuing the Community Land Act, which cost £64 million. The money could be far more sensibly spent in the way that I have proposed than on the Community Land Act. The £5 million cost of investment income surcharge could readily be obtained by withholding the giving of aid to front-line Presidents and so-called freedom fighters in Africa. That would be an equally sensible change.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I am sorry. I am just going through the catalogue that I have outlined. The reductions in the higher rates, which would cost £130 million this year, could be saved—I do not know why the Chief Secretary was not listening—by ceasing to spend £92 million on the municipalisation programme and by cutting a quarter off the selective assistance, which amounts to £166 million. They are perfectly clear suggestions which the Government could carry through forthwith. If the Government continue to say that they cannot save ¾p in the pound out of £67,000 million, then they deserve to be criticised as severely as they will be.

Those are the proposals that we shall press upon the House. We find it very difficult to discover exactly where the Government think they are going or what their position is. They are approaching the question of changes in the tax system without any sense of direction or integrity. On the one hand, we have hon. Members below the Gangway adopting a perfectly honourable view. They want to see taxes maintained at least as high as they are now. When the Budget was before the House they wanted to vote against any relaxation on the higher rates. That is one view. On the other hand, we have the Chancellor of the Duchy of Lancaster emerging, as he did on television the other day, looking forward confidently to a correction, now long overdue, in the rates on higher taxes. Where are the Government going? We do not know what the true purpose of the Labour Party is.

The Chief Secretary is as adept as any Labour Member at making speeches exposing a bleeding heart about the burden of taxes on management and the higher paid. The Prime Minister does it from time to time. The Chancellor of the Exchequer himself has said times without number that he thinks the rates of income tax are too high at every level of earnings, from the poorest paid to the highest paid. He said that he agrees: that the level of direct taxation does discourage enterprise". What do the Government believe? Does the Labour Party want to maintain a high tax system for ever—as hon. Members below the Gangway do—or does it want to make changes in the high taxes that it has introduced? I do not know what its position is.

If we propose, as we do, changes of this kind and reductions in these absurdly high rates of tax, the Chief Secretray will no doubt reserve the right to calculate how generous they are and how unfair they are by giving more at one end than the other. Yet, when he goes around the country and dines in board rooms and with people in the City—so we hear—the Chancellor is giving the impression that he would love nothing more than to be able to reduce these oppresively high rates of personal taxation.

The Government have not made up their mind. On the one hand, they wish to be beloved in Lombard Street and, on the other, they want to be lionised by the Tribune Group. They are totally divided not merely amongst themselves but in their own mind. My anxiety is that the Chancellor may have blurted out the truth—in so far as he still knows what the truth is about his own thoughts —in the Burnley Star on 13th March. He was speaking not in the Mansion House, or seeking to make a good impression on the City or on higher management, but in some Labour club in that part of the world. He said: I will offer you proper Socialism when we get a decent majority in the House of Commons to enable us to do it. What is "proper Socialism"? Is it the desire he expresses in some parts of the country to lighten the load on middle management, or is it to clamp the shackles of Socialism, as it is understood below the Gangway? We do not know. The Government do not know. The Government have ceased believing in themselves or believing in each other. The country has long since ceased to believe in them, and it is high time for them to go.

5.12 p.m.

Photo of Donald Dewar Donald Dewar , Glasgow Garscadden

I have had a great deal of gratuitous advice on how I should start this contribution today. The most popular formula has been: "As I was saying when I was rudely interrupted by the events of 18th June 1970". I rejected that because I cannot remember what I was saying at the time of the 1970 Election.

I am very glad to be back in the House of Commons, and I consider myself very fortunate indeed. I should like to put on the record my thanks to the many hundreds of ordinary Labour Party supporters in the West of Scotland and throughout Scotland who worked extremely hard to get a significant victory at Garscadden.

This is not a maiden speech—that is a technical state to which I cannot aspire. Perhaps later I shall make more controversial remarks, but there are also some maiden speech conventions which I wish to follow and which I do not consider in any sense an empty ritual.

I wish to pay tribute to my predecessor, Willie Small. He was in the House since 1959. I knew him very well, and I have always valued his advice and judgment. He did not deliberately try to capture the headlines and he did not try to turn every individual victory on behalf of a constituent into a public triumph. He had a record of service and devotion to duty that was second to none. On the night before he died he was pressing in this building the case of a constituent on Scottish Office Ministers. That was extremely typical of the dedicated effort that he put in over the years. He was a very loyal friend, a man of great common sense and essential decency. I remember him with affection, just as I believe many people in Garscadden and in this House will remember him, too.

I left this House in 1970 as the Member for South Aberdeen. I return strangely translated now to Garscadden. I have happy memories of South Aberdeen. My one complaint is that the constituency has shown a stubborn reluctance to discard the Conservative colours since 1970.

Glasgow is my home. I was born and bred there. I am proud to be the representative in this House for Garscadden. It is not an area which has scenery or architecture about which one can wax lyrical, but since I have become associated with the constituency I have been enormously impressed by its social cohesion and by the willingness to face up to the real difficulties that do exist.

In these by-election campaigns, TV journalists particularly, and sometimes newspaper journalists as well, in the search for local colour let their enthusiasm overcome the truth, and they tend to dwell on the darker areas of social problems. There are an enormous number of good things coming out of Garscadden—there is a basis upon which we can build successfully in the years ahead.

It is a constituency in the very heartland of Western Scotland. To be involved in Garscadden is to be involved in the whole area. If one lives in Drumchapel, Knightswood, Blairdardie, Yoker or Temple, if one works in the Yarrow Shipyards, the Goodyear tyre factory, at Albion trucks or any other factory in the travel-to-work area of my constituency, if one's problems are education, housing or employment, one is involved in the essential Scottish controversy.

Indeed, in a real sense the issue of the by-election was the whole future of our relations with our neighbours, and our perception of ourself. The result in Garscadden was significant, but I believe that it represents the beginning, not the end of the argument. The majority of my constituents rejected heartily the proposition that in some way we can solve our problems by cutting ourselves off from the rest of the United Kingdom. They rejected the Scottish National Party slogan that we should shed what they see as the dead weight of England.

My constituents believe that we must have a common approach to common problems. What Garscadden is looking for is a policy not of fragmentation—because that is what separatism and independence means—but of unity in the attack on poverty and injustice in society. They want coherent political priorities—which would be as relevant on Tyne-side and Merseyside, as certainly on Clydeside. They do not want romantic slogans, however slickly these may be packaged. I emphasise once again that I am proud to represent Garscadden—very deeply proud.

I turn to the Finance Bill—the legislation that embodies the Budget Statement, which, incidentally, was delivered two days before polling day at Garscadden. I welcomed it then, and there is no difficulty in understanding why I welcomed it. On maturer reflection I welcome it again today.

I did not expect the Chancellor to construct his Budget to win Garscadden for me, but I looked to it for evidence of the economic progress that this Government have made and as evidence that we are standing by the priorities that the Labour Party wants to see uppermost in the mind of a Labour Government. I believe there is such evidence.

I am not qualified to plunge into the technical niceties of capital transfer tax, the effect of revaluations on gaming licences in Scotland, or tax status for North Sea divers, fascinating though that is, and I do not intend to do so. These are arcane mysteries and I shall resist being drawn into them.

However, I shall say a few words about the central argument of this Budget—that of personal taxation, and whether the Government have got right the reductions they have proposed, or whether these should be pushed a little further. I thought that the Opposition spokesman, the right hon, and learned Member for Surrey, East (Sir G. Howe) seemed to be working on not-too-coherent principles. All he seemed to say was that anything that the Government have done the Opposition would do just that little bit better. To me that smacks of opportunism. Perhaps I am being unfair, but it is up to others to judge. I am not surprised in the slightest that the Liberals and Tories are unhappy with the Budget proposals. That is the nature of the beast. Opposition breeds ingratitude.

I feel very strongly that the Budget measures will be widely welcomed far beyond the partisan Benches of both sides of this House. They will be welcomed widely in Garscadden, where people will welcome the increased personal allowances and the proposed adjustments to the upper bands of taxation. We may argue about the minutiae of these proposals but certainly support the introduction of the new lower band of 25 per cent. on the first £750 of income. This will help some to escape from the poverty trap, and it will do something to offset the effects of fiscal drag. It will help people in every constituency up and down the land.

There are two issues by which people will judge this Budget during the next year or 18 months. These are unemployment and the impact of inflation. Unemployment was probably the dominant issue in the Garscadden by-election, apart from the question of separation from the rest of the United Kingdom. Coming from a constituency that is heavily dependent on shipbuilding, I believe that it would be wrong not to recognise the remarkable and valuable job that has been done by the Government over the last year or two. I believe that we shall see a continuing improvement in the unemployment situation. Without the Aircraft and Shipbuilding Industries Bill and Government intervention, parts of my constituency and large parts of Clydeside would be literally devastated areas.

When we bear in mind the continuing trends that are now beginning to emerge, I believe that we shall see a considerable improvement. I hope that we shall see this over the next year or so. It is something that I and many other hon. Members will be watching for carefully.

The Budget will certainly help. If there is an injection of £2,500 million into the economy, it is obvious that demand is being given a considerable push. It is inevitable that such an injection and push will have its effect on jobs. That is something that we all welcome.

However, I have some worries about the effect on inflation. It may be that I shall get reassurance during the next few months. It is inevitable that if we pump £2,500 million into the economy there will be a considerable effect on inflationary pressures. We have all read the Red Book—even I managed to read it shortly after polling day—and we find that it states: real disposable incomes … can be expected to show a very marked rise … up to the middle quarters of 1978, followed by a much more modest rise thereafter. I wonder a wee bit about that. If we assume that towards the end of the year there will be a substantial and welcome increase in pensions, and if we consider, rightly, given the social priorities, that the majority of the tax changes will benefit the lower paid, we are dealing with two categories that are not likely to be plunging heavily into the gilt-edged market or into any other form of competitive saving. I am pointing out that most of the money will go into consumer spending. That will have a considerable and helpful impact on employment, but an impact that we shall have to watch closely when it comes to inflation. That tendency will be compounded by the fact that the pound has fallen to some extent. That will have an impact on import prices.

I know that the Government have talked a good deal—there has also been a good deal of speculation—about the wage settlement in the coming year. In the Red Book we find the bland statement: The forecasts assume that average pay increases in the year beginning … 1978 are about half the average for the current pay round. Probably the best way of putting my point is to say "We shall see". However, I am perfectly clear that those such as myself, who will be campaigning in Scotland during the regional elections and subsesquent by-elections, must try to persuade electors that at the end of the day there is for them a very strong case in terms of self-interest for supporting a Government that is cutting taxes and engineering a situation in which there is a real rise in living standards. An essential part of the argument, however, is that the electorate as well as the Government should press for moderation in terms of wage settlements and the pay round. If earnings are rising at 14 per cent., or perhaps higher, as I suspect, and if inflation is falling to 9 per cent., and there are real concessions and cuts in the Budget, we have a situation that will provide, for a substantial and significant rise in living standards in the months ahead.

It is important that we get that point home. It would be sad if we did not get it home. We must persuade those we meet on the shop floor and the public generally that there is a case for moderation. Without such moderation inflation could gather pace. At the end of the day the result would be unemployment on a scale that would be totally unacceptable on the Labour Benches or anywhere else.

I strongly approve of the tax strategy that is embodied in the Bill. However, I see it as part of a whole and not something that can be taken in isolation. When it is cheered through its various stages by Labour Members, they will also have a duty to accept the wider responsibilities and the arguments that are part of the social strategy. We must try to duck those and other much more difficult problems when we face our electorates and the people.

I do not like the alternatives to the strategy. It is not merely a matter of considering what we are doing. We must also consider what is offered us. With all respect to the right hon, and learned Member for Surrey, East, I was not reassured by his speech. If the alternative to the Government's strategy, combined with reasonable restraint on the wages and earnings front, is to be severe cuts in public expenditure, that is an alternative that will be totally unacceptable on the Government Benches. That is a message that will be echoed in the House by Labour Members and by many others throughout the country.

It is not possible to give with one hand, as the right hon, and learned Gentleman is seeking to do, and to take with the other. If we start forcing up VAT rates and having an effect on the retail price index, we are courting trouble and disaster. We could find ourselves in a situation in which our basic argument on incomes becomes totally unsaleable and we should be plunged into genuine instability, which none of us wants.

I do not favour the Conservative Party's policy towards public expenditure. The Conservative Party seems to regard public expenditure—this is a delusion that is all too common on the Opposition Benches—as some sort of fiscal version of original sin. It seems that it regards public expenditure as being pushed by pinstriped busybodies against the public interest. That is not the position. As someone who worked for four and a half years outside the House as an employee, not an elected member of a local authority, I know of the difficulties and disasters that can strike once we start having the cuts that seem to be inherent in the policies propounded by the right hon, and learned Gentleman. I am against that approach. At the end of the day we need a decent social wage. We need civilised services and a level of services that people have come rightly to expect.

What are the cuts that the Opposition would make? When I start to consider where cut-backs may be found, I do not find the examples that have been offered in any way attractive or convincing. It has been suggested, for example, that the National Enterprise Board or, as translated into Scottish terms, the Scottish Development Agency, and the selective assistance programme, should be among the first sacrificial cows to Tory intransigent opposition to high public spending. That approach would have a considerable impact upon the Scottish economy and the difficulties that affect constituencies such as my own in the heartland of West Central and industrial Scotland. It would be disastrous and unacceptable to all of us. There is no doubt about that.

If that sort of philosophy were adopted and a Budget were drawn up on that basis, it would be a mean Budget and one without social relevance. It would be attractive to only a narrow and unbending sort of Conservativism. I hope that many Conservative Members will think again about the way in which they are being led, especially in Scotland, given the achievements and the record of successive Governments in terms of helping industry, saving jobs and creating jobs in areas of real and special difficulty.

I believe that the Government have it about right. I have made my caveat on inflation. There are worries and many stormy passages ahead, but I am grateful for the Budget. I think that my constituents will be extremely grateful as well. As they listen to the debate and arguments unfold, I believe that those who voted Labour at Garscadden will know that they were on the right side and that they will return to the polls next time with renewed enthusiasm.

5.29 p.m.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

It is a great pleasure to be able to congratulate the hon. Member for Glasgow, Garscadden (Mr. Dewar), having been with him in his previous life, so to speak, in the House. I can only say that it is good to see him in his reincarnation. We heard a good deal about South Aberdeen in his previous life and no doubt we shall hear much about Garscadden in future as we have today.

The right hon. and learned Member for Surrey, East (Sir G. Howe) is an extremely nice man. That makes it extremely difficult for him to make his insults sound sincere. It also makes it difficult to sound sincere if one is trying to insult him. Therefore, I shall not try to do so, although it is fairly easy. I shall leave that to the Government Front Bench. They may have that part of the partnership.

I was sorry to hear the right hon. and learned Gentleman sneer about the Liberal Party's representation of the fringes of the country. It may be that on the fringes independence is still strong enough to enable the electors to vote for those who are not tied totally to the two-party system. That may be why Liberals are still able to be elected from such areas and why the majority of the 44 hon. Members who do not tie themselves to one major party or another come from the so-called fringes. I do not take a sneer at the fringes as an insult.

The right hon. and learned Gentleman is South-East Man par excellence. The only experience that he has ever brought to the House from outside South-East England was when he travelled across the Atlantic to find out how American labour lawyers made a fortune, so that some of his friends could make one here. He is naturally jealous of my meetings with the Chief Secretary. He would make a marvellous fly on the wall. He accused me of publicising them. Not one word of the content of our latest meeting has appeared anywhere in the Press, today or yesterday. On the last occasion that there was a detailed exposé of what had passed between me and my right hon. Friend at the Treasury, it was revealed not by us but by an official Treasury briefing.

I notice that the right hon. and learned Gentleman reads not only past Liberal speeches but even our proposals—and that he seems to copy them. His proposals today showed that there is only a penny between us. But I do not accept his costing of his proposals. He has done some strange arithmetic. On the basis on which he costs his proposals at £485 million this year ours would cost not £1,000 but £765 million.

What is more, I suspect that the right hon. and learned Gentleman is guilty almost of sharp practice by estimating his revenue losses in 1978–79 terms but his public expenditure cuts in full-year terms. It simply will not be possible, even if one wanted to—I certainly would go along that road with him—to cut £50 million or £60 million from the expenditure under the Community Land Act this year. It may be possible next year, but even a Conservative Member—indeed, from most likely to do it this year.

I want to answer some of the criticisms of the Liberal proposals. I cannot say that they have gone unreported. We have inevitably been accused of a publicity stunt. The hon. Member for St. Ives (Mr. Nott) said the other day that we were engaging in a publicity stunt rather than serious Budget proposals. Politicians and would-be reformers do not shun publicity—certainly not for their ideas or for themselves—but they do not normally work quite so hard for so long investigating every minute detail of the thing they seek to reform if all they are seeking is a publicity stunt.

The Liberal proposals on tax reform had their genesis a long time ago. They have come from two years long and hard study by a working party and have involved many meetings and long hours of work. Anthony Harris, the economics correspondent of The Financial Times, wrote on 13th April: The Liberals, as so often, have rather more radical and practical ideas because they tap the best academic brains. I would remind the right hon. and learned Member for Surrey, East that one would not tap the best academic brains if all one wanted was a publicity stunt. One would instead tap the kind of "admen" that the Conservative Party nearly always gets to advise on its policies—the sort of men who served Richard Nixon.

Nor would a publicity stunt require me to spend much of the last Summer Recess writing up the report of that working party.

Photo of Dr Jeremy Bray Dr Jeremy Bray , Motherwell and Wishaw

Perhaps the hon. Gentleman would name the Liberal Party advisers. I am sure that would interest the House.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

Rather than taking up time, I would refer the hon. Gentleman to the publication in question, which he can obtain from the Liberal Party publications department and which has on its front page a full list of the advisers.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

That is the sort of remark that one might expect from the hon. Member. He actually said the name "Gerald Kaplan". That is the sort of dirty sneer that I would expect from one South-West Conservative Member—indeed from most of them.

One cannot claim that this is a publicity stunt. I therefore move on to the allegation by Mr. Ronald Butt in The Times this morning that this is merely a token gesture to prove that we have some influence on the Government and the Budget. There is no need to prove that, as the Chief Secretary will admit. There are many things in the Budget which we wholeheartedly endorse.

It is difficult even for a Conservative to claim that profit sharing would have been in a Labour Budget without our influence—and that has been welcomed by a wide range of public opinion. I welcome the small business proposals, for many of which, also, we argued. Not even a Conservative could say that the averaging of farm incomes would have been in a Labour Budget otherwise. Indeed, it never appeared in a Conservative Budget, during the 30 years that the NFU was pressing for it.

Thus, we do not need to prove that we are exercising influence on the Government. However, we need to say what is wrong with the British tax system and how it can be put right. There is surely a consensus in the House that there is something fundamentally wrong with it and that it needs to be put right. Our analysis is that far too much of our tax comes from personal income tax. This is not happening only at the moment. We have always taken too much from personal income tax—some years less, some years more, but even in the 1950s we were taking far too much.

This probably stems from the easy method of extraction through the PAYE system. This has made it easy for successive Governments to take far too much income tax. We now need to switch from personal income tax to taxes on spending. There have been suggestions that that would be inflationary, but it is not, if by inflation one does not mean something demonstrated simply and solely by the retail price index, because that and inflation have only a tenuous connection.

The RPI is a useful indicator, but it has great limitations. It does not include all taxes. In my book, an increase in the price of my loaf of bread is just as much an increase in the cost of living as a rise in my rates or my income tax. There is something strange about an index which shows up an increase in consumer expenditure through indirect taxes of £300 million on drinks as registering 0·9 per cent. on the RPI but shows £700 million extra taxes on VAT goods as registering an increase of only 0·8 per cent. One knows why this happens, but that shows that the selection for the RPI is not a satisfactory guide to the real state of inflation.

It has been suggested also that our proposals are unfair and inegalitarian. I take that criticism very seriously, but I would ask in return—is income tax progressive? The answer, of course, is that it is not. It is nothing like as progressive as it looks. I know that, because, in the very early days of the "Titmice", I read their analysis of income tax—and it has got no more progressive since.

To get the large chunk of revenue we need from income tax we must tax very poor people, because that is where the big revenue comes from. Therefore, we must go right down the income tax scale, which is what makes it a very regressive tax. Income tax should be—and is in almost every other industrial country—a middle and upper-income tax. Only in Britain is it a means of extracting money from the lower-income groups, even from those who are at or around the poverty line.

The other point that makes income tax less progressive than it looks—and again I am indebted to the "Titmice" for this advice—is that it is more easily avoidable at the top. This is still true. It is therefore not as progressive as it looks at that level. On the other hand, VAT is more progressive than it looks. It exempts the most necessitous half of all consumer spending. Moreover, we can choose how we spend our money on taxed goods.

I do not happen to smoke, but one can choose whether to smoke. It is a matter of choice. One can choose whether one drinks high-taxed whisky or low-taxed ginger ale. De have tried to discourage people from smoking and drinking by the thought of death. Why not try the threat of bankruptcy? Why do we not see what excessive taxation will do to people's propensity to smoke and drink?

If one is switching from one tax to another and reducing income tax, one cannot avoid the accusation that one will reduce the tax paid by the better off at the expense of the lower paid. A reduction in income tax is bound to help some people in the scale more than others. It will help the people at the top. That is in the nature of things. There is little that we can do about it. Nevertheless, income tax should be reduced. We should not accept that argument as a barrier to the future and present reduction of income tax.

The right hon, and learned Member for Surrey, East said that we have been irresponsible by urging a cut in income tax which will cost about £1 billion in a full year. I take the effects on the market seriously. If one really was proposing to cut the total Government revenue take by £1 billion and to increase the borrowing requirement, that would have an effect on the market. However, we are not suggesting that the borrowing requirement should be increased by even one penny. The right hon. and learned Gentleman is therefore wrong to say that the Liberal proposals would increase the borrowing requirement.

Since the right hon. and learned Gentleman asked, I shall remind him of one thing that passed between the Chief Secretary and myself. I firmly and categorically undertook, on behalf of my right hon. and hon. Friends, that we should be prepared to vote for any consequential increases in taxes on spending which were made necessary by cuts in income tax caused by the passage of amendments during the Committee stage of the Finance Bill. I hope that the right hon. and learned Gentleman will make exactly the same commitment; otherwise, if the amendments are passed, there could be difficulties in the market.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

I asked the Chief Secretary the same question. The hon. Member for Cornwall, North (Mr. Pardoe) undertook to vote for such an increase. Did the Chief Secretary give him an undertaking to propose such increases and to vote for them himself?

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

I was coming to that. Not only do I believe it right that all Opposition parties in the House should make that firm commitment, but when the time comes—not necessarily today—it would be helpful to the market, to stability and confidence, if the Chancellor of the Exchequer made this matter clear when he replies to the major amendment, or shortly after it is passed, if it is passed.

I reiterate everything that the right hon. and learned Gentleman said this afternoon about the role of Parliament in taxation. I do this for a different reason, although I accept the right hon, and learned Gentleman's historical and constitutional arguments. It will be extremely difficult for any single-party Government to make the changes in income tax which most of us on this side of the House, and many on the other side, believe are necessary. That was the biggest single reason why the last Conservative Government were not able to do what they wanted to do with income tax. They will come across the same problems again. They will come up against the allegations that they are helping the rich and bashing the poor. They will be told that they are doing terrible things to the retail price index. They will find themselves constrained by those types of arguments and prejudices.

It is better that Parliament should do this. On this occasion, unlike most past occasions, Parliament has a chance to do it. I do not believe that it would be irresponsible for Parliament to take that chance. Indeed, it is Parliament's duty to sort out the mess that the British tax system is in. I urge that it does so.

5.45 p.m.

Photo of Dr Jeremy Bray Dr Jeremy Bray , Motherwell and Wishaw

It is a privilege and pleasure to be the first on this side of the House to congratulate my hon. Friend the Member for Glasgow, Garscadden (Mr. Dewar), whom we are delighted to see back in the House. It is a particular pleasure to hon. Members from Scotland who took part in his campaign which did us a power of good in Scotland and which gave us ample confidence about the way in which we can face the electorate when the time comes. I join in the tribute that he paid to Willie Small, who was a good friend and companion to hon. Members in all parts of the House.

I did not seek to speak in the Budget debate, because I wanted to see the post-Budget analyses and forecasts. I wanted to see the forecasts of the consequences of alternative policies and the report of the Ball Committee on policy optimisation. These are now available, and it is possible to see the Government's general economic stance.

My hon. Friend the Member for Garscadden said that his voters placed unemployment at the top of their list of priorities. There is not a shadow of doubt that that is true throughout the country. The starting point of any consideration of economic policy must be the intolerable level of unemployment. I warn the Government that we are getting near the time when our party supporters will say "If we are to have Tory levels of unemployment and Tory policies, we might as well have a Tory Government."

A cold, bloody anger is building up about unemployment. It does not show in the opinion polls, because the Government have correctly bought off the first reaction of the unemployed by high redundancy payments and wage-related unemployment benefit. But that only focuses the anger more intensely on those who see what is coming. They see the jobs and communities destroyed when the redundancy money has been spent. They see the embittered generation of youth, the habitually unemployed, the blocked careers and the broken spirits.

Before long most families in the country will have been scarred by unemployment. It strikes without respect for person. It strikes at the labourer, the teacher, the company director. It strikes at men and women, at the old and young and the middle aged.

We shall not let any Government do this to us, to our country. But how can we stop them? The Government have told us, the unions and the TUC, that we cannot tackle unemployment before we bring down inflation. We have brought down inflation. But the Government have produced a Budget the consequences of which, by their own forecast, are that unemployment will stay at these appalling levels for another two years or as far ahead as we can see.

I am trying not to use the word "betrayal" because that is not the right word for the degeneration of mind and spirit that threatens us and because we can always snatch victory out of despair.

The Prime Minister is right to point to the international aspects of our problems, to world-wide unemployment, and to stagnation in trade and economic growth. He is right to seek the co-operation of our industrial partners in getting people back to work. But I do not rate his chances of success very high unless we change the basis of our own policy.

We should make it clear that we shall reduce the exchange rate, cut taxes and increase public expenditure so as to reduce the level of unemployment by a quarter of a million a year for four years while maintaining a satisfactory balance of payments. If we can get the co-operation of the unions in the continued restraint of wage increases, it can be done at little cost in higher inflation than would otherwise have occurred. But we must make it clear that we put tackling unemployment ahead of tackling inflation.

What evidence is there that this can work? I would lay a fair bet that I have looked more closely at the econometric evidence, at the record over the past 10 years, read more of the prime research in monetary economics than any other hon. Member—only because there are very few who can understand the mathematics. I must say that I enjoy it—Friedman and Schwartz, Tobin and Swan, Friedman and Meiselman, Ando and Modigliani, Brainard and Cooper, Andersen and Jordan, De Leeuw and Kalchbrenner, Fromm and Taubman, Palasch, and a lot more from the United States, There are a few relatively modest contributions from the United Kingdom including Goodhart, Laidler, Minford, Ball and Burns, Buiter and others.

Like all hon. Members, I also read the semi-technical literature, the bank reviews, the tediously repetitious columns of The Times and Financial Times and even Greenwell's Bulletin. I hope that Tory Members will not count me totally ignorant of their point of view and the evidence, or lack of it, in support of that view.

I have gone to some trouble to try to find methods by which economists, whether monetarists or otherwise, can serve the needs of policy makers rather more realistically in this uncertain world than by the forecasts and mechanical rules we are offered today—from either side of the monetarist debate. I shall not be content until those means which were discussed in the Ball Report on policy optimisation, for which the House should be grateful, are brought into use as that committee recommended.

We are politicians, responsible for today's actions, and we cannot wait. The evidence of the praticality of the policies and priorities which I urge on the Government are in the article in the latest National Institute Economic Review which compares the Treasury, London Business School and National Institute models: in the updating of that article by last month's Treasury working paper No. 2 by OdlingSmee and Hartley; and in the post-Budget forecasts prepared by the St. James' group and tabulations which I have had from the Treasury model on alternative policies, copies of which are available in the Library.

We are told that the effect of a devalution is soon worked out by wage increases and the international pricing of traded goods. It is perfectly possible to impose that behaviour on a model. But if we look for hard quantitative evidence on how long the lags are it is difficult to establish that devaluation effects are completely wiped out. Currently, with the latest version of the Treasury model, the consequence of a 10 per cent. devaluation is to improve the balance of payments by £3,200 million after four years, with unemployment reduced by 230,000 and the balance of payments still keeping up to £3,000 million after six years. Prices certainly would be higher—5·6 per cent. after four years and 8 per cent. higher after six years.

The improvement in the balance of payments would allow room for cuts in direct taxation of £1,500 million and for increases in public expenditure of £2,000 million, which would reduce unemployment by a further 800,000, to achieve the reduction of 1 million that is required. If the unions agreed to continued wage restraint—and I think that the prospects of their doing so in the context of an economic policy like this are somewhat greater than they are now—the gains would be larger and the inflation less, with the increase in the borrowing requirement limited to £2·5 billion in the fourth year and £3 billion in the sixth year. Relative to the size of the expected borrowing requirement in those years this would be perfectly manageable.

All of this must sound very reminiscent to the right hon. Member for Chipping Barnet (Mr. Maudling) and to the Prime Minister of the advice given to them in the sixties—advice which the Prime Minister forswore in that much-quoted passage in his speech at the 1976 Labour Party conference, later quoted by Friedman in his Nobel Prize lecture. There is, however, one difference between this evidence and the advice given to the Prime Minister when he was Chancellor of the Exchequer. It is that the evidence for the practicality of this policy has been accumulated mainly over the intervening years when the Prime Minister and the Chancellor have had their backs turned, listening to siren voices, with no well-informed challenge within the Cabinet.

Even if all that I say proved true, I have been talking only about changes of policy not relative to the economy today but relative to what would otherwise happen to the economy over the next four to six years. We are already facing an annual deterioration of £1,000 million or more a year in our balance of payments, due to the galloping decline of our manufacturing industry. To cope with that we shall in any case have to depreciate our currency and face higher rates of inflation than our industrial partners. Furthermore, the future is murky. We have no base against which to compare alternatives.

Sterling has already fallen 10 per cent. in the past three months. We could well find greater restrictions and even higher unemployment forced on a Government following present economic doctrine. Alternatively, there could be times when we might believe that our problems had eased.

To pursue an expansionist policy is not to escape from those uncertainties, if we are to become more certain about reducing unemployment, as I believe we must, we must be prepared to become less certain on other matters, including inflation. Furthermore, we shall only have bought time and created the conditions in which to achieve by other means the regeneration of our industry.

We cannot say in advance by how much we shall have to let the pound fall. What we can and must say is that we shall pursue an exchange rate policy which in the face of stagnant world trade would be aggressive, expanding our economy. But other countries need not import our unemployment if they also expand their economies, which would be to our advantage as well as theirs. That is the message which the Prime Minister should take to the summit. If he pleads merely for expansion he may have some success. He will have far greater success if he has the sanction of an expansionist and aggressive exchange rate policy, particularly if he has the backing of the unions in taking that line. He will certainly find it a more creditable sanction than the threat of import controls.

How we feel our way forward, the possible phasing of reflation, the instruments for influencing the exchange rate, the monetary policy implications—all of these I would cheerfully argue with Ball and Burns, Godley, Goodhart and many more hostile and less-informed critics on their criticisms, coefficiently coefficient, slogan by slogan. This is not the place to do so. It is necessary argument. It is argument that Ministers should not have neglected.

What we can ask is how can there be such swings in economic fashion as to make a policy which would have the instinctive and enthusiastic support of nine-tenths of the members of the Labour Party, and which is well based in the evidence for those who care to read it, seem for the moment so unfashionable, not only to many pundits but to our own Prime Minister and Chancellor. The reason is that there are many obscurities.

There have been traumatic disturbances to the world economy. Many people to whom it is important to understand and to speak about what is going on—journalists, bankers, civil servants, Ministers and MPs—who cannot follow the technical discussions follow each other instead. The result is this curious swarming behaviour seeking safety in numbers and flitting from one economic fashion to another.

I simply say to the Prime Minister and to the Chancellor that it has been a bad dream. Please wake up before the party wakes you up in bitter anger at the calamity of unemployment.

6.1 p.m.

Photo of Mr Reginald Maudling Mr Reginald Maudling , Barnet Chipping Barnet

I listened with great interest to the hon. Member for Motherwell and Wishaw (Dr. Bray), who is very widely read in these matters. On the exchange rate, I simply say 10 him that in the long run the international value of sterling can depend only on the relative productivity of British industry. In the short term it can do this or that. If it is true, as I believe it is, that at present over a wide range of British industry we are producing from the same machinery only half of what the Germans are producing, then our exchange rate is bound to be under very great pressure.

It seems to me that in judging any Budget or Finance Bill there are two tests—first, whether the total amount of additional purchasing power that the Chancellor intends to put into or to take out of the economy is broadly the right amount and, secondly, whether the measures that he has taken to do that are acceptable.

The first is a very difficult judgment. Any Chancellor faces enormous uncertainties in forecasting. It is easy to deride Chancellors for getting their figures wrong until one has to do it oneself. For any Chancellor in any Government the forecasting machinery available is still very tenuous compared with what is really needed. The total figures are so large that even £500 million—an enormous sum of money—falls within the margin of error or, as I should call it, the margin of judgment.

Therefore, I find it difficult to say that the Chancellor is wrong in his judgment on the amount that we should put into the economy at present. I have seen no evidence of any credible kind that he is wrong on the total amount of stimulus to demand that he is putting into the economy at the moment.

I think that the criticisms have tended to cancel themselves out. Some people have said "Despite what the Chancellor has done, no one will be very much better off." Others have said "He is taking very great chances by increasing the amount of demand in the economy." Both cannot be right. The truth is that, as a result of the Chancellor's measures, people will have a lot more money to spend than they otherwise would have had.

Those who say that such an expansion of demand as is encompassed by those figures is excessive have to prove their case in the face of the very low level of demand in our economy compared with our potential output. I do not think that it is easy to fault the Chancellor on his general Budget judgment of the total amount of additional purchasing power that he wishes to create.

Are the Chancellor's measures right? I think that to increase the allowances and to restore the reduced rate band is absolutely right. I can hardly say otherwise, having done the same myself in 1963. But I must reflect that to produce the results that we did in 1963 cost not £2½ billion, but £269 million. That is an indication of the extent to which inflation has progressed in the meanwhile.

I welcome the restoration of the reduced rate band. One of the problems with our tax system is that we let in the clutch of taxation too rapidly. When people come into taxation, they come in at too high a level. I think that restoring the reduced rate band has been a good idea and will certainly be of benefit.

Should the Chancellor have done more? I believe that he should have done more, particularly for the middle and top earners in our economy. He must recognise the disappointment created by his measures to these people who are immensely important to the health and prosperity of our economy. The disappointment has been very great. Much of the disappointment has been due to the Chancellor's pre-Budget build-up. He has done nothing about the absurdly high rate of tax on top earners, which I gather the Chancellor of the Duchy of Lancaster recognised as being absurdly high. It cannot wholly be a coincidence that our economic performance is low compared with countries whose relative rates of taxation are far less deeply progressive than our own.

I think that more should have been done to raise the levels for the higher rates. All the way up the scale more could have been done, without very large cost, to create more incentive and to meet the expectations to which pre-Budget leaks and stories had given rise. I do not think that the Chancellor should underestimate the degree of disappointment and disillusionment that his proposals have created among management in this country—the people who, by earning the higher incomes give evidence that they have higher talents, greater enterprise and produce the greater effort.

I very much hope that something can be done—I think that it can be done and that the cost would not be all that high—at the middle and higher bands as evidence of the fact that the Government as a whole, not merely the Chancellor of the Duchy, recognise the importance of those who are really creating the wealth of this country. A country can be successful only on the shoulders of successful men. If we discourage successful men, if we give them the impression that their efforts are not valued, we shall prevent them giving of their best and thereby prevent the country from enjoying the best that it could have enjoyed from their services.

It is argued that other further tax cuts could be made. I very much doubt whether it is wise to go in for a large additional reduction in the standard rate. I listened with great interest to the Chancellor-in-waiting this afternoon. I had the impression that he will be waiting for quite a long time. I do not believe that a reduction in the standard rate is as cost-effective in practical terms as reductions in the higher rates of taxation in the higher bands.

People who argue, as I understand the Liberal Party does, for very large further reductions in income tax must either accept an increase in the borrowing requirement, specify reductions in public expenditure which will finance these cuts or specify increases in other taxes which could equally finance these greater reductions.

I shall come later to the borrowing requirement. As I have said, I think that the total injection into the economy made by the Chancellor is adequate. Those who propose very large additional tax reductions—for example, the Liberal Party—should make perfectly clear what reductions in public expenditure they would put forward as a counterpart for that.

The argument that we should switch the balance between direct and indirect taxation is very old. We all followed it. I did my best in 1963–64 by reducing income tax and putting up taxes on alcohol and tobacco to vary the balance between direct and indirect taxation. The argument that we should tax people at the point of spending rather than at the point of earning is very good, but there are other considerations. Indirect taxation tends to be regressive, and VAT in particular, because it is widely spread, falls on many things which are far from being the luxuries of life.

Any Government must consider the effect on incomes policy of increases deliberately made in the cost of living by increasing indirect taxation. Therefore, the timing of any deliberate increase in indirect taxation has to be considered with very great care. I am not convinced by the Liberal Party spokesman that there is in either of these matters justification for the very large proposed reductions in income tax which the Liberal Party puts forward with such enthusiasm.

I turn briefly to the broader questions of economic policy. I believe that the whole purpose of economic policy is to achieve economic growth. I know that this is sometimes regarded by some of my colleagues as a vulgar purpose, but it seems to me that the only purpose of any economic policy is to expand the production of goods and services for human benefit.

The precondition of any expansion of output is an expansion of demand. However, that is not the total answer, certainly this year. Unless there is more demand for the products of industry, there will not be an expansion of the output of industry and there will be no expansion of investment in industry.

Much has been said about the danger of expanding the borrowing requirement. I think that this danger is sometimes exaggerated. It is difficult for any Chancellor to assess accurately—within £1,000 million—what the borrowing requirement will be. What matters about the borrowing requirement is its relationship to the total savings of the nation and whether an increase in the borrowing requirement would either pre-empt funds needed for the expansion of private investment or increase the pressure of demand in such a way as to create an inflationary situation. I cannot, at the moment, see that a further increase in the borrowing requirement would do either of those things.

There is the argument about the money supply, with which I shall not bore the House by repetition at any great length. The present monetarist doctrines are a passing fad. The figures of the money supply—M1, M3 and so on—are no more than a measure of that proportion of their total assets which the public care to keep in liquid form in any given time. To try to regulate the economy by changing the money supply is like trying to regulate the speed of a motorcar by twisting the needle on the speedometer. That might be a little controversial if I pursued it any further.

The limitation on the expansion of demand through the reduction of taxation in the 1960s was first, the danger of stimulating further incomes expansion, and secondly, the danger of strain on the balance of payments. In the current year, the danger of the further pressure on expansionary incomes demand is less than it was. The second danger to the balance of payments is sheltered, for the time being, by the development of our North Sea oil resources. But there has developed a new danger, namely the total failure of productivity to rise in this country.

In the 1960s we could be certain, and experience showed, that an increase in demand would produce not only increased output but an increase in productivity. We cannot be sure of that at present. The basic and fundamental fact of our economy is that so long as we produce less from our equipment than other people can produce, our living standards are bound to be less than the living standards of others.

By cutting taxation, particularly income tax, and by further extending the cuts, as the Chancellor should do, up the range of incomes, we shall be removing a disincentive to output and productivity. We shall be creating a new incentive. We need a wholly different attitude to the requirement of efficiency, output and productivity. The day when I hear the leaders of the trade unions spending their time and speeches on persuading their members that the fundamental need for themselves and their country is more efficiency and more productivity, I shall begin to have more hope for our future.

6.15 p.m.

Photo of Mr David Stoddart Mr David Stoddart , Swindon

We have just listened to the usual balanced, analytical and thoughtful speech that we have come to expect of the right hon. Member for Chipping Barnet (Mr. Maudling), at least in latter years. Many of my hon. Friends will agree with many of the things he said, particularly about the net borrowing requirement and the money supply. However, I believe that trade union leaders are well aware of the need to increase productivity. History has shown that it may well be that an increase in productivity will put union members out of work. We have to overcome that history. We have to persuade trade union leaders and trade unionists that by improving productivity they will not be putting themselves on the dole. That will be difficult to show them, particularly bearing in mind what has happened over the last few years—and I do not mean the last three and a half years. It has happened over a long period of time. We should apply our minds to this matter, as I am sure the right hon. Gentleman will.

When the Chancellor formulates and introduces a Budget, he has a formidable task in a modern society. The Chancellor this year must have had three major elements in mind—unemployment, inflation and the balance of payments. Those problems, which are deep-seated, deep-rooted and long-term, are all bound up together. It needs a Solomon of a Chancellor, from no matter which part of the House he comes, to be able to balance the elements and to produce a balanced Budget that will be suitable to the needs of the country.

The Chancellor has probably produced the right sort of balance for the time being. He has been able to reduce taxation, particularly direct taxation, but, at the same time, has been able to improve and increase public expenditure in areas in which it is badly needed. Nobody in the House would disagree that it was necessary and desirable to provide 400 more kidney machines. There has been that sort of public expenditure which is acceptable and desperately needed as well as a number of tax cuts which will be acceptable to all of us.

It is no longer good enough to believe that the judgment applied in a Budget can stand for any period in the present state of the world economy. We can no longer say, as some Conservative Members appear to be saying, "We can have a Budget in April and that must last for a long time. If there is the slightest suggestion that some further measures might be required in one, two, three, five or six months time, you do not know what you are talking about. You are not doing your job properly." It may be that in a short period of time, the Chancellor will need to take further measures. My right hon. Friend will have to do that if the measures that he has taken in the Budget are not producing the sort of results that he expects.

Since the Budget, there have been calls—repeated by the Conservatives and the Liberals today—for further tax cuts. The right hon. and learned Member for Surrey, East (Sir G. Howe) outlined the further tax reliefs that he would like to see, but, as so often, he was not prepared to balance that by telling us exactly where he would find the money.

Photo of Mr William Clark Mr William Clark , Croydon South

My right hon. and learned Friend told us exactly where the money would come from.

Photo of Mr David Stoddart Mr David Stoddart , Swindon

He did not. He went back to the parrot cry that the NEB must be denuded of funds. I believe that those funds will be necessary to maintain employment at a reasonable rate and to cut the level of unemployment. That was the only measure that the right hon. and learned Gentleman mentioned. I heard no other mentions of public expenditure reductions. Perhaps some of the right hon. and learned Gentleman's colleagues will be able to tell us where the other cuts are to take place so that we know exactly where we stand.

I can suggest some desirable public expenditure cuts in the current financial year. For example, we shall be spending £750 million as our net contribution to the EEC. That is equivalent, on the Shadow Chancellor's figures, to a reduction of 2p in the standard rate of income tax, but we hear no mention of that from the Opposition. They are happy to have that sort of public expenditure—and it is just as much public expenditure as is spending on hospitals and schools. It comes from the public purse, but is used not to subsidise our industry but to subsidise European farmers so that we can pay more for our food.

That is public expenditure which I should be happy to cut. Perhaps one day we shall take the Opposition, and maybe even the Government, with us in making clear to the British people that they get nothing for their £750 million except higher food prices and other detriments to their standard of living.

The hon. Member for Cornwall, North (Mr. Pardoe) wants a cut in the standard rate of income tax. I have never understood why the Liberal Party concentrates so much on a cut in the standard rate when it would be socially inequitable and, at the present time, would be using money in the wrong way.

If we have additional money to spend on tax reliefs, there is one section of the Community that needs those reliefs more than any other—the families with children. Clearly, if we want to give more assistance to families, there are better ways than by a 1p or 2p cut in the standard rate of income tax. We would do better to extend the lower rate band or increase tax allowances.

If the Liberals want to be liberal and want social progress, they should be suggesting action along those lines rather than along the lines proposed by the hon. Member for Cornwall, North. I cannot understand why they seem to go along with the Tories in wanting to reduce the higher rates of tax.

Before a man with a couple of kids reaches the 40 per cent. band, he will be earning about £9,000 a year which, even on present standards, is not an unreasonable salary. In addition, a man earning a very high salary, say £50,000 a year, will get from the Budget a tax reduction of £750 a year. As I said in the Budget debate, that relief, coupled with the post-tax 10 per cent. increase that he will no doubt receive, will give him an additional net £1,500 a year—almost the same as the £31 a week which is the total income of a pensioner couple. I hope that the hon. Member for Cornwall, North will rethink his priorities because I believe that he is more on my wavelength than on that of the Tories.

I turn to the very grave problem of unemployment. There is no doubt that to have nearly 1½ million people unemployed is grossly wasteful of our resources. The Government need to tackle this problem—perhaps in different ways. We can no longer say that if we increase expenditure in industry on plant and equipment, we shall necessarily find all the jobs that we need. Additional investment, of itself, will not do that.

We know that an additional 1 million jobs will have to be found over the next five years and I do not believe that they will be found by increased investment in industry. Indeed., the reverse may be true. Further investment in industry—certainly without the outlet of demand—could increase our unemployment rate. That is why the Government must tackle the problem, which exists not only in this country but abroad, more vigorously than it has been tackled by any previous Government.

The Prime Minister has had many talks with his counterparts overseas about the world economic situation. I hope that he has been saying to the other leaders that there is a huge unsatisfied demand throughout the world. Demand in India, Africa and South America is phenomenal and is quite sufficient to keep all the unemployed in Europe, America and elsewhere in work if we can only find ways of ensuring that the people in those countries with this huge unsatisfied demand are able to satisfy it. Perhaps this is one of the ways forward that the Government should be considering more vigorously with other Governments throughout the world.

In this country the Government must look at new measures to deal with unemployment. I shall go on pressing for a reduction in the retirement age for men. I say that not only because it would help to reduce unemployment but also because it would be equitable for men and women to retire at the same age, whether it be 60, 55 or any other age.

That is a measure which the Government could be considering seriously. It would not cost a great deal of money if the replies given me by my right hon. Friend the Chancellor are to be believed, as I am sure they are. My right hon. Friend estimates that it would cost £65 million.

Photo of Mr David Stoddart Mr David Stoddart , Swindon

Perhaps I had better explain that figure. According to an Answer given me by my right hon. Friend, all things being equal, the cost of reducing the age of retirement for men from 65 to 64, provided that all those jobs were taken up by people on the unemployment register, would be £65 million per annum.

Photo of Mr David Stoddart Mr David Stoddart , Swindon

Yes, net. That is the answer, according to the Government, and that would be a relatively low cost to get people off the unemployment register.

Photo of Mr Robert McCrindle Mr Robert McCrindle , Brentwood and Ongar

In case all the jobs were not taken up, would the hon. Gentleman care to confirm that the cost of reducing the retirement age of men from 65 to 64 would be not £65 million but nearer £265 million?

Photo of Mr David Stoddart Mr David Stoddart , Swindon

Yes. I said "all things being equal", and I hope that I explained that the £65 million applied provided all the jobs left by people at 64 were taken up by people at the moment on the unemployment register—and it is reasonable to expect that they would be.

But that is only one aspect. There are others which the Government should be considering. There is, for example, a lot of overtime being worked. This is a matter that the Government could look at with industry and with the trade union movement in an attempt to reduce the number drawing unemployment benefit.

Probably my right hon. Friend the Chancellor of the Exchequer has just about got it right. I hope that there will be good discussions on the Bill in Committee. I wish the Standing Committee every success. I shall not be joining it this year, I am glad to say. I wish the Committee good days and long nights. It will be pleasant to feel that I can go home and leave other hon. Members to get on with the most important job of studying the Bill in detail. I hope that the Committee does its job very well and that the Bill goes through this House unscathed.

6.33 p.m.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

The hon. Member for Swindon (Mr. Stoddart) is a man of sanguine and cheerful temperament, and he does us all good, though he disclosed at the end of his speech one reason for his cheerfulness today.

At various stages in his remarks he mentioned three ambitions not unconnected with one another in which I join him, though I wish I could be so hopeful about them. The first is that we could find some way of overcoming that latent and endemic Luddism in this country which causes us rather to fear than to hope for means of increasing output per man. This is undoubtedly a contrast between our attitudes and our society and those of other nations, and it is a burden and a disadvantage under which we labour.

The hon. Member for Swindon referred also to the unexploited markets of other continents. I could wish to see the freedom of investment and of trade which is the only way in which the latent demand in the world will be unlocked and turned into real demand.

Finally, though our agreement on this will not be shared throughout the House, I can wish that the enlightenment which the hon. Member for Swindon and I share upon the disadvantages of this country forming part of the European Economic Community spreads rapidly to all Benches and all parts of this House.

This will be an unusual Finance Bill, and an unusual Committee Stage that will commence shortly. Although a great deal of work has to be done upon the details of Finance Bills—indeed, upon more than the details: I mention here the whole question of retrospection which will have to be debated carefully and thoroughly in Committee—we have not for a long time been put upon the necessity of facing in practical terms what is called the Budget judgment of the Chancellor of the Exchequer. The technical reason for the difference this year is clear enough. Since the House may have it in its power to make a large alteration in the reductions of taxation proposed in the Budget, it therefore has to face as a practical consequence the implications of doing so. So I think that there will be a realism and a responsibility about our debates on this Finance Bill, for that reason, which is unusual.

That the proposals for altering the balance of the Budget are major cannot be disputed. The right hon. and learned Member for Surrey. East (Sir G. Howe) represented a further remission of taxation of £500 million as a very little thing. But it is, after all, an increase of 25 per cent. on the major remission of taxation proposed in the current year by the Chancellor of the Exchequer. The proposals of the Liberal Party amount to an increase of that proposed remission by up to a half. So the House and the Committee are being asked to face the implications of requiring a further substantial reduction of revenue and, in particular, of revenue raised from direct taxation.

There are four distinct ways in which the consequences of that could be drawn. One of them implies no net reduction in revenue. The other three accept a net reduction in revenue but would propose to deal with it in very different ways.

The method which involves no net reduction of revenue would be to offset the reduction in direct taxation by a corresponding increase in indirect taxation. This was canvassed in his Budget speech by the Chancellor of the Exchequer who, perhaps under the influence of the hon. Member for Cornwall, North (Mr. Pardoe), said that In principle I have some sympathy with this view".—[Official Report, 11th April 1978; Vol. 947, c. 1203.] that there should be a transfer of weight from the direct foot to the indirect foot. I myself believe that is a very dubious point of view and consider that the argument so often heard—it has almost become a popular fashion—that there should be a shift from direct to indirect taxation is extremely vulnerable.

I would, however, not challenge it primarily upon the reasons given by the Chancellor of the Exchequer. The Chancellor of the Exchequer argued that to raise more revenue from indirect and less for direct taxation would be "deliberately to raise the inflation rate". That I believe to be a fallacy, a special case of the general fallacy that inflation is caused by some prices rising. The mere increase in the price of some articles produced by the imposition of additional indirect taxation would not in itself—indeed, I would argue, could not—cause that general rise in prices, or fall in the value of money, which is inflation.

The Chancellor's second argument was that it would "increase the cost of living". That statement requires clarification; for if by the cost of living is meant merely the mirror-image of a fall in the value of money, then it is simply another way of repeating the fallacy that an increase in indirect taxation produces inflation. What an increase in indirect taxation almost inevitably does do is to alter the relative cost of living for different classes of people—for it can hardly help but make some items more and others relatively less expensive. Most of the forms of increase of indirect taxation would certainly, by the alteration in the make-up of the cost of living which they would produce, rest a relatively larger burden upon the shoulders of those receiving lower incomes than to levy the corresponding amount of revenue by direct taxation.

I myself do not believe that there is any force in the notion of a sort of God-given or predetermined optimum balance between the proportion of revenue raised by direct and by indirect taxation. Indeed, the whole concept of balance applied to this relationship imports a fallacy.

I would venture on the contrary to say that income tax is the best of all taxes—that may only make it the best of evils—and that it has great advantages and some of the characteristics which an ideal tax ought to have. It is, for example, more neutral in its effect than any other form of raising revenue. It prejudices less than any other method of raising revenue the decisions which are taken by the taxpayer. The decisions to spend or to save, the decisions on what to spend, the decisions as between investment and consumption, are less influenced by direct taxation than by other forms of taxation.

Its other great virtue is that it is fat more sensitive than any other method of taxation to secondary purposes. The first purpose, of course, is to secure the revenue; but the days are long gone, if they ever existed, when the motives of taxation were restricted to the raising of revenue. If it is intended to use the method of raising revenue to produce certain consequences, to favour certain activities, to assist certain classes of the community, and if hon. Members in other parts of the House want to see it used as a method of redistribution, there is nothing to rival direct taxation in the sensitivity and accuracy which which it can be made to serve those purposes.

So I would not wish to see any offsetting take place in the form of a proportionate increase of indirect taxation.

Photo of Mr Alan Clark Mr Alan Clark , Plymouth, Sutton

I remember many years ago, be fore I entered this House as a Member, being greatly impressed by a pamphlet that the right hon. Gentleman wrote, which I think was called "Income Tax at 3s. 6p. in the Pound." I may have got the figure wrong. Was that purely an intellectual exercise, or has the right hon. Gentleman changed his views about the relative merits of direct and indirect taxation?

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

I think that the hon. Gentleman will find, if he refreshes his memory, that it was actually 4s. 3d. in the pound, which shows what a long time ago it was. I also do not think that he will find that my proposals in the Morecambe Budget resulted in a shift in favour of indirect as compared with direct taxation, though they certainly resulted in a major shift as between Government expenditure and the gross national product—but that is a different matter.

So I come to the three alternative consequences of the major increase proposed in tax remission, which would result in a net diminution of revenue, whether that net diminution be £½ billion, £½ billion or £1 billion.

The first approach is to maintain that it can and should be offset by a reduction of expenditure in the current year. I am the last person to cavil at reduction of public expenditure as the basis for remission of taxation. Indeed, I have argued in a succession of debates that very substantial reductions amounting to several billions of pounds are practicable and desirable in order greatly to reduce the public sector borrowing requirement. I have also argued that in the nature of things, the emphasis of those reductions will lie on capital rather than on current public outlays.

But what I do not believe—and in this I am at one with the hon. Member for Cornwall, North—is that it is possible at the beginning of a financial year so to operate upon the expenditures during that financial year, even upon capital account—certainly not upon current account, but even upon capital account—in such a way as to accommodate either the whole or the greater part of the remissions of taxation which are being proposed.

So we fall back upon looking at the net borrowing requirement.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Surely the right hon. Gentleman must be aware that within the past two years there have been reductions of public expenditure which have had quite substantial effect in the year in which they have been made, even though there has been a still larger effect in the subsequent year.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

I wonder whether those were reductions which had been decreed in the course of the financial year itself. However, perhaps there is a connection between the intervention of the hon. Member for Blaby and what I was about to say about the net borrowing requirement; for there are two points of view which a would-be tax reducer can take of the net borrowing requirement.

The more cheerful—which I feel may well be at the back of the minds of many hon. Members on both sides of the House—is to say "Well, you never know, it is one of those magnitudes about which Chancellors of the Exchequer can be enormously mistaken; so why should we be bothering about the net borrowing requirement?" "After all", this argument continues, "in this very Budget speech we were reminded that in the financial year just closed, the net borrowing requirement turned out in the end to be no less than £3½ billion less than had been anticipated at the beginning of the year. So let us be cheerful, let us not worry too much about the odd billion or two on the net borrowing requirement, one way or the other".

In fact, I think many Labour Members felt rather cheated when they learnt that the net borrowing requirement had been so much lower in the last financial year than had been anticipated. I think they felt that there must have been, all unbeknownst to them, enormous reductions in those forms of public expenditure of which they so much approve, and that somehow they and the nation had been short-changed.

There is instruction to be had from seeing how this enormous shortfall on the estimate of the net borrowing requirement for 1977–78 took place in fact. There are three principal items. The first is that the excess of current revenue over current expenditure was about £500 million more than had been estimated. But before anyone starts to cheer over the unexpected buoyancy of the revenue which that would appear to disclose in the year 1977–78, a glance at Table 9 in the Financial Statement will repress that jollification. Almost the whole of the difference—indeed mom than the whole of the difference—is to be found in the last item in that table, which is labelled "Other". There is, however, a footnote to the word "Other". If hon. Members can read print which is so small, they will see that it says: Includes the 10 per cent. of 'own resources' refunded by the Communities to meet the costs of collection. So a windfall of the order of about £900 million from an element in the analysis of revenue so nondescript is to be relegated to the position of "Other" accounts for almost the whole of the shortfall—and that is one of the three major elements in the shortfall in last year's borrowing requirement.

The second is the less than expected outgoings from the National Loans Fund. But here again it is important, I hope that what I am saying is of some comfort and alleviation to Labour Members, particularly those below the Gangway, to notice that the diminution in loans to, for example, nationalised industries was substantially offset by an increase in loans to local authorities and harbour authorities, and that a quite substantial element was an alteration in the loans net "within central Government" itself. So the shortfall was again not so much of the nature of a real reduction in deliberate Government expenditure but very much of a presentational or accidental character.

The remaining reduction in central Government demand comes from "Other funds and accounts", and is of the order of £900 million. We find "Other funds and accounts" by referring to Table 15 of the Financial Statement, which tells us what they are. They are the surplus or deficit on the National Insurance Fund and changes in departmental balances invested in governmental debt, etc. In fact, they are pare spoof, bookkeeping entries, which turned out or were contrived to turn out—I do not know which it may be—larger than the figures which had been set down in the original estimate.

So much for the central Government shortfall of £2½ billion. The further £1 billion which makes up the full total is to be found in Table 6, and is the last item with which I shall trouble the House. The table shows that it was mainly in the "miscellaneous receipts and accruals" that the alteration between what was expected and what took place occurred.

Therefore, we learn from this analysis that, so far from there being some persistent tendency, a sort of law of nature on which we can rely, for Governments to overestimate the net borrowing requirement and to discover at the end of the year that they have been the recipients of huge sums which they have failed to disburse, the phenomenon of the underestimate in 1977–78 was a highly artificial and special one which there is no reason to expect to be repeated. It is just as likely that the miscalculation will work out in the other direction in 1978–79 as that the balance will still be the same way. So I believe that, whatever else we rely on when we address ourselves to the net borrowing requirement, we should rid our minds of the notion that the Government achieved huge economies, huge underspending, in 1977–78, and that therefore they can do it again, and probably behind our backs are planning to do it again. There is no such thing. We had better forget it and look at the net borrowing requirement upon its merits.

That brings me to the last school of thought, which says "Well, why not another half a billion, three-quarters of a billion or a billion pounds on the net borrowing requirement?" The hon. Member for Cornwall, North reminded the House that in a previous Parliament on behalf of his party he had encouraged the Government of the day not to be too afraid of what looked like a large and threatening public sector borrowing requirement.

Before the Chancellor of the Exchequer is in a position to deal with the arguments of those who say that a substantial additional remission of taxation can and should be made and can be carried upon the public sector borrowing requirement, he must go a good deal further than he has gone into the philosophy of his Budget. In particular, he must explain what I might call the theory of the stimulus. Here are the chancellor's relevant words, referring to the full year £2½ billion remission of direct taxation. He said: cuts in income tax will account for almost all the £2½ billion stimulus which I have announced".—[Official Report. 11th April 1978; Vol. 947, c. 1203.] The natural implication of those words—they correspond with expressions often used in the Press, such as "injections into the economy", "putting so much money into the economy"—is that the £2½ billion remission of direct taxation in a full year, £2 billion in this financial year, represents in itself an equivalent stimulus to the economy.

We shall need to hear a good deal more in much more detail from the representatives of the Treasury before we can decide whether it would be wise and prudent to increase that so-called stimulus by half a billion pounds or a billion pounds. How does the Chancellor believe, how does the Treasury believe—will they explain more precisely—how the stimulus is imparted to the economy by the £2 billion remission of direct taxation?

The Chancellor of the Exchequer said that remission would result in a three-quarters of 1 per cent. increase in gross domestic product in the year 1977–78. That is to be found in column 1194 in the Official Report of his Budget speech. It is a very interesting figure. The £2 billion represents 1¼ per cent. of the GDP; but apparently only three-fifths of that 1¼ per cent. is stimulus to the economy. Out of a £2 billion remission of direct taxation, the Chancellor of the Exchequer expects to get only three-fifths by way of increased output. How did he arrive at that figure? Why is it three-fifths of the remission of direct taxation that he thinks will be represented by increased output? And, by the way, Mr. Deputy Speaker, that ¾ per cent. has already been counted into the assumed basis of revenue in the calculations upon which the Budget rests. I ask, then: what is the mechanism by which the £2 billion of remission of direct taxation is converted into a ¾ per cent. increase in national output?

Let us look at the alternatives. If the same amount is to be expended but £2 billion is to be obtained by borrowing from the public and overseas, instead of being raised in direct taxation, the average effect is nil. I say the "average" effect because, of course, it may be the view of the Chancellor of the Exchequer in Gladstonian mood, that money which is left to fructify in the pockets of the people will be more actively employed than money which is secured by the Treasury by way of borrowing. But then there is an equal and opposite possibility, namely, that the public will proceed to save—and I mean save in the narrow, Keynesian sense—more than they have been doing hitherto. The Chief Secretary shakes his head at that; but I do not mind: I do not mind because I am simply assuming that the effect of a transfer from direct taxation to borrowing is neutral. So where is the stimulus? There is no increase in demand there. There is simply the same amount of demand withdrawn from the public, to be applied or exerted by the Government.

It almost looks as though it is the intention of the Chancellor of the Exchequer not to obtain the whole of his extra £2 billion, or even most of it, by borrowing from the public and from overseas, but that he intends to convert it, by borrowing from the banks, into additional demand. Is this so, or is it not?

We shall want an answer to this before we can proceed very far in deciding whether the public sector borrowing requirement ought to carry the weight of a further remission of direct taxation. We shall need to understand the calculation which underlies the present proposals before we can decide whether they ought to be altered. Does the ratio of 3:5 between the expected expansion and the remission of direct taxation represent the ratio of the £2 billion which is not to be borrowed from the public and from overseas but is to be converted into additional monetary demand? Is that the theory?

The Chancellor of the Exchequer has to do a good deal of explaining. He can no longer rest upon the simple words "£2 billion stimulus"; for if he attempts to do so we shall say "£2 billion stimulus! Why not a £2·5 billion stimulus?" The Chancellor's hon. Friends behind him, and his hon. Friends below the Gangway, will say "Very good, Chancellor of the Exchequer. We are grateful—although we do not fully understand it—for the £2 billion stimulus which is to be given to the country. We like the ¾per cent. addition to the gross national product. But why should you weary in well doing, if it can be done in that way? Take the advice of the Liberal Party or, if you do not take the advice of the Liberal Party, take the advice of Her Majesty's Opposition."

The Chancellor of the Exchequer will have to explain why it is that he can safely and properly provide a stimulus of £2 billion whereas a stimulus of £2·5 billion or £3 billion is unmanageable. The central debating point in Committee, then, will take us to the heart of the economic theory upon which the Government are operating; for unless and until that theory is exposed, the Chancellor of the Exchequer will be naked to his enemies. He will be unable to explain why he considers that the balance of his Budget has to be preserved in its present form and cannot be altered, and why the alteration cannot be charged upon the public sector borrowing requirement.

So I look forward, as does the hon. Member for Swindon (Mr. Stoddart)—although I do so with an expectation of closer participation—to happy days and nights, but fruitful and instructive days and nights. A point of great interest will be given not merely to the Treasury team but also to the Government Whips by the fact that it will be upon the exposition of the monetary or economic theory of his Budget that the ability of the Chancellor of the Exchequer to defend it in those days and nights will be found to rest.

7.5 p.m.

Photo of Mr Hugh Fraser Mr Hugh Fraser , Stafford and Stone

It is a great pleasure, Mr. Deputy Speaker, to follow my right hon. Friend the Member for Down, South (Mr. Powell). I think that when the Chancellor of the Excheqeuer comes to make his final judgment of these matters it will be seen that one of the things which have been worrying him is the reaction of the markets and exchanges to what we are doing here.

It must be particularly galling to those on the Treasury Bench, who have pursued, on the whole, a fairly monetarist policy—and a policy which has been approved by the IMF—to see, nevertheless, that in the last three months sterling has fallen by 10 per cent. while the franc has gone up by 3 per cent. against the basket of currencies. This reveals something of some importance, especially when we note that the franc went up today after Mr. Barre had announced yesterday measures which would undoubtedly increase the cost of living to the French public.

There is a judgment being made in the world, and it is a judgment that we should perhaps make here. It appears to be made, not on the basis of the figures or statistics which are available, but on the way in which the general economy of the country is going and whether there is confidence in its currency and in its ability to borrow overseas.

I believe that there are some far deeper matters which should be considered by the House before it goes into Committee to discuss the elements of the Budget. I am no economist—unlike some hon. Members who are either would-be Chancellors, potential Chancellors, or ex-Chancellors—but the point which strikes home to the ordinary person in this country involved in business is that we have seen over the years a terrifying decline in the economic strength of this country. This is very sad, and it has been going on for the last eight or 10 years. The effects of it are such that the sort of talk that we had from the hon. Member for Glasgow, Garscadden (Mr. Dewar) about further expenditure creates a cloud-cuckoo land.

There is no doubt that the real wealth of this country has declined, and it is against this background that the propositions put forward by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) this afternoon must be judged.

My right hon. Friend the Member for Down, South has spoken about the borrowing requirement and how it falls and how the Government propose either to have a real stimulus to the economy or to negative that stimulus by borrowing from the public the amount of money which is put into the economy.

I believe that there is now a necessity for a complete change in our approach to the economy. Over the last few years, there have been all sorts of impediments to the economy. Perhaps the worst and the most disastrous has been the attempt by the Government to have an incomes policy, a control of dividends, and a control of prices.

I remember saying to my right hon. Friend the Member for Sidcup (Mr. Heath), when he brought in his compulsory incomes policy, "By doing this you are institutionalising inflation." If one looks at the figures over the last few years one will see that we have had the highest rate of inflation in the Western world. That is why the strategy in this Budget is questionable. Its strategy is to try to move into a fourth phase of incomes policy with the trade unions. I do not believe that that will work. It is already breaking down. One has seen the anomalies which are creeping in. One has seen what happened to the Armed Forces. One has today seen what has happened to the medical profession. It has been recommended that it should have a 28 per cent. increase to bring it into line. Tonight the power workers have been offered 18 per cent. The whole of this policy of trying to control the economy is breaking down. One must return to a far freer system.

That is what the Conservative Party would aim to do. What it has said today is an earnest of its intention so to do. As my right hon. Friend the Member for Chipping Barnet (Mr. Maudling) said, we are faced with a sort of Luddite attitude which has reduced our production and productivity to about 50 per cent. of that of our competitors. We are surrounded by problems to the economy—the problem of a wages and incomes policy, the problem of a compulsory price mechanism, and the problem of the infringement of far too high Government borrowing on capital markets.

These things must be broken out of. They can be broken out of only by rewarding the successful. It may sound an unfortunate and unpleasant thing to say, but in every society there are certain people who are motivated by the pursuit of success, the pursuit of money, or the pursuit of power. There are such elements in any society, whether it be the Stakhanovite in the Soviet Union, whether it be an arbeit dienst gruppenfuhrer in the Nazi system, whether it is the go-getter in the American system, or whether it be the skilled man, the manager, the risk-taker or even the gambler in this country. Those are the people who make an economy move. That is why the Chancellor has spread his gifts far too wide. The margarine has been spread across the board. There needs to be far more concentration on the growth points of the economy and on individuals who will make the economy grow.

If one looks at any company report today, or deals in any way with industry, one sees an immense shortage of skilled men. There is a tremendous shortage of skilled men in engineering and a considerable shortage of good management. Managers go overseas and fewer people are prepared to take entreprenurial risks. That is why, looking at the picture as a whole. I believe that changes—changes away from a society which year after year piles up Government spending—must take place. What my right hon. and learned Friend the Member for Surrey, East is proposing is a mere token and gesture to show what the Conservative Party will do when it is returned to office.

Unfortunately, the Liberal Party has fallen into precisely the same attitude as the Labour Party over the last few years. It believes in a managed society, in an incomes policy and in controlled prices. By its own admissions all it is doing is trying to throw a few more monkey-nuts to the prisoners behind the bars.

We Conservatives propose a change in the whole basis of taxation. Of course, what we are proposing is taking a risk. It is taking a risk to give a pump priming to those elements in society which can start making the economy move once more. I remind the Financial Secretary of what happened to the French economy. In spite of their difficulties, the value of the franc has gone up while the value of the pound has gone down. In spite of their difficulties—having the weakest currency and being the most difficult country in Europe—their production over the last two years has gone up by 4½ per cent. a year while ours has remained at what it was during the three-day week.

Therefore, what the Conservative Party is doing is to make a gesture as an earnest of what it proposes to do. That is to give an additional stimulus to an economy which is foundering, both as seen from overseas and, certainly, as seen from the point of view of the unemployed and those who wish to get on with it inside our own land.

7.16 p.m.

Photo of Mr Ian Wrigglesworth Mr Ian Wrigglesworth , Teesside Thornaby

I only wish that it were quite as simple as the right hon. Member for Stafford and Stone (Mr. Fraser) seemed to suggest. I was more struck by the arguments, put forward with usual clarity and lucidity, by the right hon. Member for Down, South (Mr. Powell). I am sorry that I missed the earlier part of his speech, because I wanted to make a similar point about the uncertainty of the impact of the stimulus and the uncertainty of what the public sector borrowing requirement would be.

I do not know whether the right hon. Gentleman made the point that the forecast of the borrowing requirement was so wildly wrong in the last year that we needed only £5·7 billion as against a forecast of £8·4 billion. When one is dealing with margins of error which are that great, it is helpful to remind oneself that £500 million here and £500 million there, while very worrying in some respects, are not necessarily a matter of major catastrophe. It needs to be seen in that light, especially with regard to taking action and making judgments about what Conservative Members might do during the passage of the Finance Bill in the coming weeks.

My feeling before the Budget was that the existence of slow growth in output, high unemployment and spare productive capacity called for an expansionary Budget. But I felt that the required fiscal stimulus had to be cautious or it would be self-defeating. There is evidence in the performance of the economy over recent years to show that one should be cautious in the amount of stimulus that should be given.

Massive reflation, such as the £4·7 billion suggested by the home policy committee of the Labour Party, would in my view have resulted in an upsurge of imports, accentuated if home supply was unable to meet the demand because of constraints—particularly skilled labour constraints—which despite North Sea oil could not be financed. In addition, if too fast a fiscal stimulus were given, it would have led to the monetary expansion which would have led to a loss of confidence and renewed inflation. These effects would have led to lower sustainable growth and output and, except in the very short term, would have raised unemployment.

Basically, the sluggish growth in world trade means that we simply cannot afford to make a unilateral bid for massive growth. Therefore, as the Prime Minister and the Chancellor are doing at present, we needed to see a co-ordinated expansion of world trade to undo the deflationary effect of the OPEC countries' large surpluses. Although inflation is coming down, it is still higher than that of most of our competitors, and it must continue to fall if competitiveness and growth are to improve. This means, in my view, exercising restraint in wage bargaining this year, and some firm monetary control.

Photo of Dr Jeremy Bray Dr Jeremy Bray , Motherwell and Wishaw

My hon. Friend says that we cannot progress faster with inflation in the present state of world trade. Has he looked at the Odling-Smee working paper and the much fuller background that he can get on that from the Library about the very powerful effect that an aggressive exchange rate policy would have?

Photo of Mr Ian Wrigglesworth Mr Ian Wrigglesworth , Teesside Thornaby

I heard some of my hon. Friend's speech. I have not read the paper to which be has referred. I have looked at what has happened to our economy and other economies over the past few years, and I came to the conclusion that the dash for growth theory and the exchange rate changes that my hon. Friend was suggesting would not be possible. I do not think that the sort of policies that he seemed to be advocating took account of the reaction of partners overseas and in the Common Market, or the institutional framework within which world trade and Western world monetary systems operate. Nor did it take account of the reaction to the sort of unilateral proposals that he was suggesting, because I believe that this reaction would defeat what he was trying to achieve—the increase in world trade and a decrease in unemployment.

I was outlining my views on what the Budget should do and was talking before the Budget in terms of a fiscal stimulus of around £2 billion. I thought that this £2 billion should have taken the form of increases in tax allowances and some increases in public expenditure. I felt that any excess over the £2 billion should be made good by restoring the real value of excise duties and by standardising VAT.

That brings me to the proposals of the Liberal Party and the position of the official Opposition.

Photo of Dr Jeremy Bray Dr Jeremy Bray , Motherwell and Wishaw

Will my hon. Friend take the point that, in reflecting the conventional wisdom in the City, he has also an obligation, as a member of the Labour Party, to look more critically at the evidence than he has done?

Photo of Mr Ian Wrigglesworth Mr Ian Wrigglesworth , Teesside Thornaby

I shall study what my hon. Friend said and the paper in the Library that he recommended. I have studied what the vast majority of those who take an interest in financial and economic matters within the Labour Party usually study. I have examined the papers prepared by Transport House, the Treasury and others, and I have kept abreast of the articles in various journals and newspapers. If I change my view, I shall make it known to the House after I have studied the paper that my hon. Friend has recommended.

At present I must make my judgment on the experience of this country's economy over the past four or five years. I also take account of what has happened in other countries in recent years and the current factors affecting our position.

I was slightly disappointed that the Chancellor did not concentrate more of the reduction of taxation on the lower tax thresholds, and on tax allowances. It is interesting to note that, although the reduced rate band has done a great deal to reduce the burden on the lower paid, and, combined with measures like child benefit and school meals, has done an enormous amount to help the poor, people are still being taxed at a very low level of income.

Admittedly people are not being taxed as much as they were, but a single person earning £25 a week still has to pay £2·32 in income tax after the Budget. An income of £25 is not magnificent in this day and age, yet the recipient still has to pay more than £2 a week tax. Clearly this is not satisfactory. A married couple earning £35 a week are paying £2·39 in tax, which is also unsatisfactory, considering how much £35 is worth today.

I am disappointed that more was not concentrated at that end of the income scale, although I recognise the problems in doing this. I concede some of the arguments the Chancellor has put for the reduced rate band which is giving a broader spread of relief among a wider range of people at that level. But I am concerned particularly about getting people out of tax altogether at the bottom level, so that there is no overlap with the supplementary benefit level. I want to see a clear gap between the benefit level and the level at which tax begins to bite. I hope that it will be possible soon to increase these thresholds even more than has been done to date.

The Liberal Party has suggested some fairly substantial switches from direct taxation to indirect taxation. I would not be averse to seeing a modest increase in indirect tax, including the change to a 10 per cent. standardised rate of VAT.

The Government must recognise that they can hold down excise duties and indirect taxes only for a certain length of time, otherwise the level of these taxes in relation to inflation will get comparatively lower and the prices of the goods attracting these duties will become comparatively cheaper. In fact, that is already happening.

It staggers me that the Liberal Party, while wanting to go in that direction, is determined to exclude petroleum, of all things, from that policy. It is beyond me why a party that is keen on maintaining fossil fuels and on opposing, or at least being suspicious of, the development of nuclear energy should want to keep the cost of petrol down. When, in addition, Liberals talk of switching to indirect taxes why they should specifically exclude petrol is also beyond me.

The other proposal that the Liberals have made is to increase the national insurance surcharge. The same objection applies. I would not, in the long term, be opposed to increasing the level of contributions, but if that is to be done at present it will make the cost of employed labour that much greater at a time when there are 1·4 million people unemployed. It hardly seems to be a wise course to be taking at this juncture. Some of the increased cost would then have to be passed on by firms and by institutions as increased prices. I find that proposal rather puzzling. In the long term it may be acceptable, but at present it does not seem to be a wise course on which to be embarking.

The hon. Member for Cornwall, North (Mr. Pardoe) said that he would deal with the criticisms that have been made of the Liberal proposals. However, he did not deal with the most important criticism, namely, that of the Liberal Party's suggestion that we should move to indirect taxation. Such a move would increases prices at a time when there has been a sustained level of price increases, when there is obviously a need to get people used to the idea that prices will not be continually rising, when there is a need to reduce people's expectations of rising prices, and when it is crucial that we should have a successful incomes policy and incomes restraint.

Although the hon. Gentleman said that the impact of the proposals put forward by his party would not be as great as some have said, he did not answer the point. It is a worrying matter even for those who believe that some modest increase in direct taxation would have been acceptable.

My right hon. Friend the Chancellor of the Exchequer could have moved on the 10 per cent. rate of VAT. I appreciate that some of my hon. Friends say that VAT is regressive, and I am prepared to accept that argument to some extent. However, some of my hon. Friends tend to forget that there is a zero rate that applies to the great majority of goods and products that are considered sensitive, such as children's clothing. Although it would mean that on some luxury items the VAT rate would move from 12½ per cent. to 10 per cent., the worst abuses would not be in that area. I have in mind the sort of abuses that would be offensive if people were having to pay increased prices for food or school clothing. If my right hon. Friend had introduced the 10 per cent. rate, it would have given him more flexibility and the possibility of introducing increases in tax allowances at the bottom end of the scale to overcome the poverty trap that I should like to see.

In the light of those considerations, I should not be averse, if the need should arise, for my right hon. Friend to make such a move before the Bill completes its passage through the House. I assume that again the Chancellor will not be making his final Budget judgment until about the middle of July. I think that it was on 15th July 1977 that he gave what might be called his final Budget judgment, when he announced that the 2p decrease in the standard rate of tax would be changed and that there would be a decrease of only 1p as a result of the changes that had been made to the Bill by my hon. Friends the Members for Birmingham, Perry Barr (Mr. Rooker) and Coventry, South-West (Mrs. Wise). I assume that that is what will happen this year if any changes are made.

Should my right hon. Friend have to take such action, I personally would not be averse to a change in the VAT rate to 10 per cent. to give him the additional leeway that is required. I do not think that he should increase the public sector borrowing requirement or the net fiscal stimulus any more than he has done.

We were saying prior to the Budget that a stimulus of about £2 billion was right. My right hon. Friend decided to go along with the CBI figure of £2½ billion. In the light of our experience over the past two or three years, it is better to be cautious and to use the regulator to expand at a later stage rather than to go for a dash for growth, with increased inflation and reduced confidence leading only to an increase in unemployment and not the decrease that we all want to see.

I make one special plea which perhaps is a traditional one from Co-operative sponsored Members of Parliament. None the less, it is made seriously and sincerely. As my right hon. Friend the Minister of State, Treasury will know, the co-operative movement has been suggesting for some time that as the share capital of industrial and provident societies comes from small savers, and as they are non-profit making bodies, there should be tax relief on the first £5 of share interest for such industrial and provident societies to encourage more capital and to recognise the special place that such bodies have in the same way as building societies and similar institutions.

There was an additional reason for our hoping that the Chancellor would take action on the tax relief on share interest this year. That is because the Government have announced—the Bill is well on its way through the House—that they are to establish a Co-operative Development Agency. They feel that there is a role for co-operative societies, and not a dissimilar role in many respects to that role of small businesses, which have now been espoused by one and all as being the creators of employment. We hope that the agency will bring about the establishment of many new businesses and co-ownership enterprises, which some of us strongly support.

The Government having embraced the agency proposal, which some of us have been urging for a long time, we hoped that the recognition of co-operative principles would be extended to give tax relief on the first £5 of share interest as an additional stimulus to the establishment of new societies and new enterprises. I ask the Chancellor and his colleagues in the Treasury to think about the matter again. If I am a member of the Committee that is to consider the Finance Bill, I shall endeavour to raise the matter. I hope that my right hon. Friend will give it a sympathetic hearing and take action. It would cost very little in revenue if it were introduced.

Some adjustments could be made in the Budget without us getting into too histrionic a state. We have to keep in perspective even the proposals made by the Conservatives. As I have said, the forecast public sector borrowing requirement of £8·4 million turned out to be an actual requirement of £5·7 million. I do not think that there need be any panic talk about elections. There is no need to panic if such measures go through. It would be unwelcome to extend the borrowing requirement any more as the reaction of the market seemed to indicate on the day after the Budget. On the other hand, by July the situation will be much clearer. At that stage the Chancellor will be able to make his final judgment without having to have a General Election to help him to do so.

7.40 p.m.

Photo of Mr William Clark Mr William Clark , Croydon South

The hon. Member for Thornaby (Mr. Wrigglesworth) will certainly get the support of the Opposition if he introduces an amendment which helps small savers. I am sure that the cost of his suggestion would be infinitesimal. He will find that many Opposition Members are absolutely convinced that savings in all forms should be encouraged by the Government.

It was interesting to hear the hon. Gentleman talk about a flat 10 per cent. VAT. Alas, he will not be able to move such an amendment in Committee on the Bill, because it will be out of order. But if somehow he can engineer, persuade or cajole his right hon. Friends on the Front Bench to introduce a 10 per cent. VAT, he will have tremendous support from us. Perhaps I might come later to how we should use the £700 million extra revenue that it would produce.

I think that we should look at the overall effect of this, the Chancellor's 13th Budget. The background, as one hon. Gentleman said, has been low production—practically stagnant—high unemployment and high prices. The Government are taking credit to themselves now by saying "The rate of inflation is coming down. It is only 9·1 per cent." But that is on top of the 20 per cent., the 15 per cent. and the 18 per cent. that we have had—a total of about 95 per cent. inflation. Although it is a good sign that inflation is coming down, the Government should not get too euphoric by saying that it is now 9·1 per cent. and we are doing very well. As the hon. Member for Thornaby said, we still have a much higher inflation rate than most of our competitors. That cannot be right and it cannot be good for the economy.

I always thought that the Chancellor, of all Members in this House, was consistent. His consistency is beyond reproach. For each of the 13 Budgets that he has introduced, he has promised that he has got it right this time. He does not change his tune one scrap. The previous 12 Budgets should not have given anybody any confidence that he has necessarily got it right this time.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) has already given a token of what the Conservative Government will do regarding tax cuts in their first Budget. It is not within the competence of any Opposition party to raise taxes. That is out of order. Consequently, we have said that, without increasing taxes, cuts can be made in public expenditure. I think that my right hon. and learned Friend spelled them out very clearly, and I shall not rehearse them. He suggested some cuts in public expenditure adding up to £485 million in a year.

There is one matter that the Government—this applies to all Governments—should look at. With public expenditure at about £67,000 million a year, it should not be beyond the wit of any Chancellor to get a 1 per cent. reduction. My right hon. and learned Friend suggested a reduction of only three-quarters of 1 per cent. I should have thought that, with a total Budget of £67,000 million a year, it is within the Government's competence to cut £500 million off that and use that money in the ways suggested by my right hon. and learned Friend.

If the Government would accept a 10 per cent. flat rate for VAT, there would be £700 million extra in the kitty. Obviously, that would not affect the public borrowing requirement. One thing should be said about VAT. I hope that the Minister will look into this matter, because I shall cerainly be pursuing it. I think that the general public are alarmed by Press stories about the antics of some VAT officers. This matter should be looked at very carefully. I noticed today—no doubt the Minister did, too—that in another place Lord Houghton raised the question of the powers of VAT officers to search and so on. These alarming phenomena of our society need looking at. I am not suggesting that the Inland Revenue or the Customs should not collect every penny of VAT that is due. However, some Press reports that we read are particularly alarming by their references to the kind of strong-arm tactics of some VAT officers.

Our economy is suffering from many disincentives. No matter where we look in society, there are restrictions and disincentives. Allied to the Finance Bill is the fact that there is now a kind of phobia in some sections of business for perks for employees. That is because our rate of tax is far too high. It does not matter what comparison one makes. I am speaking now of direct taxation. We are the most heavily taxed nation in Europe, particularly on the incidence of direct taxation. Our marginal rates are crazy and absolutely ludicrous.

Our marginal tax rate is way above that of other EEC countries. We are all concerned that there should be harmonisation within the Community so that one member State does not have an advantage over another. This country, with its high rate of taxation, is working under an unfair disadvantage vis-à-vis the French, the Germans, the Italians or whoever. I think that the Government should consider this matter.

My right hon. Friend the Member for Stafford and Stone (Mr. Fraser) said the only way to increase our standard of living is to increase production and to create more wealth. It is silly and uneconomic to penalise the wealth creators. But that is what the Chancellor has done in his 13 Budgets.

As the hon. Member for Thornaby said, a married man earning £30 a week does not pay any tax. On the next £15 he pays 25 per cent. For the rest above that amount he pays 34 per cent. until he gets up to £7,000 a year. The average married man with the average industrial wage of about £80 a week pays £803 in tax. That is after the Budget and with the reduced rate band. That is £16 a week—a fifth of his income. I am convinced that that is a disincentive. It is frustrating to the worker, and it is certainly frustrating higher up the scale for the managerial and executive types on whom any economy must depend.

Obviously, the Opposition cannot necessarily change all the taxes that the Chancellor has introduced, but he could. However, I think that it is high time that the Government looked at the top rate of taxation. The tranches have been eased slightly by the Finance Bill, but we cannot afford a top rate of 83 per cent. It is ludicrous and it is a disincentive. As has been said, many medical men, entrepreneurs, pop stars and so on are going abroad because they cannot afford to live in this country with its penal taxation.

Although it might be a pipe dream, I should like to support the suggestion made by the hon. Member for Thornaby to cut the top rate of tax and pay for it with the £700 million that one might get from a 10 per cent. VAT rate. To cut the top rate to 60 per cent. would cost about £300 million. That would leave £400 million from the £700 million to help at the lower level by 1p or 2p in the pound reduction or an increase in allowances. I am convinced that as a nation we shall not achieve the extra production and effort that is needed if managers, executive workers and the wealth creators are frustrated.

The frustration does not apply only to those in the higher tax band. Many of the tax allowances are not index-linked. For example, the limit on mortgage interest allowances is £25,000. This limit was fixed a few years ago. It is staggering that to achieve the same purchasing power one would have to have a limit of £41,200. If one is made redundant one can receive £5,000. That figure was fixed some time ago. To give the same purchasing power that sum should now be £19,000. Other examples of this loss of value are capital gains tax and the gifts that one can make under capital gains tax rules. Apart from the exemptions in the Bill one can make a gift of £100. That sum should now be increased to £323 to be worth the same. Apart from the exemptions in the Bill chattels might be worth up to £1,000. That sum should now be £3,227. To put these matters right would not cost the Exchequer much. But the psychological effect would be tremendous to the middle-band worker.

We have not spoken much today about capital gains tax. I and many of my hon. Friends have always maintained that this is a tax on inflation. The Chancellor of the Exchequer has done something through the exemption limit, but this tax should be tapered off so that the longer one holds an investment the less tax one pays upon it, until after a while, no tax is payable on it. Everyone knows that one might have bought £1,000 worth of shares some years ago which one could sell for £2,500 today. That is a paper profit of £1,500. But that is ludicrous because the purchasing power of the £2,500 is now less than the original £1,000.

The Chancellor has done something about investment surcharge but it is a confidence trick on savers in particular. The exemption limit has been lifted although it is not yet at the level of £2,000 at which we left it. I have never understood the logic of taxing two men in different ways. A man who happens to work for a company where he enjoys the benefit of a pension scheme is not subjected to a surcharge on his pension when he retires. However, the man who has saved up during his working life because he did not work for a firm that operated a pension scheme is subjected to the surcharge. As the Chief Secretary said, the exemption limit is £30,000. To impose an investment surcharge on a man who has saved for his retirement and not impose it upon a man who receives a pension is illogical, unfair and unjust, I do not suggest that both should pay. I suggest that neither should pay this surcharge.

With the increase in the limit of corporation tax the Chancellor has gone some way to help small businesses. There are about 400,000 active small businesses in this country. With a little encouragement I am sure that they could make a tremendous indent on the unemployment figures. Apart from the financial aspect a problem is caused by the Employment Protection Act. It is an inhibiting factor on small business men taking on extra employees. In addition, small business men are heavily taxed. They are more highly taxed as individuals than their counterparts in France or Germany. A reduction in the top rate would help small business men.

Many small businesses depend on outsiders for some of their finance. The dividend limitation is mother inhibiting factor. I am sorry that the Chief Secretary was not more forthcoming after being asked three or four times about what is to happen about this in July when the present period runs out.

I should like to bring to the Minister's attention a small but important issue. Over many years we have had good voluntary services. All hon. Members want to see the WVS, Sea Rescue service, lifeboat men, the Specials, the TA and other such organisations given encouragement and help. The Treasuries of successive Governments have been mean towards these voluntary services. The voluntary services save the taxpayer money. It is difficult to quantify how much they save but they should be encouraged.

A lifeboat man, for example, is a volunteer. He lives in his village, the siren sounds and out he goes with his colleagues to effect a rescue. That man will receive £6 or £7 for this. Over a year he will probably receive about £100. That sum is added to his income and he pays income tax on it. How mean can one get? It would not cost the Exchequer much to abolish that and it would be an encouragement to the voluntary services.

I turn to the borrowing requirement. The hon. Member for Thornaby asked "What is another £500 million?" He said that we should not get too excited about it and that we should not have an election about it. But it is a lot of money. One of the things that upset the City—and I mean not the speculators but the financial world—was the large borrowing requirement. This was why the Budget did not receive a good reception. I am convinced that we experienced the weakening of sterling because of this lack of confidence.

Photo of Mr Ian Wrigglesworth Mr Ian Wrigglesworth , Teesside Thornaby

I must make it clear that I do not think that £500 million is nothing about which to be troubled. What I was encouraging the Treasury Bench to do was to refrain from getting as panicky as did the City about the public sector borrowing requirement figures. I pointed out that the forecasts had not been shown to be all that accurate in the past and I went on to say that the money required could be raised without doing tremendous damage to the money supply.

Photo of Mr William Clark Mr William Clark , Croydon South

I accept that. I do not think that it can be said that the City has panicked. It is not fair to accuse it of panicking. Let us not think in billions of pounds, because we get a bit lost. In 1977–78 we were, as a country, borrowing £15 million a day or, putting it another way, we were, as a nation, overspending by £15 million a day. This year it is envisaged that we shall be overspending by £23 million a day. This is the borrowing requirement.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

Is the hon. Gentleman equating borrowing with overspending? I cannot see that there is an exact corollary.

Photo of Mr William Clark Mr William Clark , Croydon South

Surely one borrows only to spend. The borrowing requirement is £23 million per day now and it was £15 million a day last year. This in itself is bound to give the City a lack of confidence. We cannot go on borrowing at this rate, particularly with our low production.

Photo of Mr Ian Wrigglesworth Mr Ian Wrigglesworth , Teesside Thornaby

I hope that the hon. Member will forgive me for interrupting yet again, but this is an important point. If the City were anxious, as the hon. Gentleman suggests, should it not have paid more attention to the new controls on money supply which the Chancellor introduced—the six-month rolling targets and so on?

Photo of Mr William Clark Mr William Clark , Croydon South

We have to be careful when we talk about the City. The City is not just one person. It is made up of 20 or 30 different markets—the commodity markets, the tin market, the metal exchange and all the rest. It is made up of many individuals operating in different facets of business. The people in the City are not playing shove-ha'penny with pound notes or with foreign currency. In the City there are all the head offices of manufacturing industry. It is the assessment of individuals which has brought about this lack of confidence, not the act of one part of the City.

In my view the borrowing requirement is far too high. We have had 13 Budgets. The Government are claiming credit for helping this, reducing taxation here, helping a business man there, and so on. What they do not realise is that most of the tax troubles that exist have been imposed by them. If the Chancellor wanted to get back to the 1974 tax levels he would have had to reduce taxation by £5,000 million rather than £2,500 million.

As a nation we are paying more tax today than we did in 1974. My assessment of the Budget and the Finance Bill is that I doubt whether the Chancellor has got it right. He has missed the boat and he cannot undo the untold damage that has been done to incentives. Until he gets out and until there is a proper Government we shall not have the much-needed improvement in the economy. While it might have been very funny for the Chancellor to say that he would make people howl with anguish as a result of his tax measures, it is not those people who are howling but the country generally.

8.5 p.m.

Photo of Mr Dafydd Wigley Mr Dafydd Wigley , Caernarvon

I shall not take up the argument of the hon. Member for Croydon, South (Mr. Clark) too closely, except to say, on the question of our borrowing requirement, that what is important is the way in which the money is being used. If it is used in a way which will generate productive work in the longer term it does not matter too much. All manufacturing industries depend, in the first place, on borrowing and then on using the money effectively. The question is how the money is being used by the Government. The debate is about the priorities exercised in using the money at our disposal, whether in the public sector or private sector.

Due to the lateness of the hour, I shall not go into great detail on the Budget because I had an opportunity of doing that during the Budget debate. I should like to follow one or two themes and come to the central question to which many hon. Members have referred, namely, taxation policy. I got the impression earlier today, from several hon. Members, that the approach to the Budget was mechanistic. Listening to the hon. Member for Motherwell and Wishaw (Dr. Bray) describing what appeared to be a beautiful economic model, I was not convinced that it was a model which necessarily contained the required motivation. The right hon. Member for Chipping Barnet (Mr. Maudling) had the answer, he said, through a policy of continuous growth. I question fundamentally whether continuous growth is feasible, at least in the longer term, with constraints on energy and materials.

The basic question facing any Government concerns motivation at all levels within our community—the motivation of those employed in the most humble factory jobs and the motivation of those in the higher echelons of industry who should be taking a lead in establishing employment.

Motivation is not a linear function. It is not part of a continuum and, by taking certain steps, there will be a quantified result. It depends on leadership and upon triggering levels. This is what we ought to be considering as a background to our debate. The hon. Member for Motherwell and Wishaw was right to say that the central problem must be unemployment. That is the central worry in Wales, where it went up again last month by another 1,000. While it has been coming down in the United Kingdom generally in the past six months, unemployment in Wales has been going up virtually continuously. Future prospects are even bleaker as a result of recently announced redundancies.

The question arises whether unemployment is inevitable. I find that difficult to believe, particularly when I look around at all the work that needs to be done in our community. There are roads needing to be built and houses requiring repair. There is squalor around many of our old industrial areas. There is all around us work that needs to be done. Yet in Wales 90,000 people and in the United Kingdom as a whole 1½ million people are out of work. It is the incapability of a system of government or of economics to bring these two problems together which should form the central core of our thinking.

If unemployment is not inevitable, we must find the mechanisms for dealing with it. If there is some part of it that is inevitable, it is a fair question whether we should be applying our minds to earlier retiring ages so that those who come out of the employment pool are those who will be least socially affected. We must reach a balance on this. The alternative of having everyone in employment at the current level of the gross domestic product is an inevitable lowering in the average level of real income. That may not be acceptable. It may be the price that we have to pay to bring everyone into the pool of work. If we were to have a higher standard of living coupled with lower unemployment, it must mean greater output and greater productivity, which in itself must mean people losing jobs for an interim period.

There is a problem of leadership here, in which the Government and the trade unions will have to play a close part We hear a lot about the balance between direct and indirect taxation. As I said in the Budget debate, there is no necessary guarantee that by switching funds from the public to the private sector or vice versa we shall create jobs. We may create more, we may create fewer. It depends on the nature of the change and the other implications to which the right hon. Member for Down, South (Mr. Powell) referred.

It may well be that the direct taxation levels are creating a disincentive. From my own surgeries and from meeting people at their places of work, I get the impression that there is a disincentive. People who earn a low level of income ask "Why am I being taxed so heavily?" If that is the case, even if it does not mean that they have stopped working it affects their attitude to work.

There might be a case for raising the motivation, for looking at the possibility of switching a certain amount from direct to indirect taxation. By and large, I prefer direct taxation because it is more progressive, but if we were to get to the stage where direct taxation was having that negative effect we should have to face the consequences.

Given the choice—and it is one of priorities—of having some money to spend on reducing taxation levels, my colleagues and I would prefer to see the funds being used to bring about a further increase in the taxation threshold to take people out of the taxation net. We should prefer to see the married allowance going up by £200 and the single allowance by £100. At next best we should like to see the intermediate tax band lowered from 25 per cent. to 22 per cent. or 20 per cent., or an increase in the band width, with the figure of £750 going up to £1,000. It would only be as the fourth favoured option that we would say that the standard rate should be reduced.

Given the way in which the Committee is likely to take its business and given also the likelihood that we shall not be on the Committee, the only option on which we are likely to have a chance to vote is that of reducing the standard rate. To that extent, although it is only our fourth preferred option, we shall support a proposal to reduce the standard rate. We much prefer to see this money being used to raise the threshold at which people are taxed and thereby pull them out of the taxation net.

I hope that if we are to have changes in income tax levels we can try to contain ourselves to doing this once a year, because the mind boggles at the bureaucracy that is generated when there are three or four changes in taxation levels within a year. I can only imagine what the cost is of doing that. I have a Question in the pipeline, and I look forward to seeing the answer when it eventually comes.

I accept the argument about the need for an incentive to get people to start enterprises, but I am not convinced that such an incentive is best found by reducing the 83 per cent. level to 60 per cent. or to any other level. Those whom we have to trigger to get them to start enterprises are the young people who are leaving colleges or universities. Perhaps one should bear in mind the PhDs that one sees in America starting up so many companies.

People taking such risks at an early age are not on income levels that will be affected by a reduction from 83 per cent. to 60 per cent. What they need is an immediate benefit at the lower rate at which they will start to pay tax, and I should like to see an innovation such as a tax holiday for two, three, four or five years, with up to a maximum of £5.000 for somebody starting up an enterprise on his own. It should be something that can be obtained only once in the lifetime of such a person. That will encourage him to take a step that he is not taking now, and that could be of benefit to society as a whole.

Those matters which we now stress are ones that can help us to overcome the unemployment problem, which we see in Wales as the biggest problem facing us.

8.13 p.m.

Photo of Ms Audrey Wise Ms Audrey Wise , Coventry South West

It has been suggested in this debate that acceptance of this Finance Bill necessarily means acceptance of the Government's economic strategy. I deny that. I think that it is possible and necessary to distinguish very carefully between those two things. I accept this Finance Bill and regard it as immeasurably better than the Finance Bill of last year. The pattern of tax cuts is about right, and I do not quarrel with the scale of tax cuts.

My criticisms of the economic strategy of the Government as shown in the Budget as a whole, and in other things, are different. I do not propose to dwell on them, but as so many hon. Members have talked about the economoic strategy at large I shall say a few words about it.

The economic strategy as a whole must be judged by looking at four factors. The first is the large-scale level of unemployment. The second is the scale of unmet needs of the population. The third is the need for a more democratic society, especially industrially. The fourth is the need to protect our environment and ensure that our resources, especially the irreplacable ones, are properly used. I regret that, judged against the yardstick of those four factors, the Government's economic strategy falls far short of what is required.

The criticisms directed at the Government's economic strategy by hon. Gentlemen opposite are piffling and trivial in the extreme, but justifiable criticisms can be made by the Labour movement. I accept the scale of the tax cuts, but I should have liked to see, in addition, changing levels of public expenditure. I am pleased that at least we are moving in the right direction, but the advances that have been made are inadequate. It seems extraordinary to have an economic strategy that accepts unemployment alongside unmet need. For instance, building workers are unemployed at a time when people are without proper housing or are in houses that are in need of repair. Again, school classes are oversized at a time when there are many unemployed teachers.

To find those factors side by side is monstrous, and no Socialist economy, no economy moving even feebly in a Socialist direction, could possibly tolerate such a situation. Measured against that state of affairs the Chancellor's strategy is woefully inadequate. As I said, I am glad that my right hon. Friend is at least pointing in the right direction on public expenditure, but it is time to take some more firm steps.

Industrial democracy is extremely important in an economic context. It has been my experience since coming to this House that the relationship between a Labour Government and industry is similar in essential ways, to the relationship of any Government—including Conservative Governments—with industry.

What I have in mind is shown clearly by the words used by Conservative Members. When they refer to industry, they always mean the management. By that I mean not the technical management but the top management and especially the financial management. When someone from this side of the House says "What about the workers?", Conservative Members take a great imaginative leap forward and concede that the workers also have a place in the scheme of things.

It is unfortunate that the Labour Government, although they have taken steps to bring about a close working relationship with the trade union machinery—and that is valuable—do not seem to have taken any step at all in the direction of having a close working relationship with workers as part of the productive process—with our side of industry. The Government have a relationship with trade unions representing workers as consumers and as earners, but they do not have a relationship with the people on the shop floor as part of the productive process. They do not take their views into account in the context of production decisions.

What I have in mind—and hon. Members will not be surprised at this—is the lamentable lack of support for interest in, and relationship with the initiatives being taken by some workers at their places of work through their combined shop stewards committees. I am thinking of the Lucas aerospace workers' combined committee, the Vickers combine committee, and so on. Until the Government have a direct relationship with our side of industry in connection with the production decisions that it wants made we shall not take even shaky steps towards Socialism.

Measured against that requirement the Budget gets nowhere, and the Government's practices get nowhere. Nor do they rate very highly in relation to the proper use of resources and the proper protection of the environment. Many hon. Members on both sides of the House above and below the Gangways take a primitive view of economic growth. We hear a great deal about the need for growth and it is always assumed that any kind of growth is of itself desirable.

When Chancellors are applying stimuli to or injecting, or whatever is the appropriate term, into the economy, they should consider the sort of growth that is likely to be stimulated. It seems that we do not start to do this, either.

As an economic strategy, the Budget is disappointing, but the Finance Bill is an immeasurable improvement on last year and well worth defending against the predatory attacks about to be made by Conservative Members. I found the speeches of Conservative Members reasonably interesting. The right hon. Member for Stafford and Stone (Mr. Fraser) frankly said that the Chancellor had spread his gifts too widely. He suggested that it would be proper to concentrate them much more closely at the top of the financial tree.

Illuminating suggestions were made by the hon. Member for Croydon, South (Mr. Clark), who speculated on the best way of spending the £700 million which would be raised if VAT were standardised at 10 per cent. He suggested that £300 million should be spent on cutting the top rate of income tax to 60 per cent. He said that that would increase everybody's incentives enormously.

It is remarkable that Conservative Members do not seem to grasp the simple arithmetical fact that, under the Budget, the top rate of tax is not payable on incomes of less than £23,000. Indeed, that is too generous an estimate because it does not take into account that it is precisely at those levels of income that all sorts of other tax allowances can be achieved, such as on insurance premiums and mortgages.

The same hon. Gentleman complained that mortgage interest relief goes up to only £25,000 per house, but he ignored the fact that this is still substantially above the average price of a house, even in London. Instead of moaning about this matter, those receiving mortgage interest relief on that kind of figure and on their high marginal rates should be quiet and modest and should not focus too much attention on the fact that the easiest way of saving about £100 million would be to allow the mortgage interest relief only at the standard rate instead of at the highest marginal rates.

If we are looking for money to give to families or to people on low incomes, here is a nice, handy place at which we could start. The population at large would welcome that, because the population at large does not have mortgages of £25,000 or incomes of more than £23,000.

There are some interesting figures relating to Northern Ireland. I wonder how hon. Gentlemen representing Northern Ireland will regard the fixation of Members on the Benches around them with the higher income groups. I have noticed with interest, on reading Hansard, that in Northern Ireland there are only 4,500 incomes which exceed £10,000—and that is taking the husband and wife jointly. Hon. Members representing Northern Ireland will find it easier to focus their attention on people with lower incomes than will other hon. Gentlemen.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

The hon. Lady has overlooked the fact that there are many farmers in Northern Ireland.

Photo of Ms Audrey Wise Ms Audrey Wise , Coventry South West

I have not overlooked that. It reinforces my view that they may prefer the pattern of tax cuts in this Budget, particularly as it also includes concessions especially for farmers. If we look after farmers and low income groups, we are looking after Northern Ireland and I imagine that hon. Members from Northern Ireland constituences will back the Chancellor's pattern of tax cuts all the way. If they were seduced into supporting reductions in the higher tax bands, they would not find many of their constituents applauding them—but I am sure that hon. Members from Northern Ireland are too shrewd to do that.

The hon. Member for Cornwall, North (Mr. Pardoe) said that the income tax system was not progressive. He seemed to think that saying that finished the discussion. He did not explain why, if he considers that the income tax system is not progressive, he is proposing changes that would make it substantially less progressive. I find that a little bewildering.

The hon. Member said that there was no way of avoiding tax concessions being more advantageous to the high income groups. He seemed to be trying to excuse some of his proposals. But there are ways in which the tax system could be designed to make it progressive. If we used the exemption system instead of the allowance system, we could do a great deal to relieve the anxieties of the ordinary worker who feels that he is paying too much tax, without at the same time, needing to make concessions to those on high incomes.

It is time that the Chancellor looked at this possibility. It would be a radical change in the tax system. However, since that has not been forthcoming and we are faced with a choice between the Chancellor's pattern of tax cuts and the suggestions of the Opposition, I must say that at least the Chancellor's pattern is slanted as much as possible within our peculiar allowances system, in favour of those on average and below average incomes and it is a good pattern. The proposals of Opposition Members to go in the opposite direction and favour those on high incomes at the expense of those on low incomes are monstrous and should be rejected.

I look forward with interest to the opportunity of defending the Budget in the Finance Bill Committee against the destructive attacks of the Opposition. However unpopular the Finance Bill may be to Conservative and Liberal Members, it is exceedingly popular among the people at large.

For example, pensioners will not be keen on the view of the hon. Member for Cornwall, North that there is something more advantageous in indirect taxation than in direct taxation because pensioners have been particularly helped by this Bill and it would be extremely disadvantageous to them if the Budget proposals were put into reverse and we had a series of indirect tax impositions. I believe that many people will be able to see through the sound and fury coming from the Conservatives and Liberals in this connection.

It is also extremely reprehensible of the hon. Member for Cornwall, North to suggest increasing the employer's share of national insurance contributions. I might have thought it a good idea at one time, but I have come increasingly to think that it is quite wrong for employment to be penalised and charged at high rates when mechanisation is subsidised. The correct balance between mechanisation and labour intensity will not be reached so long as we give generous subsidies to mechanisation and impose very heavy penalties for taking on labour. Whilst we have some semblance of a market economy, that is one aspect which I should like to see find its own balance. His suggestion would have a detrimental effect on employment policy and is highly irresponsible.

Although I do not think that this Budget is a sufficient response to our economic problems, I reiterate that the Finance Bill proposes a pattern of tax cuts which is acceptable to the population at large, to Government supporters and to the Labour movement. I look forward to defending them.

Photo of Mr Myer Galpern Mr Myer Galpern , Glasgow Shettleston

Mr. Harold Macmillan—Mr. Maurice Macmillan.

8.31 p.m.

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

My right hon. and learned Friend's proposals made it clear to me at least that he knew where he wanted to make the necessary savings. They require public expenditure savings of a little under £500 million—about three-quarters of 1 per cent. of total expenditure. Speaking as a former Chief Secretary—and there are not many of us in this House—I find that this saving is quite possible even in this current year, despite the doubts expressed by my right hon. and hon. Friends. It is possible to achieve this level of saving through the normal shortfall which so many programmes have throughout the year, provided that the Treasury and the Chief Secretary do not allow any switching of expenditure from a programme which is going more slowly than expected into some other programme—in other words, the shortfall is retained as a saving and not spent elsewhere.

For a very long time now—it seems to us even longer since the present Government came to office—we have had too little effort devoted to the production of marketable goods and services, mostly by the private sector but also in part by the public sector, and too much of the total economic effort of the country devoted to the sort of public spending which hinders rather than helps the creation and spread of new wealth.

We can see that in the increasing amount of administration which is required for every benefit which the public sector seeks to bring to our citizens, compared to the amounts spent on goods and services. There are more administrators for every patient treated in the National Health Service. As my right hon. and learned Friend said, there are more tax gatherers than there ever have been—£200 million worth a year more than there used to be.

There is too much public spending which does very little for the productive sector and especially for the private part of the corporate sector. It is in the private part of the corporate sector where the greatest innovation comes and has come consistently ever since the last war, and where there is most scope for employing people who are now out of work.

We have suffered a fiscal system and a tax structure under the present Government which is a positive encouragement to the get-rich-quick brigade, which encourages those who succeed in business to confine their success to one generation rather than to try to build on into the future, and which encourages spiv success rather than the long haul effort which takes some time to earn its due reward.

There has been active discouragement of businesses, be they in manufacturing industry or in service industries, to take a longer view and to build for the future, and active discouragement of those earners who seek to become owners and wish to invest in productive industry.

Alas, this Budget continues down the same dreary road to egalitarian poverty. That is why we have progressively worse services in the National Health Service, fewer teachers in our schools and fewer services to the public generally. By its efforts, the country is not generating the wealth out of which the cost of these services has to be met.

In some of its measures, I think that this Finance Bill has slowed down a little this dull and dreary progress, but it certainly has not reversed the direction. For example, there is no real benefit or incentive to the highly skilled wage earner. I believe that the strategy of the Budget envisages wage rises over the year 1978–79 of some 7 per cent. That seems a somewhat optimistic view to take, considering that the average household, after the Budget, will be paying £960 a year in tax compared with £880 last year, and when in any case the great success, so-called, of the 10 per cent. wage increase has, as far as one can see, produced an increase of nearer 14 per cent. So there is little in it for the above-average earner on the shop floor. For all the talk of the need to help those who are poorer and whose need is greatest, it is on the effort put in by the above-average earner that everything, in the end, depends.

There is very little incentive for middle and top management in this Budget. After it, the differential rate between, for example, the chief executive of a company and an average earner in the same company is the lowest in Europe. In Germany the rate is 11·3. In Italy it is higher, at 13·2; perhaps it is so high because the Italian Government must compromise with their Communist Party. In the Communist countries, it is a very great deal higher than it is in any democracy. In the United States it is 11·3. In the United Kingdom, it is 5·7.

Even now, the higher rates of tax start at slightly over £7,000 a year. Under the previous Tory Government those higher rates, at the equivalent of today's prices, started at £10,500. That is the extent to which middle and higher management have not been helped by the Budget.

I agree that the Bill gives a certain amount of aid to the small investor, and we are grateful for small mercies. The investment income surcharge has been reduced and there have been some capital gains tax concessions. These have, incidentally, brought a great deal of benefit to those with very high incomes in a liquid portfolio investment and to the small-time stock market speculator. If one can manage to make a capital gain of £5,000 a year on a regular basis, that is £5,000 a year taxed at an average of 12 per cent., which is a good deal better than most of us can hope for. But that again is a benefit to the dealer, not to the creator of new real wealth.

As my right hon. Friend the Member for Stafford and Stone (Mr. Fraser) pointed out, this is the key—that not enough is being done, or has been done for some years, to try to stimulate those at every level in manufacturing and service industries and to make it in their interests not merely to make a lot of money to spend but to create and go on creating new, real wealth in productive forms which can begin to supply the needs of the country as a whole.

A little has been done for small businesses, but not very much for slightly larger and more medium-sized private companies. Perhaps I should declare my interest, which I think is well enough known, as taking part in one such enterprise.

When they talk about capital transfer tax and so on the Chancellor of the Exchequer and the Chancellor of the Duchy of Lancaster talk about encouraging the growth of small businesses. They talk about the need for fathers to be able to pass them on to their sons and so on. But it is capital transfer tax that effectively prevents that and actively encourages those who would like to continue in their businesses to sell out, to cash in while the going is good. The words from the Treasury Bench now come in the dulcet tones of the Chancellor of the Duchy of Lancaster, but underneath them we hear the hard Yorkshire rasp of the Chancellor of the Exchequer talking about squeezing until the pips squeak.

They cannot have it both ways. Either they believe that unquoted companies, unincorporated businesses and the private section of the corporate sector matter or they do not. These provide about half the private sector employment and produce about 40 per cent. of the gross domestic product. The Treasury Bench must decide whether it believes in this particular element of private enterprise in the mixed economy, whether it truly thinks that it can provide jobs. If it is to be able to provide jobs for some of the unemployed, this is the sector that must be encouraged to expand. It cannot take people on if it is not there. Employers who have been driven out of business, businesses which have disappeared into a great combine or into bankruptcy, cannot be there on the same terms to take on all those made unemployed by higher productivity elsewhere.

Most of the types of business that I am talking about have already reached a higher level of profitability and productivity. They already re-invest a higher proportion of their profits. So their expansion means more jobs. If the Chancellor of the Exchequer is serious about his wish that this type of enterprise should continue to make the contrbiution that it has made in the past, he ought to think seriously about bringing in roll-over provisions for capital transfer tax, so that the ownership of a private company can be transferred without tax being paid until the assets are realised.

Obviously, whatever Budget any Chancellor of the Exchequer put forward, and whatever improvements may be made to the Finance Bill, none of it will do much good until we can get a new look taken at productivity by management, unions, shop floor, finance, and everyone concerned with the production of goods and services for marketing here and abroad.

I believe that we should start thinking of productivity as a factor not of labour, of harder work by people, but of investment. Our object should be to see how the machines can be kept going and how highly we can pay those people who keep them going. Perhaps there could be a three-day week, or early retirement, or perhaps a different pattern of holidays. But, provided the relationship between the output of the machines and the payment of the people who look after them is correct, we can let wages go as high as the capacity of the firm concerned to sell its goods in a free market will allow. What we cannot do as a country is consistently to produce less from the same equipment than all our competitors overseas. This is the position that we are in.

I remember well the taunts, at the end of the last Conservative Government, which came from the Labour Party that we had reduced the country to a three-day week output. After all these years of Labour Government it is still there, and now the Labour Members sit on the Government side taking pride in what is, in effect, a non-achievement.

But if we can get the expansion, the higher productivity and the output at prices at which our goods can be sold, we shall have some incentive to invest and to expand the economy for the purposes which many of us would share with some Members in other parts of the House. But this means having a reduction in the higher tax rates. I do not think that the Chancellor of the Exchequer would lose very much in revenue after a while. It is quite possible that the yield from a lower rate of tax at the top end would actually increase as a result of reducing the rate of taxation. In fiscal terms, 50 per cent. of 100 is more than 90 per cent. of 50, and in economic terms a great deal more can be done with 100 than with 50.

Even if this takes a little while, we have the revenue coming to the Exchequer from the North Sea oil, and we have some sort of relief to the balance of payments constraint which has usually in the past prevented our efforts in this direction from being effective. But these are only temporary alleviations, and our resources must be used to build for the future and not frittered away in the present.

Obviously, everything cannot be done at once. In listening to the Chief Secretary opening the debate, I found that all he said was that the pit in which the economy has now sunk is too deep to get out of in one Budget. He did not add that it was the Chancellor of the Exchequer who digged that pit nor that in his present Budget he has made but a feeble effort to get out of it.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) this afternoon showed how to start that escape from the pit which the Chancellor has dug. I hope that the whole House will support him in the measures that he put forward.

8.50 p.m.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

It is on a day like this that I feel genuinely sorry for Conservative Back Benchers—I mean ordinary Conservative Back Benchers. It is just as well that we do not have a Ten o'clock Rule on the Second Reading of the Finance Bill, otherwise very few genuine Conservative Back Benchers would participate in the debate. We had one Privy Councillor after another pontificating at great and inordinate length.

The right hon. Member for Farnham (Mr. Macmillan) is a typical example. The fact that he uttered inaccuracies made it even more annoying for Labour Members. The higher rates of tax do not start at a salary of £7,000 a year. That is the sort of twaddle which gets reported outside this House. They start at a minimum of £8,535 for a married man without any other allowances, and there is a slight difference between £7,000 and £8,535. The right hon. Gentleman, as a former Chief Secretary, ought to have known that.

The right hon. Gentleman makes the great claim that public expenditure is all damaging and that we must encourage the private sector. I need quote only two examples to show how fallacious his argument is. The privately owned construction industry in this country has suffered more as an industry than any other because of the public expenditure cuts. There was a massive lobby of this House by hundreds of workers from the privately owned Plessey telecommunications firm when the Post Office cut back on its ordering. That was a direct result of public expenditure cuts affecting the private sector.

It is not "private" in that sense. Both sectors depend very much upon each other. It is as false for I or my hon. Friends to make the opposite claim as it is for the right hon. Gentleman to make the claim which he did tonight.

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

If the hon. Gentleman reads Hansard, he will see that at the beginning of my speech I said that too much effort was devoted to the non-marketable effort both in the private and public sectors. I made it plain that the public expenditure cuts I was referring to did not help in the creation of wealth or in the provision of jobs.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

I do not want to get diverted, but one could argue that the telecommunications sector of the public sector is a marketable part of that sector. That is the way I have always understood it, unlike other areas of the public sector.

Photo of Ms Audrey Wise Ms Audrey Wise , Coventry South West

Does my hon. Friend agree that the terms "marketable" and "non-marketable" are in themselves very odd? For instance, how does one regard hospitals? What about the relationship with pharmaceuticals? What about all the commodities that hospitals have to buy, from drugs through to bed sheets? What about schools, school books and so on? The distinction being made by the right hon. Gentleman is quite false.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

My hon. Friend is perfectly correct and has made the point better than I would have made it.

I should like to refer to the remarks of the right hon. Member for Chipping Barnet (Mr. Maudling), the former Chancellor of the Exchequer. I think I heard the right hon. Gentleman correctly—no doubt I shall be corrected if I am wrong—but I think the right hon. Gentleman talked about the Chancellor-in-waiting. The fact that he said he will be waiting quite a long time—not that he has been waiting a long time—is one great condemnation from a former Tory Chancellor to a so-called prospective Tory Chancellor.

Photo of Mr Robert McCrindle Mr Robert McCrindle , Brentwood and Ongar

I hate to disillusion the hon. Member but I have listened to nearly all the speeches, and I heard my right hon. Friend the Member for Chipping Barnet (Mr. Maudling) refer to the hon. Member for Cornwall, North (Mr. Pardoe) as the Chancellor-in-waiting.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

If that is so, I withdraw any imputation that I made. I would hate to cause dissension within the Tory Party ranks.. I thought that the right hon. Member was referring to his right hon. and learned Friend the Member for Surrey, East (Sir G. Howe).

I wish to refer to the speech made by the right hon. Member for Down, South (Mr. Powell). In the last 10 minutes of his speech he posed a whole series of questions—far more than can be answered tonight. They were so relevant and central to the Budget and the Finance Bill that I wonder why they were not posed by the official Opposition. Until these questions are answered it would be absolute folly and totally irresponsible for any major political party in this country to combine with another party in order to muck around with the Government's Budget strategy. I shall listen with interest for the answers to the questions.

There is another reason why there is less cause this year to muck around with the Government's Budget figures. I emphasise that I have no intention of trying to change any figures in the Finance Bill [HON. MEMBERS: "Oh".] There is nothing Machiavellian in that. In fact, I hope to defend the Finance Bill in Committee. I intend to play an active part in Committee stage, either down here on the Floor of the House or upstairs. I would prefer to do it upstairs because it does not disrupt the proceedings of the House so much. But I wish to make it clear that I support the Government and will help them to make sure that no detrimental changes are made.

There is a difference between this year's Finance Bill and that of last year. This year the Chancellor has not put into the Budget Statement any conditional area that he may amend later. Last year, on Second Reading, he said that the standard rate of income tax would be kept at 35 per cent., but subject to certain arrangements decided with the TUC it could come down to 33 per cent.—a difference of about £1 billion. Knowing that there was that amount to play around with, some hon. Members sought to change the direction of the tax cuts.

We have not been offered any further conditional tax cuts by the Chancellor this year. Perhaps the Chancellor has them in mind, but this year he has had the wisdom not to announce them, and this has cut the ground from under the feet of those hon. Members who would seek to push the Chancellor further down this road. The road that my right hon. Friend has gone down is the one that I would have advised him to take. It is the road that I pressed him to take 12 months ago, both on the Floor of the House and in Standing Committee.

To that extent, I am pleased with the tone of the tax arrangements in the Bill. However, there will be problems. For example, there are the retrospective clauses.

I was distressed by an article that appeared in The Times of 24th April headed Has the Opposition to courage to fight retrospective tax laws? It was written by Mr. Oliver Stanley. There was one paragraph that made my blood boil. It dealt with the concept of retrospective legislation, and read: It is said that in some countries revenue officers come through your door at three in the morning with sub machine guns in their hands. This is not so very different from that"— "this" being the Bill. I cannot imagine a more extreme description of that which the Government are intending to do in the Bill than that paragraph. I hope that we shall not have all the constitutional mumbo jumbo that we get from certain quarters on both sides of the House about the concept of retrospective legislation.

All that the Government are seeking to do is to make illegal schemes that are strictly artificial. The right hon. and learned Member for Surrey, East was careful not to say that the Tories would oppose the clauses having a retrospective effect. He did not say that. He merely said that they would be considered with care and debated and that an effort would be made to amend them.

Of course, the hon. and learned Member for Dover and Deal (Mr. Rees) knows a thing or two about these areas of tax law. The hon. and learned Gentleman and I took part in a television programme some time before Christmas during which he did not seek to defend the scurrilous activities of those who are deliberately setting up artificial tax avoidance schemes. I advise my right hon. Friend to contact London Weekend and to obtain a transcript of the London Programme in which the hon. and learned Gentleman took part. Such a transcript will be valuable ammunition in Committee. He will not be able to escape from the highly moral stand that he then took. He was already an Opposition Front Bench spokesman, so the stand that he took represented official Conservative policy.

In the short time that I have been a Members the House has passed retrospective legislation. One example concerned the Crown Agents. That legislation slipped through three and a half years ago. No one bothered about it. Things started to come out only when we discovered that £200 million had gone. We passed retrospective legislation involving £85 million when the right hon. Member for Newham, North-East (Mr. Prentice) was the Minister of State for Overseas Development. That was done late at night. There was no complaint from the constitutional specialists in this place on that occasion.

I do not take exception to retrospective legislation on that ground or any other ground. In this instance the beauty is that we have put in dates that are prior to the parliamentary announcement. We are dealing with those who are setting up tax avoidance schemes. They do so in the knowledge that we in this place are almost pristine white. They know that we play the game according to the rules. They take advantage of that to manipulate so that George Wimpey, for example, can get away without paying its rightful amount of corporation tax.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

I agree with the hon. Gentleman in his condemnation of tax avoidance schemes. However, does he think that he should obey the law as it is now, or as he thinks it may be changed in future? Does he think that it was a good thing that the West hanged the 11 Nuremburg criminals for breaking a law that did not exist at the time that it was broken?

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

The short answer is "Yes". However, we are coming on to a different plane of argument. I should consider it wrong to pass retrospective tax laws in the sense that we enacted a clause that had the effect that for last year, or the year before, the highest rate of tax would be not 83 per cent. but 95 per cent. That would be totally abhorrent.

Photo of Mr Jerry Wiggin Mr Jerry Wiggin , Weston-Super-Mare

That is exactly the same.

Photo of Mr Jeff Rooker Mr Jeff Rooker , Birmingham, Perry Barr

No, it is not exactly the same. There is a massive difference between that type of retrospective legislation and the type that is in the Bill, which is strictly defined to catch those who have set up artificial businesses with the intention not of creating wealth, jobs and providing an input for the economy, but of avoiding their legal tax duty. That is the only reason for such businesses being established. That is not the same as the example that I gave. I shall take a great deal of convincing that it is the same.

The other brief point to which I want to refer concerns Britain being overtaxed. We have had this argument again tonight. We are not over-taxed. I advise Opposition Members to look at the "Which?" report on comparative tax payments—social security and income tax—between Britain and what are called the Western industrialised countries That report comes out in June. We are nowhere near as highly taxed as is generally believed.

I do not accept the change that was put in the Meade Report—that we could cut income tax and jack up all the prices on goods—and which the hon. Member for Cornwall, North (Mr. Pardoe) put forward on the Jimmy Young show this morning and rightly got his comeuppance when the pensioners started ringing in and Jimmy Young said "They are not very keen about beer and tobacco prices going up. They will not gain from any of John Pardoe's tax cuts."

The people outside who will not benefit from further tax cuts—the elderly, the sick and the disabled and those working on low wages who are not paying tax—have got the message of what is implied by the cohorts of responsible or irresponsible politicians who will seek to put the Government in the position of having to recoup lost revenue. They will not gain at all. It is unfair and irresponsible for both the Liberal and Tory Parties not to make their positions abundantly clear.

The right hon. and learned Member for Surrey, East was on the same programme. There seems to be a line-up of politicians on the Jimmy Young show putting forward the picture of the poor over-taxed business man paying his 83 per cent. Even the interviewer did not have the wit to ask "What has he to earn before he starts paying that amount of tax?" At present rates, it is nearly £500 a week before one pays a marginal rate of 83 per cent.

The CBI claimed in the Press that it was getting Members of Parliament together to gang up on the Government. It has not written to any Labour Members as far as I can tell. I do not know what letters have gone to Tory and Liberal Members, but the CBI has not written to me. I feel a bit put out about it, in the sense that once in a while one can gleam some useful information from the CBI. It is always quick to attack Labour Members for not knowing what is going on and not understanding what it is putting forward. But there have been national and regional Press headlines galore in the last few weeks to the effect "CBI wants an extra £900 million. It will work with MPs to get it." The CBI is not trying to work with Labour Members of Parliament. It would get its come-uppance if it came to me, but it certainly did not write to me.

The Tory plan that we have heard today is irresponsible, as I have no doubt my right hon. Friend, the Financial Secretary will point out. I was going to intervene when the right hon. and learned Member for Surrey, East talked about the effect of taxes on skilled workers. He kept tying skilled workers in with management. Later, when he started to give examples, he stopped using the term "skilled workers". I was careful to note that because I proposed to ask him about it.

The right hon. and learned Gentleman proposed a change of 40 per cent. at £8,000 instead of £6,000. If one adds the married man's allowance, it means that the 40 per cent. rate becomes payable at £9,500—approximately £190 a week. I was going to ask whether the right hon. and learned Gentleman could give me examples of skilled craftsmen who would benefit from such a change. There are not many people in the West Midlands pulling in £190 a week. A great deal of our manufacturing capacity is based in the West Midlands which relies heavily on skilled workers. This Tory proposal is absolutely meaningless for skilled craftsmen in manufacturing industry, and they will soon get that message.

The proposal for 1p off the basic rate has to be fought off. First, it would be very expensive—£350 million. I am not prepared to accept the argument that we should take it from the Vote to the National Enterprise Board. My hon. Friends in the Department of Industry often say in this House that Tory Members of Parliament, just as much as Labour Members of Parliament, are queuing up at the door of the Department asking for help for firms in their constituencies. One way of getting such help is through the National Enterprise Board. It is a pity that we do not have all the correspondence published so that we may see what is being asked for. Therefore, it is not on. The argument about where the money will come from is totally unsatisfactory and specious.

I turn to a matter which grieves me this year as it did last year. During the debate on the Budget I commended the Chancellor of the Exchequer for the way in which he directed the tax cuts. However, the situation is still not ideal. It will not be altered by the plans of the Liberal or Tory Parties. The tax threshold for a married couple with two children aged 10 and 13 years, including child benefit, is £40·04p. The threshold for the family income supplement entitlement for the same family is £47·80p. Those figures include this year's changes. That means that a family could be earning over £45, be in the tax net and at the same time, eligible for family income supplement.

That means that we have not solved the problem. This matter has nothing to do with the argument about unemployment or supplementary benefit. One can receive family income supplement only if one is in work. Even after this Budget we have the ludicrous situation in which some families will be paying income tax and going to the State for family income supplement. That is the State's way of subsidising bad employers. I resent deeply that taxpayers' money should be used for this purpose. Instead, we should introduce a statutory minimum wage. If the Chancellor has left any goodies in the dark about which he has not told us, I hope that he will use them to close that gap. I hope that he will not use them to take 1p off the basic rate, because that will help most of those in the top bracket.

The Finance Bill is a good one. It needs defending in Committee. The Chancellor will have a problem to defend it. It is as well that he has Government Back Benchers who want to support him and who have taken the trouble to come here today. It is better that he should have hon. Friends who will get stuck into the Tories to defend the Finance Bill.

9.13 p.m.

Photo of Mr John Wakeham Mr John Wakeham , Maldon

Having listened to the speeches by the hon. Members for Birmingham, Perry Barr (Mr. Rooker) and Coventry, South-West (Mrs. Wise), I am inclined to ask where all the rebels are now.

Photo of Ms Audrey Wise Ms Audrey Wise , Coventry South West

We do not need to rebel because the Chancellor listened. We won that particular battle.

Photo of Mr John Wakeham Mr John Wakeham , Maldon

We shall see about that. I suppose that it is not surprising in election year.

This also involves a serious matter. It is that the proposals that we shall make do not stand a chance of being passed unless we have full support from the minor parties. That was evident from the remarks of the hon. Members for Perry Barr and Coventry, South-West. What applies to the Conservative Party's proposals must apply even more to the Liberal Party's proposals.

I shall deal with the questions raised by the hon. Member for Perry Barr in the middle of his speech. My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) began by saying that it was an important duty of the House to consider the Finance Bill. We have heard many speeches dealing with the major matters of the levels of taxation and allowances and about how we deal with direct and indirect taxation. But there are also issues, as the hon. Member for Perry Barr said, which might be considered small in totality but which involve great principles, which are fundamental to the rule of law and which are sufficiently important to be considered in principle on Second Reading.

The Government have great responsibility in framing their proposals. Their first duty must be to consider the overall interest of taxpayers large and small and the ability of those taxpayers to discharge what is due to the Revenue with the minimum of inconvenience, knowing that their fellow citizens are doing the same. I also believe that the law must be such that those taxpayers whose affairs are more complicated can face their responsibilities with a sure knowledge of the law. This is an important point, and some aspects of the Bill present worrying features.

I make no secret of the fact—I think that most hon. Members know this—that I am a practising chartered accountant, as the Chief Secretary used to be. Obviously I have an interest in this matter. I wish to deal with some of the points that have emerged from the Finance Bill relating to tax avoidance. This is a much more complicated issue than the hon. Member for Perry Barr suggested. If I may correct him on one point, there is nothing to do with legality or illegality in these matters. There is nothing illegal, as such, in tax avoidance. We are not talking about legality or illegality but about steps which are perfectly legal although we may have different views on whether they are desirable.

I am in favour of the Government taking steps to deal with tax avoidance. It is right and proper that they should do so. Nevertheless, I want to look at the Chancellor's proposals with a great deal of care. I accept the general proposition that the Government should take powers in any Finance Bill to block an artificial device. I do not think that any hon. Member would seriously quarrel with the proposition that they should back-date the effect of legislation to the time when the Treasury announcement was made. Nevertheless, the speeches of the Chancellor and the Chief Secretary have raised some important issues. If we are asked to approve retrospective legislation well before the date of any announcement, the first question we have to ask is, what is artificial?

This is clear in practice in the extreme cases. We can all recognise a purely artificial scheme which is strictly within the law. And that is all it has to be at the moment. It is also quite clear at the other extreme. We can recognise a transaction where there are purely commercial arrangements, with the tax consequences merely a by-product of the transaction. What will be difficult to recognise is an artificial scheme dressed up to look like a commercial scheme. It will need to be well dressed up and the sums of money will have to be large. It may well be that it would involve buying businesses to provide a flavour of authenticity. The effect will be to make the avoidance business available, presumably, only to a few extremely large taxpayers. I fear that we shall still go on with this situation if we do not deal with matters more satisfactorily.

Clause 26 appears to break nearly new ground in referring to benefits rather than intentions. Presumably this is to avoid the necessity of demonstrating intention. We shall have to look at this carefully in Committee.

This leads me to the view that the Revenue has a big responsibility and that further changes in the law are necessary if the Government are to deal effectively with tax avoidance. The Revenue must be told that it must devise a much more adequate clearance procedure than currently exists. Then anyone with tax liabilities can know much more surely and quickly whether he will have a problem.

The Revenue must also be told that its delays in getting out warnings, even if only non-binding signals, will be borne in mind when setting the dates of legislation. It must also be told not to operate existing legislation unfairly or oppressively, and Parliament should not hesitate to backdate legislation in the taxpayers' favour if that hapens.

We have brought some of these problems on ourselves. High taxation is fundamental to this problem, but even if it were much lower, there would still be tax avoidance if it were possible.

Some aspects of our tax law still work unfairly. For example, some substantial costs incurred by businesses are sometimes not allowable. On occasions the Revenue takes advantage of the small print in legislation just as tax avoiders have done. Some of the shortfall provisions have worked to leave many people building businesses with a difficult choice—either to sell out or to establish some way of avoiding or deferring tax in the hope of building the business up a little more and selling out later. Someone involved in tax avoidance not only runs a substantial risk of having his fingers burned: he must also consider fees of 20 per cent. and a tax rate of 98 per cent.

But that does not deal with the great matter of principle which worries me—retrospection. Surely no one can approve of retrospective legislation in principle. The only justification is the loss of revenue, and we do not know what that is. The Chief Secretary has referred several times to £200 million a year. I understand that that is a Treasury estimate of the total possible loss from all avoidance schemes. What I want to know before the Committee stage is the loss of revenue on one scheme—the commodity scheme—from 6th April 1976 to 25th November 1977. According to the financial Press, it is much more like £15 million than £200 million. The right hon. Gentleman must know the figure because he has given us the total. If, as I suspect, it is about £15 million, that is a small price to pay. I am not prepared to breach a substantial principle for that sum.

9.25 p.m.

Photo of Mr Graham Page Mr Graham Page , Crosby

Mr. Deputy Speaker, you and I owe the hon. Member for Birmingham, Perry Barr (Mr. Rooker) an apology. Another Privy Councillor has got up, not I hope to pontificate, but it may be so. I do not pay the hon. Gentleman the compliment that he paid the Privy Councillors who have spoken in the debate. When he attends the Finance Bill Committee, we enjoy his presence. We are used to the entertainment from the double acts on the Committee. We used to be entertained by Gilert and Sullivan. Now we shall be entertained by Morecambe and Wise.

Almost every speaker has referred to the importance of unemployment in considering the Budget strategy and therefore in considering the Bill. We are told almost every Tuesday and Thursday in Prime Minister's answers to Questions that the reduction of unemployment is our overriding need or, to put it more positively, we must create new jobs. The Chancellor in his Budget Statement said: Our main object in the coming years, like that of other countries, must be to reduce the intolerable level of unemployment. He went on: But we cannot expect to see the rate of unemployment moving down at an acceptable speed unless we can create new jobs. He said later: If industry is to become more competitive … —he listed one or two prescriptions for that and finished by stressing the need for: more investment in new capacity."—[Official Report, 11th April 1978; Vol. 947, c. 1187–1188.] There is a connection between investment and reducing unemployment. That interdependence between reducing unemployment or creating new jobs and investment is not recognised in the Bill. For every job there must be a capital investment base. There are few circumstances in which there can be more jobs without more capital investment. Accepting that the Government are committed to a policy of reducing unemployment, of trying to create more employment, where is the policy for increasing investment to back that up? It does not appear in the Bill. No such policy appears in the Budget Statement or in the Bill, other than perhaps the injections of State capital into industry.

I appreciate that within the framework of our present tax system it is difficult to encourage investment. The system is geared to discouraging investment and even to penalising, by higher tax rates, all private investment. The distinction between the goodies, whose income is earned, and the baddies, whose income is so-called unearned lingers on.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) put forward proposals of the Opposition further to reduce the unfortunate effects of the surcharge on those who have capital to invest. However, one looks in vain in the Bill for any recognition of the damage done by the principle, that lingers on in our tax system, of the difference in treatment between earned and unearned income and for the link between employment and investment.

For the provision of an investment base for new jobs the Chancellor relies on two policies. The first is indirect. The Chancellor hopes that the money being released through reductions in taxation will go into investment. Secondly there is the State investment by means of several measures of job creation and job sustenance operated by the Department of Employment.

I do not deny that there is a policy of State investment—compulsory investment by the taxpayer—but there are substantial disincentives for private investment in private enterprise. These days, most private investment is made by institutions—pension funds, insurance companies and so on—and, in some respects, this is an unfortunate aspect of the modern development of financing. Many such institutions have trustee status and cannot use their funds as risk capital. They find it much safer to invest in central or local government securities.

I wish to draw attention to the other sector of private investment in private enterprise. Individuals with savings to invest find that if they invest in the Government by buying national savings certificates or some gilt-edged securities, they are rewarded by various tax concessions. Otherwise, they are penalised by being charged higher rates of tax on their income from investments.

Is it beyond the wit of planners and draftsmen who draw up our tax legislation to distinguish investments that are accumulated fairly recently out of earnings? I am not asking for concessions on long-inherited wealth, but surely we can find a way to give concessions on savings made comparatively recently from earned income so that these savings may be relieved from higher rates of tax. I should like to see some imaginative incentives in the Bill for the ordinary citizen to invest his savings in private enterprise, or at least in a channel that would lead to investment in private enterprise.

The imaginative incentive that I have in mind is a scheme that could be called "Buy Yourself an Extra Personal Allowance." There would be a trust company, independent of the Government, which would issue bonds for, say, £1,000 each in cash. That cash would be invested in private enterprise undertakings, the size and nature of which could, if necessary, be defined by statute.

The income of the trust company from investments would be paid into the national Exchequer. The bonds would carry no interest but would entitle the holder to treat an amount of his income—say, £500 for each £1,000 bond—as a personal allowance so that this part of his income would be free of tax.

If the right figures were chosen, the individual would pay less tax and the Government, by having the use of the money and putting in into private enterprise, would not lose revenue. I would extend the scheme to the purchase of what I call an extra personal allowance by a father for his son on the occasion of marriage or other family relationship What I call "Buy Yourself an Extra Personal Allowance"—it would no doubt come to be known as BYEPA—would be a very attractive form of saving.

The Chancellor of the Exchequer said that our main object must be to reduce the intolerable level of unemployment. The reduction of unemployment can be brought about only by an increase in investment. An increase in investment by the individual can be brought about only by his savings. Therefore, we must make savings attractive. This Bill in no way does this, but it is essential for any budgetary strategy.

9.36 p.m.

Photo of Mr Robert McCrindle Mr Robert McCrindle , Brentwood and Ongar

Like my hon. Friend the Member for Maldon (Mr. Wakeham), I propose to concentrate my remarks entirely on that part of the Bill which refers to tax avoidance and the proposed retrospection of the Government's measures.

Like the Chief Secretary, I should say that before 1970 I, too, was involved in the tax avoidance industry. I am certain that neither the right hon. Gentleman nor I recommended a scheme which we did not think entirely within the law. I do not know much about the scheme referred to in Clause 26. From what I have been able to ascertain, it is not particularly commendable. It may even be reprehensible. Therefore, I do not wish to give the scheme my personal support. However, no matter how reprehensible the scheme may be, we cannot escape the fact that when it was entered into by people it was perfectly legal.

There is a legal dictum which overlies a great deal of what we are discussing. It is that it is not only the right but the duty of every citizen so to arrange his affairs that he pays the minimum taxation legally necessary. The proposed retrospection is denying to one section of the community the right so to do, and I believe that that is a backward step.

As a general principle, all members of the public are entitled to assume that they can act on the basis of the law as it is at the time when they enter into any arrangement. It is intolerable to have a society where this is otherwise, and retroactive taxation is one of the worst manifestations of it. If the Chancellor of the Exchequer is retrospectively to clamp down on tax avoidance, he can only encourage tax evasion. That may be disagreeable. It may be reprehensible. It may be immoral. But we have to face the facts as they are rather than as we would like them to be.

Although tax avoidance has always been legal, tax evasion has always been illegal. If people who today would engage in tax avoidance are pushed into tax evasion, the responsibility will lie largely at the door of Her Majesty's Government through this proposal. Retrospective changes in the law of themselves presupposes an inability to comply with the law and therefore bring the law into disrepute.

This may seem a relatively small matter to some Government supporters, if only one or two of them were here to hear what I say. However, it is a matter of basic principle that there should be some retrospective action proposed on a matter of taxation. The excuse given for these changes applying retrospectively is that they go back to the date of the announcement that changes were to be made. My hon. Friend the Member for Maldon appeared to take that as something which moderately justified the Government's proposals. I do not share that view. I believe that to take this action is nothing less than an affront to Parliament. It is time that the message went out from the House of Commons that laws are not made at Press conferences—which seems to be the implication of saying that one should date back this action to the date when the announcement was made that some action was contemplated.

Government by threat and innuendo is simply not acceptable, and I submit that that is what this proposal amounts to. If this sort of excuse becomes commonplace, I believe that effective law will be made without parliamentary approval. Its effect is to put the Government above the law, and that is a proposition with revolu- tionary implications. While such a proposition may appeal to the Government's supporters, it certainly does not appeal to me.

In the Budget debate, the Chief Secretary spoke of tax avoiders as playing with fire, assuming that they, not the Government, have taken the initiative. We should point out that, on the contrary, it is the Government who installed a very high rate of tax in the first place, to which people are reacting by setting up these schemes. Therefore, I hope that, even at this late stage, the Government will seriously think again.

I particularly hope that my hon. and learned Friend the Member for Dover and Deal (Mr. Rees), who will be winding up the debate on behalf of the Opposition, will tell us in a little more detail than, understandably, my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) was able to do just where the Opposition are likely to stand on this matter.

I have suggested that it is a matter of principle. I would not therefore think that it is a matter which can be the subject of amendment in Committee. It is a matter which is sufficiently of principle that in my judgment—and in case we get caught in some future Finance Act once again—this is the time to stand against this, as a pure matter of principle. I hope that my hon. and learned Friend will be able to tell us that that is the approach that the Conservative Party brings to the matter this evening.

9.42 p.m.

Photo of Mr Jerry Wiggin Mr Jerry Wiggin , Weston-Super-Mare

I am very glad to follow my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) in what he has said, because I entirely agree with the way in which he has exposed the principle of retrospection. I do not see how we can maintain the rule of law and allow our citizens to operate under the law, which has always been the principle of this country, if, having done so, this House and Parliament can then go back and change that law simply because our citizens have read the small print.

I do not support tax evasion, any more than does the next man. I fail to see why it is impossible for the Government, on discovering the invention of some scheme—and I have some little knowledge of how these things are done; not, unhappily, on my own behalf, but because I have a relation who is deeply involved in this matter—to decide that this will no longer be acceptable and to make a statement saying that from a certain day and at a certain time, no new scheme can be produced. However, no doubt this is a matter that will be debated in great depth in Committee and I would not wish to take up the time of the House at this hour of night to go any further into it.

I, too, would have enjoyed debating with the right hon. Member for Down, South (Mr. Powell) his conversion to income tax. I recall many years ago listening to an excellent speech that he made in the constituency in which I used to live explaining in simple terms the iniquities of income tax, and the way in which it stopped people wishing to work harder, imposed upon the individual the will of the Government, and so on. But a conversion has taken place. Perhaps in Committee we shall have the opportunity to debate that, too.

I have one relatively small point, on the face of it, to make tonight. It may be that some hon. Members might consider that it is basically a Committee point. I make it because in the Bill there is being introduced a brand new tax, a tax that is new in principle and requires a special dispensation from Brussels for its introduction. It will affect a small but important section of our community. It is called the tobacco products duty, which is basically putting a punitive duty on certain cigarettes with a high tar content.

I have no interest in the tobacco industry. I am not a smoker. But I have a constituency near the city of Bristol, in which the tobacco industry is a major employer and major investor, and a number of my constituents are involved in the industry. I try to keep an eye on the rather special provisions of tobacco taxation.

The proposal will put roughly 7p on a packet of cigarettes with a tar yield above 20 milligrammes. Surely it is a new policy that the Treasury should try to direct our social habits by penal taxation. I do not accept that the existing duties on alcohol and tobacco are in any way parallel. I believe that those duties are for the raising of revenue, that they should be at the highest optimum level producing the maximum return to the Treasury.

Who are the mandarins of the Treasury to decide whether one cigarette should be smoked rather than another? They will be telling us next that we should drink one sort of drink rather than another. It may be that more old socks go into one Italian aperitif than another and that it may rot our guts faster, and they will decide that it will carry an extra duty. Gym shoes are bad for the feet. Are we to have an extra duty on gym shoes? Sweets are bad for the teeth. This principle could be extended throughout our lives, and it is wholly indefensible.

The Chancellor of the Exchequer has admitted that the revenue will be a mere £25 million and that he has introduced the duty not for the purpose of raising revenue but rather to change people's smoking habits. I understand that the majority of those likely to be affected are in the poorer and older sections of our community. They persist in smoking those cigarettes despite the propaganda put out over many years, which shows that they do not wish to have these habits altered. I do not believe that the Treasury is the right instrument for trying to change them.

Furthermore, this action is both unjustified and unnecessary, because on 8th March 1977 the industry entered into a three-year agreement with the Secretary of State for Social Services. The agreement, under six different heads, dealt with a progressive change in the advertising and promotion of cigarettes according to their tar content. It dealt with the non-introduction of high tar cigarettes and a change in emphasis over a period from high tar to low tar. The objectives of the agreement were obvious. It enabled the companies concerned to plan ahead and maintain employment, and not at one stroke deprive a section of the community of those things which they enjoyed.

Yet it was not long before the Government traded a decrease of 5 per cent. in high specific taxation for the European Economic Community agreement to a derogation for a United Kingdom health tax, in response to demands by the French and Italian tobacco industries, which are national monopolies. That little bit of jiggery-pokery has not been given much publicity.

Finally, to add insult to injury, the Government have selected a figure right in the middle of the existing bands used for health purposes and well understood in advertising on packets by the vast majority of the public. It is a figure that bears no relation to all the testing that has been carried out. I have no doubt that in Committee we shall be able to point out the precise difficulties that will be caused by the proposals in the Bill.

It is right to say that some companies will be more affected than others. Nevertheless, the tobacco industry is united in opposing this principle. I have a letter from the chairman of the Tobacco Advisory Committee, Sir James Wilson, which sets out the case quite admirably. It is the sort of letter that one would be tempted to read to the House in full because it puts the argument so well, but I will confine myself to one sentence: The industry feels that the Government have not only imposed a tax which is unnecessary, unjustified and a breach of an agreement, but also done so in the most damaging possible way from the industy's point of view. We shall argue the finer points of this elsewhere, but on the Floor of the House let us be reminded that a new tax is being introduced on a brand new principle which can and no doubt will be extended—as with all new taxes—into all sorts of other areas of our life at the whim and wish of Government, and not because we as individuals can have the choice of what we do to ourselves.

The principle involved here is one that I hold dear, as do many hon. Members on each side of the House. This principle must not be allowed to go by default. The tax is wrong in principle and wrong in execution, and I for one hope that it will be rejected in Committee.

9.51 p.m.

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

In spite of what was said by the hon. Member for Coventry, South-West (Mrs. Wise)—I am sorry she is not here for me to say it to her face—I believe that no Government have been more fortunate in their main Opposition party than the present Government, at least in one respect the matter of fiscal legislation.

Over the past four years, this House has, after all, had to endure a torrent of fiscal legislation, and my right hon. and hon. Friends on the Opposition Benches have been assiduous, indefatigable, constructive and responsible in the way in which they have handled it. The debate tonight has, I believe, been no exception. There have been some very notable contributions from the Opposition side particularly, to which I shall refer in the course of my intervention.

But I should like at this point to refer to the speech of the hon. Member for Glasgow, Garscadden (Mr. Dewar). I do not know whether technically, within the conventions of this House, it counts as a maiden speech

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

—but, since I did not have the privilege of serving with the hon. Gentleman before 1970, I hope that I may be permitted to welcome it. The right hon. Member for Down, South (Mr. Powell), who is always a stickler for the finer points of etiquette, will, I hope, allow me to make a personal reference to the speech. I warmed to the hon. Gentleman's vigorous and fresh approach. I liked the way in which he described the role for Scotland in the United Kingdom. I perhaps cooled slightly when he referred to ingratitude in relation to the Budget. The Budget and the Finance Bill may have looked slightly different in the streets of Garscadden during the by-election from what they do here in this House, and we shall criticise them, perhaps, from a slightly different standpoint.

There will, of course, be much to be done with the Bill in Committee, with or without the assistance of the hon. Member for Birmingham, Perry Barr (Mr. Rooker). Whether the Patronage Secretary will encourage the hon. Gentleman to join us upstairs; remains to be seen, but I can foresee that if he joins us, we shall have some notable contributions from him, even if he does not always join us with his vote.

The fundamental improvements to our fiscal system will not however be achieved through this Bill. They must be left to a Conservative Administration, to my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe). Indeed, I seemed to detect a rather wistful invitation from the hon. Member for Cornwall, North (Mr. Pardoe) to be asked to join us in this great task. I have no doubt that, if and when the time comes, we shall look at his invitation, if it is renewed, with sympathy and understanding and see how far we can make common cause in reducing our present fiscal system to some kind of coherence and order. Like the hon. Gentleman, I recognise that there is much to be done. If it can be done on a bipartisan basis, so much the better.

The Government Front Bench seems to be a little surprised by that, but since the hon. Gentleman affects to think that the Government's measures have in large part over the past 12 months depended on a bipartisan approach by the Labour and Liberal Parties, I do not see why it should be regarded as unduly outwith the bounds of parliamentary convention that we should at least consider the possibility of the hon. Gentleman renewing this tempting invitation in rather different circumstances. As I say, what conditions he will attempt to attach to it and what conditions we shall consider appropriate remain to be seen. Let us for the moment, at any rate, consider how best we can join forces in Committee. Again, I conceive that there may be one or two points on which we shall be able to make a common cause.

I have read the hon. Gentleman's dreamland Budget. I am not certain how far it must be regarded as Liberal Party thinking. It may be that after another bruising encounter with the Chancellor of the Exchequer, he has jettisoned some of the more challenging proposals. At any rate, we can explore these proposals on a later occasion.

We understand why the Chancellor himself, with or without Liberal support, cannot really contemplate any fundamental overhaul of our tax structure. But the constraints are largely of his own making. First, there is the increased public expenditure which is forecast in the Financial Statement. That confirms the worst suspicions that we nurtured when we debated the public expenditure White Paper in March. At a later stage I shall come to the cogent analysis of the right hon. Member for Down, South, which led me to suppose that he might find it difficult to vote for any major tax cuts in this Finance Bill.

The other constraint which the Chancellor has erected is his stubborn and obstinate aversion to even considering the possibility of altering the rate of VAT. Even the possibility of using the regulator seems to have escaped his attention. We have it on very good authority from the Chief Secretary—it was repeated again by the Financial Secretary this afternoon—that VAT is nothing like as regressive as we used to think. At least the process of education has gone a certain distance on the Labour Benches. Perhaps we shall have a chance of taking it a little further if needs be.

I do not suppose that such a robust figure as the Chancellor really needs any sympathy from me. But there have been times when I have almost been moved to sympathy by the difficulties he has had in reconciling, in political terms, his hon. Friend's below the Gangway, Transport House, the TUC and even the hon. Member for Cornwall, North. Even with the skilled mediation of the Chancellor of the Duchy of Lancaster, I concede that to have been a challenging political task.

We Conservatives can well understand why it has left the Chancellor little time to study the needs and real aspirations of the British people. It also explains why no coherent discernible theme has emerged in this Finance Bill. As my right hon. Friend the Member for Chipping Barnet (Mr. Maudling), with all his vast experience, observed, it has been a disappointing Budget. Indeed, that view was echoed by the hon. Member for Coventry, South-West. She, too, was a little disappointed, as we all were.

We recognise the political constraints on the Chancellor. We shall endeavour to relieve him of some of those constraints, even at the risk of encountering a charge of irresponsibility from the Chief Secretary I shall come to that in a moment.

Before coming to the central theme of this debate I should like to deal with some of the random yet still important points. My hon. Friend the Member for Weston-super-Mare (Mr. Wiggin) referred to the duty on high tar cigarettes. I suspect that it is a little too late to complain of taxation as an instrument of policy, whether it be political, economic or social. I am afraid that there are too many earlier examples of that. I appreciate that perhaps in this case the medical evidence is a little more finely balanced than the Secretary of State for Health and Social Security may be prepared to concede. I think we may have to explore that in a little more detail in Committee upstairs.

The main charge against this tax is that in March 1977 a three-year package was negotiated between the industry and the Secretary of State and this tax is in breach of that concordat. It is up to the Secretary of State and the Treasury Front Bench to consider the implications. When I next hear then talk at undue length and with perhaps rather maudlin sentiments about the high unemployment level which we certainly deplore I shall wonder whether they have considered the impact of this tax on employment in the tobacco industry.

It being Ten o'clock, the debate stood adjourned.