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National Insurance Surcharge

Ways and Means – in the House of Commons at 12:00 am on 5th July 1978.

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4.0 p.m.

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

I beg to move, That for the percentage specified in section 1(1) of the National Insurance Surcharge Act 1976 there shall be substituted a higher percentage applying to all persons by or in respect of whom the surcharge imposed by that Act is payable. I understand that if we say from this Front Bench that the new clause and the Ways and Means Resolution would not have been necessary but for the irresponsibility of the Opposition, that upsets them rather a bit. So perhaps I should repeat it: this new clause would not have been necessary had it not been for the irresponsibility of the Opposition.

However, I am bound to accept that a majority of the House voted for the two amendments increasing the borrowing requirement by £440 million in 1978–79. We do not propose to try to reverse those two votes. The new clause, on the other hand, seeks to offset a major part of the cost by increasing the national insurance surcharge by 1½ per cent., instead of the 2½ per cent. that we originally had in mind.

Of course we would have preferred neither. The 2½ per cent. had the attraction that it would not only have more than offset the cost of the two amendments but would have given us a substantial surplus next year to enable us to have sufficient funds available for further income tax cuts, which all sides of the House would have liked to see.

However one is bound to recognise that there was no majority in the House for a 2½ per cent. increase in the national insurance surcharge. I hope, however, that when the House sees the arguments for a 1½ per cent. increase it will find them acceptable.

Perhaps first of all I should take a question—what the right hon. Member for Down, South (Mr. Powell) termed his "examination question" to us when he spoke in the debate on 8th May. I think that I paraphrase him correctly when I say that he asked us on what grounds we asserted that our £8·5 billion borrowing requirement was safe, whereas a requirement of £9 billion was unsafe. That was his basic question. He recognised in his remarks that at the end of the day it was a matter of judgment. In the past he indicated that on the whole he had supported the Chancellor in his Budget judgment, but on that occasion he felt that by implication, as the question could not be answered precisely and as it was basically political, there was an overriding consideration—namely local government in Northern Ireland. Therefore, on that occasion he voted against the Government.

It is not only true that the figure of £8·5 billion—or more or less—is a matter of judgment at the end of the day, it is also true that that figure is the best estimate. No one is saying with absolute exactitude that it will be the figure. It is easy to poke fun at the fact that it could be £1 billion or more out by way of a margin of error. But we should recognise that we are talking about cash flows of £148 billion. Therefore, it is in that context that we must look at any margin of error.

One must bear in mind particularly that those cash flows are not under the direct control of the Government. That having been said—and because there is such a large cash flow and the margin of error is so imprecise, because the out-turn may be less than the £8·5 billion—I do not think that that is an excuse for adding a further £440 million to that requirement. Whatever the eventual outturn, the House, by its votes, has added an additional £440 million to that figure, which is the best estimate that we can make.

Of course it is foolish to get hysterical over comparatively small sums in a context of a borrowing requirement of £8·5 billion. But in my view it is equally foolish, because of the margin of error argument, to take that to the ultimate, and say that it does not matter whether there is an extra few hundred million pounds added to the requirement. That kind of argument takes the margin of error argument to the ultimate end of the logic of the case by saying that because there is a margin of error we can allow an extra few hundred million pounds with impunity.

The income tax cuts in question to which the two amendments relate, cannot be implemented under the PAYE scheme until about 9th November. That is because of the need to have new tables printed and distributed. In the meantime I make clear to the House that we shall review the prospect for the borrowing requirement in the light of all the further information coming before us between now and then. This will enable us to take any corrective action necessary to keep the borrowing requirement within the £8·5 billion to which we are committed.

I make clear that the £140 million difference between the national insurance surcharge increase of 1½ per cent. and the £440 million of the two amendments is about 0.1 per cent. of the public sector receipts and payments. Therefore, we are dealing with comparatively small sums.

However, whatever the judgment may be about the outturn of the borrowing requirement I begin from an assumption that even those who voted for the two amendments would want to see the amount offset, and see a borrowing requirement considerably lower than £8·5 billion.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Just to clear up the business about the margin of error, did I understand the Chief Secretary to say that within a total of cash flows of £148 billion the £440 million was not very much it was still very significant, but that the £140 million which he is not recouping is so small as to be insignificant? Can he tell the House where he draws the line between something which is insignificant and something which is significant?

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

The hon. Gentleman should have been listening, as I assume everyone else was. I said that the £140 million is about 0·1 per cent. of the cash flows of public sector receipts and payments—a comparatively small sum. But I did not say that we would not necessarily need to recoup it. I said that we would study the situation between now and November, when the income tax cuts take effect, and decide then what further action is necessary, if any, in order to ensure that the borrowing requirement remains within the £8·5 billion.

Whatever the judgment about the borrowing requirement, I assume that most people want to see the £440 million offset in whole or part. There are two ways in which this can be done. It can be done by public expenditure cuts or by tax increases, or by a combination of the two.

I start by looking at possible public expenditure decreases. We have had few specific public expenditure cuts suggested by the right hon. and learned Member for Surrey, East (Sir G. Howe), apart from the specific one to cut the Chancellor's salary—and that motion was defective anyway, so even had it been carried his salary would have been all right. The only other specific proposals we have had from the right hon. and learned Gentleman amounted to savings of £500 million and it was shown quite conclusively to the satisfaction of the House and probably to the satisfaction of the right hon. and learned Gentleman himself that those items that he suggested proved to be a myth to a very large extent.

We now read a variety of leaks in the press these days from various working parties of the Conservative Party. I quote from The Guardian of 26th June: The Conservative Party is engaged in an increasingly acrimonious row over the scale and distribution of the cuts in public spending which will be needed to finance the level of reductions in direct taxation now being recommended by Mrs. Thatcher's team of top economic advisers. It goes on to say that these top economic advisers are the axemen, who include Sir Geoffrey Howe, Mr. Nigel Lawson and Sir Keith Joseph". I am told elsewhere that my right hon. Friend the Chancellor of the Exchequer is now the "viable ogre" of the Conservative Party in any coming election. Looking at that bunch of mad axemen opposite, a finer bunch of viable ogres I never wish to meet. The article continued: The original belief was that the range of cuts would be between £2½ billion and £3 billion. It now seems certain that the global figure will be very much higher than this, with housing subsidies as the major target. Shadow Ministers have been told in the bluntest possible terms: 'We intend to do it'. That sounds like the hon. Member for Blaby (Mr. Lawson), if ever there was an ogre.

Perhaps the right hon. and learned Member for Surrey, East would say whether that is true. Do they intend to take this action? I think that it is worth giving the House one or two figures. He could make cuts in public expenditure in that way. He could increase council house rents by £5 per week and in the process could cut subsidies by a figure of £1¼ billion. He could take that action, but the effect on those council house tenants would be the same as if income tax were increased. The effect on their living standards would certainly be the same.

If what is being said is "We shall give it back in tax cuts", which is the customary argument of Conservative Members, it is worth reminding the House that if they sought to do that in respect of a married man with no children and were to give proportionate allowances to other people, single and others, the cost of so doing would be about £5 billion. Therefore, it would not exactly help the borrowing requirement, if one sought to give it back in tax cuts, or one could leave it and not make tax cuts to the individuals concerned, and they would be £5 per week worse off.

I hope that some time the right hon. and learned Member for Surrey, East, who is looking closely at his brief, will tell us the answer.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I am looking at my watch.

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

The right hon. and learned Gentleman should certainly look at something and tell us whether he intends to listen to his hon. Friend the Member for Blaby and do what has been suggested on housing subsidies. Council house tenants are entitled to know. Are these the Opposition proposals on public expenditure?

I have been very modest in some of the suggestions I have made about what the Opposition might do to reduce the borrowing requirement, but the press tells us rather more. We were told in the Financial Times on 6th July that the right hon. Member for Leeds, North-East (Sir K. Joseph), who shares a city with my right hon. Friend the Chancellor of the Exchequer, said in Cardiff: …as part of a general programme of public expenditure cuts the Tories proposed a limit on the rate of grant for large capital projects such as a new petrochemical capacity. How much will they save on that? The total expenditure this year is about £450 million. Have they calculated the effect of such a saving on inward investment in the regions? Would they, for example—perhaps the right hon. and learned Gentleman will tell us—cut grants on the Ford project in Wales, which is a large capital project? I see that the right hon. and learned Gentleman is still writing. I hope that at some time he will tell us what he proposes to do.

Photo of Mr Timothy Renton Mr Timothy Renton , Mid Sussex

Will the right hon. Gentleman give way?

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

I would rather give way to the right hon. and learned Gentleman the Member for Surrey, East. I am not sure that the hon. Member for Mid-Sussex (Mr. Renton) can speak for his right hon. and learned Friend.

Photo of Mr Timothy Renton Mr Timothy Renton , Mid Sussex

Will the Chief Secretary leave his teasing, baiting mood, which he enjoys so much, and say seriously whether he has considered the application of Laffer's curve to this country? As he will know, that principle is based on the example of the United States in the 1920s and West Germany since the war—namely, the argument that much lower tax rates can lead to a higher tax revenue because people are encouraged to work much more, productivity increases, and thus GDP grows at a much faster rare. I fully appreciate the difficulties we face in the present state of high unemployment, but has the right hon. Gentleman considered the application of that economic theory and its potential to this country?

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

There is a wide variety of economic theories that I study constantly and Laffer's curve, together with many other curves, I spend a great deal of my time thinking about. However, I must tell the hon. Gentleman that the people of California may not be quite so pleased with what is happening there when they begin to see the precise consequences of what they have done. Although personally I should like to see lower rates of direct taxation, I do not believe that that is the answer to all our problems. Certainly there is a need to reduce taxation, but to suggest that that would solve the serious problems of this country is to take it to a somewhat exaggerated length.

The hon. Member for Mid-Sussex diverted me in my course. I was trying to extract some answers from the right hon. and learned Member for Surrey, East. I am desperately trying to make him a credible figure. It is a difficult task. I am trying hard to persuade him to make clear to the House and the country how he will ever make all these huge tax cuts about which he constantly talks. I never mention my own speeches, but I shall do so on this occasion because recently I suggested that the Conservatives intended drastically to reduce Government employment measures, reduce grants to the regions, increase prescription charges, make charges for staying in hospital, impose charges for visiting doctors. I put all these suggestions and suggested that the right hon. and learned Gentleman could deny or confirm them. Needless to say he has not dropped me a note about the matter, so I can only assume that he intends to keep the information a secret.

I overlooked a number of items in my modest suggestions about what the Conservatives might intend to do. I hope that the right hon. and learned Gentleman will tell the House today what they have in mind in order to make the kind of tax cuts they suggest, and also at the same time, to reduce the borrowing requirement. Perhaps he will use the curve which the hon. Member for Mid-Sussex had in mind. If so, it would be a somewhat miraculous one if he were to cut the borrowing requirement at the same time as he reduced the tax yield in the early years of so doing by thousands of millions of pounds.

However, as he will not answer my simple questions about public expenditure, perhaps he will answer one last question: Does he intend to cut public expenditure at all? I see that I do not even get a nod from the hon. Member for Blaby, who usually is able to move his head at almost any time. But the reason I ask that simple question is that in a speech in Wales on 9th June the right hon. and learned Member for Surrey, East said: This is why we shall have to rein back public spending. Why did the right hon. and learned Gentleman use the words "rein back"? He is usually very careful in his choice of words. Why use two four-letter words when one three-letter word will do? Why did he not say that he proposed to "cut" public expenditure? Will not even the hon. Member for Blaby tell me? He usually does—and indeed he usually speaks for everybody. Will he tell me why his right hon. and learned Friend used the words "rein back" when he meant "cut"? I noted those words carefully because the right hon. and learned Gentleman is a lawyer and does not use two words where one would do. Perhaps he does if he gets paid by the word. I hope that the right hon. and learned Gentleman will tell us at some time.

If the right hon. and learned Gentleman does not intend to tell us about any specific public expenditure cuts, how will he meet the objective which he constantly puts before the House? Surely he will be able to tell us that he is proposing substantial indirect tax increases. Indeed, when he was in Wales he spoke about tax in the speech to which I referred, but that part of the speech was not in the Conservative Central Office handout because presumably he wrote it on his way down. I quote from The Guardian of Monday 12th June: It is left to Sir Geoffrey Howe—proudly introduced as a son of Wales '—to rewrite Harry Secombe's signature tune: Sir Geoffrey, whose efforts would not cut much ice in the Gorsedd of Bards, promised that Well make a tax cut on the hillsides we'll pay a bonus in the Dales; we'll bring the jobs back to the Valleys, when you come home to Tory Wales."' I am bound to say that if those tax cuts are dependent on a Tory Wales, the Opposition will be waiting a very long time. Coming from a man who complains about the PSBR being too high, that is irresponsibility of the highest order.

However, to be fair, the right hon. and learned Gentleman said in that same speech that we must accept higher taxes on what we spend. So we know that the Opposition are in favour of increasing indirect taxes.

The Liberals, of course, honest in this and in every other matter, spell out precisely what they mean—by just how much they would increase indirect taxes and how they would do it. But as for the Opposition 10 per cent. VAT broadly recoups the two amendments which they carried in the House, but that is all. It certainly would not reduce the borrowing requirement, which the right hon. and learned Gentleman says he wants to do. It would not help to make bigger cuts in direct taxation. Therefore, what is the right hon. and learned Gentleman suggesting on VAT?

Is it a massive further increase in VAT, an increase in petrol taxes—which he voted against last year—or an increase in beer duty and whisky duty? Which indirect tax increases will give him room to cut income taxes? He has not told us.

I am bound to say to the right hon. and learned Gentleman that he cannot be both coy and credible. Despite all my attempts at trying my best to lift him up and make him a more credible figure, I am sorry to say that I am not getting very far. If he says, as he does, that there must be higher taxes on what we spend—with which I would not broadly disagree—he is bound to say, if he wants to be credible, where and when he is going to do it. If he does not do that, his whole policy of income tax cuts does not bear examination. [Interruption.]

What is the hon. Member for Blaby muttering about now? Is he going to tell us?

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

The right hon. Gentleman looks like a worried man.

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

If I look like a worried man, the country must be in a serious condition. If I am worried, it is about the credibility of the Opposition Front Bench.

Photo of Mr Oscar Murton Mr Oscar Murton , Poole

Order. I hope that there will not be too many interventions, because that will worry the Chair, too.

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

I would not want to worry you, Mr. Deputy Speaker. That is the last thing in my mind.

It is interesting that I am always able to provoke the hon. Member for Blaby at a second's notice. On this occasion, despite all the questions I have put, even he has not been prepared to get up and tell us. It is very strange. It is very interesting why the Opposition are keeping these things so secret. No doubt they will tell us some time in the not too distant future. At least I promise this: I shall keep asking and putting suggestions as to what they will be doing.

The Opposition are never slow to complain that United Kingdom taxes are the highest in the OECD countries. It is not true, of course. It is not even true that income tax, if one includes social security contributions of employees, is the highest in the OECD countries. I would personally accept that our income tax, certainly on the margins, at the highest and lowest ends, is very high and needs to be cut. But as far as being out of line with that of OECD countries, it is nothing compared with how far we are out of line with their employers' national insurance contributions. On that we are wildly out of line.

So why are the Opposition so selective in which taxes they want to get back into line? Why are they in favour of reducing income tax in order to get us into line with OECD countries, but opposed to the idea of bringing us into line on employers' national insurance contributions? Or is it—perhaps the right hon. and learned Gentleman will answer this question—that they are in favour of increasing the employers' national insurance contributions, but not now? Are they in favour of increasing them at some time in the future, or are they permanently opposed to any increase?

I am bound to ask Opposition Members, who may, very shortly, some time before October 1979, be having to stump the country, telling the people how they are proposing to pay for these income tax cuts which their incredible Shadow Chancellor talks about, how they are going to explain it when they are not in favour of, or not prepared to spell out, a single specific public expenditure cut, or a single specific indirect tax increase. How are they going to explain it? Certainly the right hon. and learned Gentleman never has, and I assume he has no intention of doing so today, either.

I make it clear to this House, as I did at the outset, that I would personally have preferred not to increase the national insurance surcharge at this time. Indeed, my right hon. Friend and I told the right hon. Gentleman the Leader of the Liberal Party and the hon. Member for Cornwall, North (Mr. Pardoe), very politely at the time, why we disagreed with their proposition. I do not understand this other myth that my right hon. Friend is always very rough with the hon. Member for Cornwall, North. I cannot understand it. Everybody knows that my right hon. Friend is such a nice fellow. If anything, he is a lovable bear on these occasions—perhaps, a lovable grizzly bear. But certainly he is never rude, never discourteous, and always very polite. We told the hon. Member for Cornwall, North very politely why we were not able to go along with the Liberal proposals on that occasion. It was because we did not wish to add to industrial costs and, ultimately, to prices.

I make it quite clear to the House that the consequences of this new clause, in general demand, employment and GDP terms, to the first half of 1979, are broadly to offset the income tax cuts represented by the two amendments. Of course, there will be differential employment and liquidity effects, dependent on the ability of the firm to pass on the national insurance surcharge. On the other hand, it might also encourage more efficient use of labour, and an improvement of productivity—to which I assume the Opposition are not opposed. I assume that they are in favour of it.

Therefore, I say again that although in the interim there will be some effect on cash flow, which is why I would have preferred the switch at another time—but then, while not wishing to hurt the hon. Gentleman any more, I did not vote for those two amendments, nor did any of my hon. Friends—that is why we have the new clause before us today.

Therefore, whilst I would have preferred not to do it, the fact is that the financing position of manufacturing industry generally has improved—indeed, company liquidity improved markedly in 1977—and while, of course, the national insurance surcharge will affect liquidity and cash flow in firms for a while, this would be far outweighed by the excessive pay settlements in the next round, which would certainly have been the case if we had gone for immediate price increases through VAT, as the Opposition have suggested.

This is not an ideal solution. It certainly would have been better if the two amendments had not been carried, but if we agree that the Budget financial balance is right. or even that the public sector borrowing requirement is too high—as the right hon. and learned Gentleman suggests—then, it having been unbalanced by those two amendments, we must responsibly put it right. There have been no meaningful public expenditure proposals as an alternative which would not do much more harm and no indirect tax alternatives which equally would not do much more harm. I therefore ask the House to approve the new clause.

4.30 p.m.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

There are a number of curious omissions from the right hon. Gentleman's speech. He began by reminiscing about the basis on which I might once have been paid as a lawyer, rehearsing the old myth that one was paid by the word. As we well know, the right hon. Gentleman, in his own private existence—to which he will shortly be returning—was paid by the amount of tax he avoided. [HON. MEMBERS: "Oh."] Certainly the right hon. Gentleman's practice would not have flourished if he had not been able to produce successful results in that direction. I do not criticise him at all. It is an entirely legitimate activity. There must be many people outside this House now suffering because they have not had the benefit of his advice in avoiding some of the taxes he has been imposing.

But the right hon. Gentleman seems to have changed to a different style and should really be paid by the amount of attention he devotes to study of my speeches, as reported in the press and in Conservative Central Office press releases. I am very flattered by that, and I shall come back to deal with his points in a moment.

The right hon. Gentleman seems also to be paid by the number of questions he asks, certainly not by the number of points he makes in defence of his own propositions. He should remember that it is his proposal, the Budget that he is seeking to support, the new clause that he will put before the House, that are on trial, and he should begin trying to defend what he is putting before the House instead of seeking to divert the argument elsewhere.

The reality of the argument underlying the right hon. Gentleman's case is that for the foreseeable future he sees no prospect of any substantial change in the burden of public spending. He will denounce us, as he and his right hon. Friends have denounced us in debate after debate, for having been so rash as to make even the most modest steps towards getting down the high rates of personal taxation in this country. He is making plain that his party is and will remain a high-tax party, stifling the prospects of growth and success, into the foreseeable future.

It is exactly in line with that tradition that the right hon. Gentleman brings before the House now, although he is not prepared to say much about its merits, what we regard as a foolish and unnecessary measure, introduced, as the Chancellor of the Exchequer himself explained not long ago, at a foolish time and in a foolish fashion. I do not want to burden the Chancellor unduly, but he must remember what he said about the matter in his Budget statement, and why he said then that such a move would be quite wrong. He said: I do not believe it would be right to increase it so soon after it has been introduced, and at a time when unemployment is our major problem. It would increase industrial costs at a time when it is essential to improve our competitiveness and it would ultimately be largely passed on in higher prices at a time when the fight against inflation is at a crucial stage."—[Official Report, 11 th April 1978; Vol. 947, c. 1204.] The Chief Secretary had a different way of describing that in his speech this afternoon. The increased surcharge would no longer increase unemployment at the wrong time but would encourage the efficient use of labour. That was the euphemism we heard from the right hon. Gentleman. In fact, he knows perfectly well that the measure takes effect as a tax on jobs, a tax on profits and a tax on investment. He knows perfectly well that the Chancellor was right to say how foolish it would be to go further down that road at this time.

In the 18 months since March last year, the total burden of payroll taxes being paid by employers will have risen from 8¾ per cent. to 13 per cent. To push it up by that amount over 18 months seems plain folly. It is a tax increased over that period to the tune of about £200 per full-time job.

That is the way in which the tax is perceived. I have received letters, and I know that my hon. Friends have, from employers large and small throughout the country, and from co-operative societies complaining about the impact on their employment pattern. It is having distortionary effects, as many people have pointed out to me, because many full-time employees are either not being taken on or are being laid off in order to be replaced by part-time employees who do not have the surcharge placed upon them.

The Chancellor tried to argue—although the Chief Secretary did not try to repeat the argument today—that the last surcharge of 2 per cent. had no effect upon employment, although as a matter of fact in the six months after it was first imposed unemployment rose by 100,000. If the Chief Secretary thinks that employers are not influenced in deciding whether to maintain or increase their payroll by the fact that there is an additional burden of this kind on them, he must be living in a totally foolish world of him own.

Aside from jobs, the tax falls on profits as well. The Chief Secretary tried to brush this aside. He took some comfort from the fact that company liquidity and profitability were agreeably high. But he knows that profits are still running at a very low level compared with those in the early 1970s, and that they have been flat since the end of last year.

The right hon. Gentleman may well have seen the impressive analysis produced recently by Messrs. Phillips and Drew suggesting that even before this increase took place company liquidity in the year ahead was likely to be severely affected and that the sector was likely to be in deficit to the tune of about £3½ billion. Therefore, it is no wonder this increase will be damaging in its effects on jobs and in its effects on company confidence and investment.

The Chief Secretary taunted us, saying that in a speech at Llandudno, one of many I have made on the subject, I had explained that the necessary reductions in personal taxation would involve increases in taxes on expenditure. The right hon. Gentleman must have been unusually neglectful, because we have made that point in virtually every Budget debate and every public expenditure debate in the House. We have made it on every platform in the country, and the right hon. Gentleman must have noticed it in his frequent studies of "The Right Approach" and "The Right Approach to the Economy". Yet he says that we keep it a secret. There is no secret about it. He cannot have it both ways, denouncing me on the one hand for candour and on the other for secrecy.

Ever since the Chancellor first cut the basic rate of VAT from 10 per cent. to 8 per cent. we have said that it was a foolish step in the wrong direction. It would have been far more sensible to consider increases in indirect taxation of that kind than the tax that we are now dealing with. We would wish to make changes of that kind not as part of some lumbering, limping accommodation to the judgments of this House, as the Chancellor has done, but as part of a considered strategy for the reduction of taxes on personal income, earnings and investment, in order to promote incentives.

That has been our policy, declared in debate after debate, and it is a policy on which the Liberal Party shares the same general approach. It is a policy on which all the Opposition parties take the same view. It is a policy on which almost every independent adviser outside the House takes the same view. It is a policy on which the great mass of the citizenry take the same view. It is a policy that the Chancellor of the Duchy of Lancaster considers to be entirely right. He never ceases to reiterate that. In answer to a Question recently he said that of course we must do something to reduce the high burdens of personal taxation.

The only people who are unable or unprepared to move in that direction are those who compose the present Government, either because of their lack of enthusiasm or because they are fettered and tied by those below the Gangway. It is a clear change to which we are committed, and there is no secret about it.

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

Perhaps the right hon. and learned Gentleman can explain why he voted against the petrol tax increase.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

We explained at the time that a petrol tax increase of that kind, taken in isolation—

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Chancellor cannot seek to refight the battles that he has lost in years gone by. We voted against the petrol tax increase, again with the support of other Opposition parties, for reasons that we explained then. We are not discussing why the Chancellor has been defeated on occasion after occasion. We are discussing the absurd measure that is now before the House.

The Chief Secretary sought again to justify this change at this time by saying that it was justifiable by reference to foreign comparisons. If he looks at what has been happening to other countries' payroll and social security taxes, he will see that they have been at a higher level than ours. Some of them still are. But the important point is that while this Government are raising taxes of that kind most of those countries are reducing them.

The OECD report on the subject, produced last December, said that a number of countries—Finland, France, Italy, the Netherlands, Norway, Spain and the United States—had reduced employers' charges to improve the cost position of firms and/or encourage employment.

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

The right hon. and learned Gentleman mentioned one country on the continent of Europe which after the change we propose, which I think the House will approve tonight, will have a lower level of employers' contribution for payroll tax than the United Kingdom has—one.

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

Will the right hon. and learned Gentleman answer?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The right hon. Gentleman misses the point completely.

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

What about answering?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

My point is that, of course, from the point of view of a standback analysis of the shape of tax structures there has been a case to be made for a change in this direction. Such a case was put forward by many people when unemployment was not as high as it is now and was not rising. At the very time when every other country that has had high levels of social security taxation is reducing them for the sake of encouraging employment—

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Chancellor cannot get away with it by shouting "nonsense".

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

What about answering the question?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Chancellor may not like what I am saying, but these are the facts.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

Does the Chancellor of the Exchequer deny that employers' paroll taxes are being reduced in Finland, France, Italy—

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

Will the right hon. and learned Gentleman give way?

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

On a point of order, Mr. Deputy Speaker. The right hon. and learned Gentleman has asked me a question. I rose to answer it, but he refused to give way.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Chancellor knows that in the countries that I have listed, and I shall list them again—

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

Will the right hon. and learned Gentleman give way?

Photo of Mr Oscar Murton Mr Oscar Murton , Poole

It would be helpful to the Chair if one of the right hon. Gentlemen would give way and allow the other to answer.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I want the Chancellor to address himself to this question. At a time when the Government have increased the employers' surcharge by 2 per cent. initially and now propose a further increase of 1½ per cent., adding to the burden and raising it by a total of 50 per cent. over the last 18 months, is it not a fact that Finland, France, Italy, Netherlands, Norway, Spain and the United States have been reducing those employers' charges and moving in exactly the opposite direction for the sake of promoting employment?

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

I am most grateful to the right hon. and learned Gentleman for allowing me to answer. It is true that the countries he mentioned have reduced their level of taxation in this area, but it is still very much higher than it is in this country. He cannot deny that. He is misleading the House and the country if he makes his point without also recognising that, even with the proposed increase, the level of British taxation derived from this source is substantially lower than that in any of the countries he has mentioned.

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

Does the right hon. and learned Gentleman deny that?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The figures are not directly comparable in any event. The Chancellor can snort as much as he likes, but the figures in this country do not take account of the fact that we have very much larger private pension provisions and the total cost of private pension contributions and employers' contributions to the State are significantly larger here for that reason.

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

That is quite untrue.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

If the Chancellor was right when he said in his Budget statement that he did not want to increase the surcharge because it would have an adverse effect on unemployment and if other countries are right to be moving in the opposite direction for precisely that reason, what could be more foolish than the Government's decision to impose the proposed increase in the surcharge?

The effect of the Government's policy has been to achieve three results. Over their period in office, they have progressively diminished the rewards for going to work and being employed, they have progressively increased the rewards for not going to work and for being unemployed and, by the latest proposals, they have progressively increased the cost of employing people. In the light of those three factors, it is not in the least surprising that unemployment has risen and is likely to go on rising as a result of these measures.

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

Will the right hon. and learned Gentleman give way?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

No. I am making my own speech.

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

I wish to ask a very simple question.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Chief Secretary asked enough foolish questions in his own speech. He ought to let me proceed with my speech.

The cause of the problem is nothing done by Opposition parties in the House. It is the failure of the Government to take any of the right steps in their Budget this year and afterwards. The Chief Secretary said that the Budget was a matter of judgment, but that is the judgment which the Chancellor got wrong and which has led to the collapse of confidence since that time so that he has difficulty in covering the borrowing requirement, which has led to the necessity of making changes of which this proposal is just a part.

The public sector borrowing requirement started off by being too high as a result of the Government's decision to raise public expenditure by £4 billion.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Chancellor knows perfectly well that it is true, and the House and the country know that it is true. Interest rates have been going up steadily since the Budget was introduced. They went up on Budget day and that is why we face these measures now.

I want to ask the Chief Secretary, or whoever is to reply to the debate, some questions about the Government's proposals. I understand that these measures impose a burden on the cost of employing people in the public sector. For example, the Chancellor made great play in his Budget Statement about a decision to give £50 million more to the National Health Service, but the cost of the surcharge to the NHS will be more than that. It will increase costs by £54 million. It has a similar effect in local government. The cost of employment there will be increased by about £42 million.

The Chief Secretary has given an indication of the consequences of this measure on the borrowing requirement. Does it take account of the offsetting expense to the public sector? Will there be a corresponding change in the cash limits for the NHS or will it be this much light as a result of the Government's proposals? Will there be any change in the rate support grant or in any other way to help local government?

Hon. Members:

Answer.

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

It is very interesting that when I am asked one question, Conservative Members demand that I should answer it. I asked the right hon. and learned Gentleman dozens of questions and he has not answered one.

Cash limits will be increased as necessary. May I now ask the right hon. and learned Gentleman to answer a question about the national insurance surcharge? Is he opposed to an increase in the surcharge at any time to pay for income tax cuts?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

We are dealing with this measure at this time in this House. The Chancellor explained to the House in his Budget Statement that introducing such a change at a time when unemployment was high is profoundly foolish. To introduce it just after having introduced a 2 per cent. increase is to compound the folly and the effect is to diminish employment, investment, profits and success. It is a result of the extraordinary way in which the Chancellor has approached this matter throughout.

In the Budget Statement, the Chancellor said that he would not impose an increase. When the cuts in income tax were imposed upon him, he made the most menacing noises and said that he would do all sorts of things that man could not dream of, including increasing the surcharge. A week before the announcement of the increase, he said in answer to Questions in the House that he was watching carefully but had not decided that it was necessary to do anything. When the measure first came before the House, it was proposed that the increase should be 2½ per cent. As a result of some consorting with the Liberal Party, the Chancellor appears to regard 1½ per cent. as an adequate increase and apparently the balance of £140 million is to be held over for future consideration. It is a most erratic way of coping with the matter and of taking us in the wrong direction at the wrong time in a foolish fashion.

The Chief Secretary knows that the Government are off course and are offering no sensible strategy for the restoration of employment or prosperity in this country. He and the great mass of people outside the House know that we must set about rewarding work and enterprise more sensibly and effectively. The Chief Secretary may shake his head, but in his more candid moments he says such things. But he never does anything about it.

It is necessary to reward success and enterprise of all kinds if we are to begin creating jobs in this country. Labour Members constantly say that this analysis is not credible, but they should look at the credibility and disastrous nature of their own performance. We have had four years of the Government reaching from measure to measure and from expedient to expedient without any sign of a return of prosperity or enterprise to this country.

The Chancellor of the Exchequer is fond of suggesting that he has done no worse than other countries in this sense, but he should look around him. Let him look at those societies where success is taking place. Let him look at the United States, for example, where he will see that in that society, going through the same world recession that we have gone through, 9 million new jobs have come into existence over the past five years and a far better performance is being achieved in terms of growth and in every other sense than has been achieved in this country. If we contrast that with what is on offer from the Government, it cannot be seen how they can continue defending a record of such total and complete failure.

Their policy has reached a dead end. If we are to make the necessary changes, there is involved the checking and reducing of the size of the public sector borrowing requirement. We have made that clear. That is an essential pre-condition to the conquest of inflation. As we have also made clear, it involves taking steps to switch the burden from taxes on income to taxes on expenditure. The change will take time but the switch is necessary. Nobody should know better than the Chief Secretary and the Chancellor that one essential part of the strategy is a reduction in public expenditure.

The tragedy is that the Chief Secretary, having striven so valiantly to achieve a reduction of the borrowing requirement, seems to have cast the achievements aside. When it finally became inescapable under pressure from the International Monetary Fund, why did the Chief Secretary slog and sweat to reduce public spending by £4 billion? He did so because he knew that it was necessary. Only a year or so ago he and the Chancellor were saying that it was necessary to secure a progressive reduction in the size of the public sector borrowing requirement. He was right to do so and he was able to achieve a reduction. It is tragic that within a matter of months he and the Chancellor are saying to the TUC and the country as a whole that they are determined and pledged to achieve a growth in public spending of 6 per cent. and to achieve an expansion of public spending to the tune of £4,000 million, exactly the sum that they had first saved.

The Chief Secretary asks why I use the words "reined back" rather than "reduced"? The right hon. Gentleman knows that during the debate on the public expenditure White Paper my hon. Friend the Member for Blaby (Mr. Lawson) and I said that the figure at which public spending should be held and "reined back" was the outturn for last year. That has been our position throughout. The Chief Secretary should reflect that he has spent the past four years extremely foolishly. He spent two years struggling to reduce public spending and this year he has been struggling and pledging himself to fulfil a re-expansion to exactly the same extent as the reduction that he achieved. That is a futile waste of four years. It has destroyed any scope for maneouvre that we should have.

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

We should try to get this straight. The right hon. and learned Gentleman knows that we did not increase public expenditure in 1978–79 by £4 billion. There was a shortfall in 1977–78. In 1977–78, much to my personal regret, public expenditure was in real terms below the level of that of 1975–76 and 1976–77.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The figures are not in dispute. All that I am saying is that it is supremely foolish for the right hon. Gentleman to have taken his party and Britain through three different phases of tribulation. He has taken us through a massive expansion of public spending. That took place in his first period of office. Following that the right hon. Gentleman spent two years hauling it back. He is now saying specifically that underspending is equally as serious a fault as overspending and that the Government are now determined, come what may, to expand public spending by 6 per cent., even if that pushes the borrowing requirement up against the limit of £8·5 billion. That is their policy, even if it prevents them cutting taxes in any sensible way.

The Chief Secretary has heard us speak often enough about the sort of savings that should be made in public expenditure.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

He has heard us say so often enough, even if we contemplate only the areas in which he has tried to achieve reductions. The total pattern of spending on subsidies to trade, industry and employment is running at over £3,000 million a year, but we are not achieving anything like the returns that we should be gaining in terms of jobs. Surely the plainest example is that the British people heard yesterday of the continuing losses of the British Steel Corporation. That is not immediately public expenditure out of this year's Budget, but the Government are spending from the borrowing limit money that should be being spent on capital investment. That spending will have to be financed in due course by the future borrowing requirement.

How can it be sensible to spend huge sums to finance losses in the steel industry in such a way in the past three years? The Chief Secretary knows that that cannot continue. The losses of the steel industry since nationalisation—I say this with some regret—amount to £764 million in 11 years.

I spent my first two elections fighting steel nationalisation. I considered that it would do no good to those working in the industry. I have spent most of my life working professionally for the Iron and Steel Trades Confederation throughout Wales. What has happened to the steel industry as a result of nationalisation is not merely a matter of public expenditure but a total tragedy.

We hear that in the three and a half years to October 1978 more than £1,000 million will have been spent or committed in meeting the losses of the British Steel Corporation. If that were doing anything useful in maintaining jobs in the long term, it would be a sensible pattern to be following. However, it is doing no such thing. That has to be compared with the achievements of the private steel industry that is competing alongside BSC. For example, Guest, Keen and Nettlefolds has made a post-tax profit of £324 million while the nationalised steel industry has lost more than £760 million in the past 11 years. Guest, Keen and Nettlefords has seen an expansion in its total labour force of 10,000 while the nationalised steel industry has seen a contraction of nearly 60,000.

In no sense are the huge losses and huge outpourings of public money, present or in prospect, doing anything in the long run to achieve greater prosperity for the people.

Photo of Mr Denis Healey Mr Denis Healey , Leeds East

What are you going to do about it?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Chancellor knows what should be happening. The solutions are not easy, but Britain would be trying to deceive itself, as the Government are doing, if it continued trying to pretend that we can maintain jobs indefinitely at great expense to the public sector, to the cost of huge burdens being placed on prosperous firms that could be expanding their employment.

The answers to the Chief Secretary's questions about public spending are not easy. They cannot be easy for the British people. However, when the right hon. Gentleman was in his cutting mood and addressing himself honestly to the problems, he frequently drew our attention to the need to begin restoring the percentage of the cost of housing paid for by rents. He set himself a target to that effect. He has now abandoned that target, but he knows as well as us that if we are to reduce the public sector borrowing requirement it is throughout the larger sections of public spending that economies must be found. It is only in that way that we can begin to reduce the borrowing requirement. It is only in that way that we shall begin to get inflation under control and begin to find room for making tax cuts. Unless the right hon. Gentleman is prepared to face those issues, there is no prospect for Britain.

The Opposition want better social services. The Chancellor may laugh, but the periods during which our social services improve steadily and progressively were periods of Conservative Government. That is when we could afford to pay for better services. We can begin to achieve better social services only if we achieve a better standard of wealth creation.

The two parties have shared time in their responsibility for governing Britain almost equally since the end of the war. During l6½ years of Labour Government living standards rose by 6 per cent. overall. During 16½ years of Conservative Government living standards rose by 60 per cent. The real wealth of Britain has improved 10 times more quickly under Conservative Governments than under Labour Governments. That has happened because we have been willing to give people a chance to keep something of what they earn and because we have been willing to restore incentives.

That is the only way of achieving a higher standard of wealth creation. That can be done only by controlling and reducing the borrowing requirement and controlling and reducing public expenditure along the lines that the Chief Secretary knows very well—namely, along lines that he has proposed to his colleagues, sometimes with success and sometimes with failure. He knows that perfectly well. It must be done along lines that he followed during the past two years. He knows that perfectly well.

The right hon. Gentleman should be filled with remorse and regret that the past four years of his life have been totally wasted by acting like the Duke of York, going in one direction and then in the other and back again. The sooner that he ceases to defend measures of this sort and returns to more profitable private practice, the better it will be for the British people.

5.0 p.m.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

I cannot imagine that any right hon. or hon. Member wants to increase any taxes. I think that we can start from that position. But that is not the question that we are debating today. We are being asked, if there is a debate about taxation at all, to decide between different kinds of taxes. That is the issue to which the right hon. and learned Member for Surrey, East (Sir G. Howe) addressed himself partly in his speech. What I want to say is primarily concerned with which is the least bad form of taxation and whether the payroll tax is that form of tax.

The right hon. and learned Gentleman spoke of a consensus on reducing income tax. A very wide-ranging consensus on the reduction of income tax is emerging. It is not confined to the Opposition parties, because the Chief Secretary, the Chancellor of the Exchequer, the Chancellor of the Duchy of Lancaster and other Chancellors have said that they recognise that income tax is too high. The trouble is that they recognise that it is too high in principle but, when asked to do anything about it, they find it extraordinarily difficult. It is because it is extraordinarily difficult that we, having looked at the British tax system in some detail, came to the conclusion that taxes had to be raised in order to bring down income tax.

I put it to the right hon. and learned Member for Surrey, East that there may be a consensus on reducing income tax but there is precious little consensus on how to pay for that reduction. That is the real problem facing the House and a Government of any political persuasion in trying to change our tax system. Indeed, we cannot have a consensus with the Conservatives on how we should pay for reductions in income tax, because, as the Chief Secretary told us, they determinedly refuse to tell us how they would pay for those reductions. I think that they do that because they can then more freely attack those who put forward specific and constructive suggestions on how cuts in income tax can be paid for. It is easy for the Conservative Opposition to attack the Liberal Party, which puts a figure to its increases in taxes on spending and decides which taxes it wishes to increase, if they are not liable to be attacked at the same time for having done the same thing on VAT or some other form of expenditure tax.

The Conservative Opposition have in the past said that they would pay for some of these cuts by a switch to taxes on spending and that one of those taxes would be VAT. They have said that it would be 10 per cent. this year, but that would not pay for very much. It would in fact pay for the sum with which we are concerned this afternoon. But it is not the answer to the problem. The Conservative Opposition must recognise that if they are to make a major change in the balance between taxes on income and taxes on spending, the total amount required to make the necessary reductions in income tax, if they are to have any impact on incentives right across the board, is very substantail, because income tax is such a heavy revenue raiser.

The problem is that we have relied so heavily on income tax to raise such a large proportion of our total revenue that we have had to go very far down the income scale to get it. We know that £1 from 20 million people will bring in more revenue than £10 from 1 million people. Because we have relied on income tax for this revenue, we have taxed people who were never intended by any politicians to be taxed through income tax. If it is a tax on anyone, it is or should be a tax on middle and upper incomes. It ought never to be a tax on lower incomes, but it has become a tax on lower incomes. For that reason, it is not now a progressive tax in any real sense of that word.

The Conservative Opposition then turn from VAT to public spending cuts, but again they do not say what, or how much. That means that they are not prepared to set out the ways in which these cuts in income tax will be paid for.

The right hon. and learned Member for Surrey, East, in answer to questions from the Government Front Bench on this matter designed to pin him down, said "We are dealing with this clause at this time." In previous debates the right hon. and learned Gentleman excused the Conservative Opposition from putting forward specific proposals by saying that Oppositions cannot put forward specific proposals for increasing taxes.

I should like to put a question to the hon. Member for Blaby (Mr. Lawson), should he be winding up for the Opposition forced through these tax cuts in been able to put forward amendments which incorporated both tax cuts and tax increases at the time when the Opposition forced through these tax cuts in Committee on the Floor of the House, it would presumably have been open to them to have added to those amendments a specific commitment to increase taxes accordingly. Which taxes would they have inserted into those amendments had the rules of the House allowed them to do so? I hope that we get a specific answer to that question, because so far we have had none.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Perhaps I may save some time by answering the hon. Gentleman now. We made it clear at the time that if there were a question of a tax switch—we prefer the public expenditure route—we would have been happy to see a 10 per cent. value added tax, which, as the Chief Secretary conceded, would have more than recouped the amount at stake.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

I am well aware of that, and I had partially dealt with it. But, although that would pay for these tax cuts this year, it would not pay for any major long-term reductions in income tax. I understood that the Conservative Party partially agreed with the Liberal Party's position, namely, that we needed a three- or four-year plan for the reduction of income tax to levels substantially lower than we have now. If so, we want to know not how the Conservative Opposition would finance the cuts which, with the aid of other Opposition parties, they introduced in Committee, but how they would go beyond the 10 per cent. VAT to finance their changes in future.

Perhaps I may spell out the Liberal Party's position. First, we believe that income tax is far too high at every level of income. I do not wish to develop that aspect, because we are debating a particular tax increase. If we accept it—the right hon. and learned Member for Surrey East made it clear this afternoon, if not before, that the Conservative Party agrees to a large extent with the Liberal Party on this matter—the question is: how do we reduce it?

First, there is public spending. By how much do we have to cut public spending to finance the necessary cuts in income tax? The problem is that Britain is not a high-public-spending country. In no sense of the word can we say that we spend a higher proportion of our GNP on the public sector than do other successful economies. There are many very successful economies which spend on the public sector substantially more of their GNP, both current and capital, than we do. It is important to distinguish between these two forms of expenditure.

If other countries are spending more, we should ask ourselves: is there something inherent in society in those economies which makes it necessary to have fairly high levels of public spending? I think that there is. I do not believe that any Government will be able to make substantial cuts in public spending in the short term—and by that I mean within five years. Obviously, if the economy grew rapidly it might be possible at the end of a decade to have public spending as a lower proportion of GNP. However, I do not think that it would accomplish the kind of changes that the Conservative Opposition want to see and that the Liberal Party certainly wants to see in income taxes in a five-year Parliament.

The question whether these cuts will be capital or current is important. Again, I hope that the hon. Member for Blaby will say exactly where these cuts should be made, or, if not in specific terms, whether they should be capital or current. If they are to be on current spending—I think that would be more relevant—are they to be cuts merely in transfer payments? Is the Conservative Party absolutely determined to commit itself for all time to the continued indexation of benefits, such as old-age pensions, or does it believe that it will be necessary to cut back, or "rein back" as the right hon. and learned Member for Surrey, East said, on those benefits? I do not see how we shall make the necessary cuts in current expenditure without making attacks on transfer payments. That is one reason why I do not accept that we need to go down the road of making cuts in public spending.

If, however, the cuts that the Conservatives would make are to be capital cuts, how will they ensure that the money goes into the formation of private capital? It is one thing to take money out of public current spending and put it into private current spending, but if one takes money out of capital public spending and puts it into private current spending, one gets the worst of all worlds, and investment as a whole falls substantially. I do not believe that that is what the Conservative Party wants. I do not accept that the money can come from public spending. I want it to be proved to us that the Conservatives have a plan to do so.

The second possibility is that it should come from the borrowing requirement. Many of us regard the City's reaction to the Budget as stark, raving bonkers. The people in the City have all gone monetary mad. They have been totally converted, bewitched, seduced, bothered and bewildered by the guru from Chicago and his absolute lunacy. It is time that they all went on a compulsory course to the department of applied economics at Cambridge for a renewal in Keynesianism.

Whatever we might think about the City and its nonsense, unfortunately markets dictate our lives to an extent that we do not always like to admit. The Government have to borrow the money. If they have to borrow the money, under the present regime and the present system they have somehow to placate those people who decree that it shall or shall not be lent.

I am sorry to introduce a note of criticism into the happy atmosphere that the Chief Secretary has built up between the Chancellor and myself, but if the Chancellor had ensured an agreed Budget—and that would have been extremely easy for him to do—the borrowing requirement could have been coped with easily, without any of the reaction that we have seen in the City.

The right hon. and learned Member for Surrey, East lectured the Government on how to reduce the borrowing requirement, and talked about the Duke of York. He will not like me mentioning 1974, because he always says that I urged them to do even more. That is true. I am urging the Government to do even more now, because I do not believe that the borrowing requirement is too high. In real terms it is substantially less than when the hon. Member for Blaby and his Government had anything to do with it. In real terms it is substantially less as a proportion of GNP.

I do not know whether the right hon. and learned Member for Surrey, East criticised it from within the Cabinet. It is easier to criticise things from within the Cabinet than from the Opposition Benches. The right hon. and learned Member now stands as the great high priest of monetarism and cutting the borrowing requirement. I do not. He must explain how the Conservative Government of which he was an esteemed senior member increased the borrowing requirement to such an extent.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

Is the Minister questioning that the right hon. and learned Member for Surrey, East was a senior member of the Cabinet?

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

I was questioning the word "esteemed".

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

That word might have been ill-chosen.

I do not believe that this can be financed by cutting public spending or by raising the borrowing requirement. We could do it to some extent, but I do not believe that it would finance the size of cuts in income tax that both Conservatives and Liberals want.

We must consider the possibility of other taxes. First, there is the possibility of new revenues from North Sea oil. Clearly, the Government will receive substantial revenues from North Sea oil, but there are huge dangers in financing cuts in income tax from North Sea oil revenues. If we do that, there is no guarantee that the money will find its way into the renewal of British industry or into the development of new sources of energy. In 1990 we could end up with massive imports, nothing to pay for them and an industry which bears a relation to a desert but to little else. We cannot use North Sea oil.

The Conservatives have suggested VAT. I wish to know at what rate it would be set to obtain the size of revenue for which they are searching. We would have to have a single rate of at least 15 per cent.—possibly 18 per cent.—because VAT, for every 1 per cent. it goes up, raises only half the revenue that can be raised from a payroll tax.

We could do something on excise duties and tobacco. But we must look at other tax systems in Europe. We must recognise that they have been able to cut income tax by increasing taxes on the payroll. That is the biggest difference between ourselves and other OECD countries.

In the publication which came out in November last year "Revenue Statistics, 1965 to 1975", page 23, paragraph 18 it is stated that in the period covered the revenues from social security contributions rose significantly—in Germany from 27 per cent. to 34 per cent.; in Ireland, from 6 per cent. to 14 per cent.; in Italy, from 34 per cent. to 36 per cent.; in the Netherlands, from 31 per cent. to 38 per cent.; in Portugal, from 21 per cent. to 31 per cent.; in Sweden, from 12 per cent. to 19 per cent.; in the United States, from 16 per cent. to 25 per cent. The percentage decreased in three countries only—Denmark, Greece and Luxembourg.

I do not think that we should look to Finland as the great example of what we should be doing. In Finland income tax is substantially higher as a proportion of GNP than it is here. I do not think that that is what we wish to accomplish.

It is true that some of these countries have been reducing income tax, but they have not reduced it to our present levels? We have much lower levels of payroll tax than almost any other major OECD country. That being so, we have to ask ourselves whether this is not the best way of financing cuts in income tax.

My view, for which I make no apology, is that income tax is a fundamentally bad tax. I do not regard any tax as a good tax but, in so far as there can be one that is better than others, the payroll tax seems to have substantial advantages. It has advantages because it is an extremely efficient revenue raiser. It has advantages because it is extremely broad-based and therefore does not distort the economy.

If it has any effect on employment at all, it encourages the optimum use of that employment. But whether it has an effect on employment is open to question. I do not believe that 1½ per cent. will have a substantial effect on employment but something higher than that, at the margin—and this is one of the reasons way we came to the conclusion that 2½ per cent. in one year would be too big—it could have an effect. I believe that 2½ per cent. in one year would have a significant effect on employment. I do not believe that 1½ per cent. would have that effect.

The payroll tax is flexible. It is possible to use it as the major weapon in regional planning. We have always advocated that the payroll tax should be used for that purpose. It should be used by varying it. For instance, one should have a higher rate of payroll tax in areas such as the south-east and a lower rate in the assisted areas such as Scotland, Wales, the south-west and Merseyside.

It is also possible to discriminate in favour of the employment of the low-paid. The payroll tax should be used in that way. Its flexibility comes to our aid in that respect. At the moment those who are earning less than £17 a week—mainly part-timers—are exempt from the payroll tax. It would be a much more effective weapon on employment policy if it were to be recast completely and if the first £17, or whatever figure, of income per week were exempted from it.

Britain has a surplus of unskilled and a shortage of skilled people. The cost to the State of converting unskilled people into skilled people is considerable. We should therefore devise a payroll tax that puts a premium on the employment of unskilled people as long as there is a surplus of them, but also puts a premium on the efficient use of skilled labour. If, say, the first £15 of income was exempted from the payroll tax, that would undoubtedly work in the direction we seek.

Therefore, for all these reasons, the 1·5 per cent. proposal is the least bad way of raising the revenue which the Opposition cut from the Budget. I must tell the Chief Secretary that it is no good blaming the Opposition for cutting income tax. We are here to cut taxes and to deny the Government revenue. If we did that more efficiently Governments would spend their money a lot more efficiently too—

Photo of Mr Russell Kerr Mr Russell Kerr , Hounslow Feltham and Heston

The hon. Gentleman is getting too enthusiastic.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

Well, that is one of our jobs. I thought we had done it rather well so far.

Therefore, I do not take any share of the blame for making the cuts, but now that we have made them I accept that the Government are entitled to ask for the revenue to be replaced. Until today I understood that the Conservative Party, too, believed that a responsible Opposition would be willing to replace the revenue. We have not heard too much of that from the right hon. and learned Member for Surrey, East this afternoon. Certainly when the amendments ware being debated I said that we would be prepared to vote for replacing the revenue, and the 1½ per cent. proposal replaces it in the least bad way——

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Two-thirds of it.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

Is the hon. Member for Blaby worried about £140 million? If he thinks that he can forecast the borrowing requirement to the nearest £140 million he is more of a lunatic than I take him to be. I am glad that he has now stopped mumbling. He is much better when he stops mumbling.—[Interruption.] He has started mumbling again.

I agree with the Government that nobody wants to increase the tax, but if we are making a switch from taxes on income to taxes on spending, this is the best way of doing that. This is not a tax on employment, profits or investment, but on spending—

Photo of Mr Robin Maxwell-Hyslop Mr Robin Maxwell-Hyslop , Tiverton

It is a tax on employment.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

The Conservatives have clearly been reading the CBI submission, and that is why they have it all wrong. The CBI has gone berserk on this.

Photo of Cyril Smith Cyril Smith , Rochdale

The CBI goes beserk on everything.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

It goes berserk on most things. The CBI thinks that there is some special magic about taking money out of the economy by one tax rather than another. Any tax that brings in £350 million to £400 million will reduce demand and, therefore, employment. That is inevitable. The answer to that is to print lots more money, have a bigger borrowing requirement, and put everyone back to work. I do not think, however, that the Conservatives want to make that argument.

Even if we had increased VAT by 2 per cent. and got the £700 million extra revenue that that would have brought in, that would have reduced demand and employment. I do not believe that, pound for pound, a payroll tax reduces employment any more than a tax on beer, tobacco, or any other form of expenditure.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

Conservatives believe that there is a direct relationship between employment and a payroll tax. Germany has a much higher payroll tax than we do, as does the United States. The United States has successfully created new jobs. Germany has not. The country in Europe with the lowest payroll taxSwitzerland—has the worst record for loss of jobs since 1973 of any economy in Europe.

The two factors do not correlate. Every kind of exercise one does fails to provide convincing evidence of a straight relationship between employment and a payroll tax. In the long term there must come a point somewhere up the scale where there is an effect on employment—

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

—but I do not believe that it is happening at this stage, and I believe that we could go a lot higher. I must tell the hon. Member for Blaby that I had understood that part of the Conservative position was that the high incidence of income tax was deterring people from taking up work, taking risks, using their enterprise and creating new jobs. We cannot have it both ways. If we want to reduce income tax in order to create interprise and encourage private industry to build factories and make jobs, and I believe that the hon. Member for Blaby supports that, we have to pay for it by finding other sources of revenue. The 1½ per cent. proposal is such another source of revenue, and it is the least bad method we could find.

5.28 p.m.

Photo of Mr Giles Radice Mr Giles Radice , Chester-le-Street

I was tempted to intervene in the debate by the speech of the right hon. and learned Member for Surrey, East (Sir G. Howe). It was such a blatantly opportunistic speech that it cannot go unchallenged. He spent a lot of time arguing against the idea of increasing the surcharge because, he said, it would increase unemployment. There may be something in that. I do not believe that we on the Labour Benches can predict the precise impact of this tax, and therefore the right hon. and learned Gentleman is entitled to take the view he took. We did not hear from him, however, that the Chancellor was forced to raise the extra revenue because the Conservatives supported the extra tax reduction.

That factor was certainly mentioned by the hon. Member for Cornwall, North (Mr. Pardoe). He said, quite properly, that the Opposition parties had combined to reduce the tax and that it was right and proper for the Government to secure that lost revenue in some way. He said that it was the task of an Opposition party to cut the revenue. That is true. We hear a lot of talk about the Conservatives having a grand strategy for increasing indirect taxation, but it is an odd strategy when it enables them to oppose an increase in indirect tax—for example, the petrol tax. Whenever proposals have been made in this Parliament to increase indirect tax they have opposed them, in spite of their grand strategy.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

We made clear at the time that with the petrol tax we were concerned that many people found it paid them more to be out of work than to work. The problem mainly concerned income tax and untaxed social security benefits. But one of the elements was the cost of travel to work and we did not think that it was sensible to increase the cost of that and so make the problem of "Why work?" even more acute.

Photo of Mr Giles Radice Mr Giles Radice , Chester-le-Street

I think that the real answer was that the Conservatives were more concerned about the by-election that was to take place two or three days later. I was glad that my right hon. Friend the Chancellor did not take the same opportunistic view. However, the behaviour of the Conservatives on that occasion was characteristic of them throughout this Parliament. Is it suggested that the Chancellor should at this stage have sought to increase indirect taxation just when he is trying to talk to the major unions into agreeing to another round of incomes policy?

It would be total folly to decide that this was the best moment to increase indirect taxation. Even when the Tory Party has come to favour an incomes policy, at least in the public sector—they do not reveal what will happen in the private sector—they should see that such an increase now would be the worst of the Government's options.

The right hon. and learned Member for Surrey, East therefore took up a strange position. He said of course that he would not have arrived at this stage in the first place, because under a Conservative Government public spending would have been greatly reduced, and they would not have had the problem of the PSBR. The right hon. and learned Gentleman did not mention that the Government have substantially reduced the PSBR over the years and that, even with the increases in the Budget, public spending will be well within the IMF limits. The right hon. Gentleman spends most of his time saying that any improvements in the economy are due to the IMF, but he ignores that fact.

The £4 billion to which the right hon. and learned Gentleman referred is a totally phoney figure, as anyone who was on the General Sub-Committee of the Expenditure Committee will realise. That will come about only if one ignores totally the fact that there was a shortfall in public expenditure last year—as the right hon. Gentleman ignored it. Public spending is well within control. There has been no practical proposal by the Tory Party to cut it, because they know that if they were the Government they would find it difficult to do so.

We are told that too much is spent on aids to industry. What will the Opposition cut? Will they cut regional incentives, money spent on industrial innovation, money given to the NEB

Photo of Mr Giles Radice Mr Giles Radice , Chester-le-Street

We are told they will cut that. We have also been told that they will cut support for nationalised industries, international trade and export promotion. Will they cut the money spent on industrial training? They always say that we should spend more. Will they cut the money spent on health and safety at work? If too much money is being spent in this area, they should say what will be cut. All that we hear are vague and irresponsible suggestions.

One or two speeches by Opposition spokesmen suggest that they will cut the housing budget. Does that mean that rents will go up? They say that taxation should be further reduced, but they do not say how.

The right hon. and learned Member made an entirely opportunistic speech. The proper course for an Opposition who have blown a hole in the Budget strategy would have been to come forward with a credible way to raise revenue. They have not done that, so I conclude that their attack has been opportunistic. I include their lack of a credible strategy for taxation, for public spending control or for the economy as a whole. They deserve to lose tonight and they deserve to lose in October, or whenever the election comes.

5.36 p.m.

Photo of Mr Ian Stewart Mr Ian Stewart , Hitchin

I have a feeling that there is an element of shadowboxing about this debate. We had yesterday a serious and in many ways odd debate about some of the fundamental issues of employment and the level of economic activity. This afternoon's debate is set against that background. The vehicle that the Government have chosen to recover some of their lost revenue as a result of defeats on the Budget is the national insurance surcharge. I doubt whether a Government can conduct their own economic policy or whether Parliament can debate acutely the exact effects of marginal changes in individual taxes taken on their own.

It is self-evident that such a change in the surcharge must damage employment. It could not possibly improve it. There must he marginal cases in which the extra 1½ per cent. will just tip the scales. No hon. Member can deny that. On the other hand, it is impossible to measure the effect. There is no doubt that the effect will be adverse, which is one ground on which we oppose the proposals.

When interviewed by the Select Committee on the then proposals for a 2½ per cent. increase, the Chancellor suggested that the unemployment effect over the next 12 months might be as low as 5,000 jobs. That is almost certainly incredible—first because it is so precise and second because I do not see how such minor changes are measureable at all. I do not know whether the CBI's figure of 100,000 jobs is any more precise and informed, but this proposal can only damage employment.

We must therefore ask whether such a relatively minor adjustment to tax revenues and company finances should be brought about in this way. I question also the effect of any adjustment in taxation and that sort of pseudo-precision in measuring the effect of a change in one tax, disregarding the consequential effects throughout the tax system and the economy as a whole. I get the impression that the effect of tax changes is much greater in their impact on the economy as a whole than in the revenue which they raise or do not raise in many areas.

Parliament must ask, what is the proper level of taxation that we raise from companies and what is the correct method of raising it? We had lengthy debates in Committee on the Finance Bill about the structure of company taxation. There was a clause in the Bill to perpetuate the existing corporation tax rate of 52 per cent. Many of us pointed out that very few companies actually pay that rate.

In shifting some of the burden of tax-raising from the corporate structure to the national insurance surcharge, I suspect that the Government feel that this is a certain form of tax, because it depends on the numbers of persons employed and not on some variable amount of allowances and offsets or even on the actual level of profits in the companies which are paying their tax.

I do not believe that it is possible for Government or Opposition—obviously, it is even more difficult for any Opposition—to say here and now, for all time, that they have a policy to increase this type of taxation on companies or reduce that type of taxation on companies—to say that they would or would not impose the national insurance surcharge, increase it or reduce it—whatever it may be—in future circumstances which none of us can precisely predict.

What we have to beware of is the simplicity with which this particular tax can be imposed and the temptation which it therefore offers to Governments for raising a bit of revenue at short notice when they have got themselves into a corner. This is the way in which the tax came about in the first place. It came in the summer of 1976 when an emergency package was needed. I cannot remember which of the Chancellor's Budget it was—it must have been about the seventh—

Photo of Mr Ian Stewart Mr Ian Stewart , Hitchin

In the summer of 1976 the Chancellor put to the Cabinet some proposals for public expenditure cuts, and, if I recall aright, they were to reduce the borrowing requirement by only £1 billion or so. It was felt that an extra billion was necessary, so the 2 per cent. national insurance surcharge was wheeled on stage at a very late point in the discussions. We did not enact it until about November of that year, when things had greatly changed because the Government had then been forced to have recourse to the IMF.

At that stage it was an emergency expedient. Today, we are finding circumstances of precisely the same kind. Whatever its merits and demerits, and whether they are measurable at all, this form of tax has been chosen because it is capable of being brought into play fairly quickly and it has a more or less predictable and certain yield. That is what the Government are looking for in today's conditions.

We have already had hints that if, by the end of the year or Budget time next year, conditions have changed, it may be possible to unwind this tax, to offset it or to reduce it— the matter will be up for review—and it does not actually come into play until October of this year, so the revenue effect will be concentrated in the last half of the year.

That brings me to the next point, that this form of tax has considerable disadvantages in a technical sense as a means of raising revenue because, in order to offset a shortfall of revenue during the current year, the surcharge has to be set at a much higher rate if it is imposed merely for the last few months in order to raise enough revenue before the next year's Budget than would he necessary if it were a continuing revenue raiser. It has a distorting effect.

The Government may reply that because there is a delay in implementing the income tax coding changes, the effect of this tax will harmonise with the income tax rebate which will be due to taxpayers later in the year. That is fortuitous on this occasion, and it does not in any way detract from my main point that there is a temptation if Governments find that there is a relatively simple way of imposing tax on the corporate sector at short notice to get themselves out of a problem. Whenever circumstances of this kind arise, this is the measure to which they are likely first to turn, and I suspect that in the choice of measures which the Government have decided to bring forward for Report on the Finance Bill this year, that has been one of the motives uppermost in their mind.

I believe that the need to introduce this tax at all—in a moment or two I shall question its necessity in any event—arises from a fundamental confusion of Government strategy regarding what they are trying to do—what they were trying to do at the time of the Budget and what they are trying to do now. Hon. Members may recall that in the Standing Committee we had a debate on the regulator clause not many weeks ago before the emergency measures were introduced. I said at that time that I felt that the problems in which the Government then found themselves were the outcome of miscalculations made many months ago. It had taken a considerable time for the effect to work through and for the Government to realise that further action had to be taken.

In fact, I take that matter back to the original publication of the Government's White Paper on public expenditure. I take issue here with the hon. Member for Chester-le-Street (Mr. Radice). Of course, part of the change in the planned public expenditure for this year over the actual outturn for last year arises from shortfall on last year's Estimates. I think that that is common ground between us. It is a matter of practical arithmetic.

But I differ with the hon. Gentleman in this respect. Whatever was the out-turn last year was the outturn last year, and that is the base from which we start. If it was a base which the Government had some difficulty in financing, any change to increase that requirement in the following year will obviously give rise to added difficulties. I do not believe that this is a matter open to much question. As a matter of fact, the Government did not find it easy until a late stage last year—and certainly not at Budget time in 1977—to meet what was then considered, and for a long time proved to be, a borrowing requirement of a size which was difficult to finance. Their financing problems were somewhat eased by the discovery later during that financial year that the borrowing requirement would actually be less than it was expected to be, and had it remained at the intended level there would have been continuing difficulty in financing it.

Thus, if we say that the public expenditure during the current year is projected to be whatever it is—£4,000 million higher than last year—in actual terms it is that amount higher than the level which had to be coped with last year. So if we are talking in real terms of the practical problem which Governments face in financing their expenditure, we have to look at the actual figures, and to say that the increase in the public sector borrowing requirement this year would not have been as high if last year's public expenditure had been higher than it actually was is true, but it does not get one out of the problem that it is this year's public sector borrowing requirement which has to be funded this year, and last year's last year.

The hon. Member for Cornwall, North (Mr. Pardoe) said—I do not know whether he included me specifically in this comment—that people in the City seemed to be pretty well off their heads in their reaction to these financial difficulties. To some extent, I agree, but we cannot speak just of the City's reaction or the reaction of an individual market. The City is an international centre and it reflects international views about what is happening domestically in this country just as our markets reflect what is happening elsewhere. If the market is distorted, the distortion derives from an international as well as a domestic view of what is happening in the British economy and in our domestic financial affairs.

I shall give one example showing where I think that the views of the City or the views of the market are perverse at present. I refer to the question of the effect of dollar interest rates on sterling interest rates. I have read a great deal in the past week or two about the threat of higher interest rates in this country because dollar interest rates were having to rise This comes out in the leading columns of the financial press and in the various financial pages of the serious press, and it is commonly mentioned in discussion.

But why are interest rates having to rise in the United States? It is because the dollar is weak, because the Americans have a severe imbalance on their foreign trade, they have a serious balance of payments deficit, and the dollar has been falling in value sharply against many of the major currencies of the world, including sterling. So to put up sterling rates to offset that would merely make the problem worse, and I think that certain cases such as that the reflexes of the market are perverse.

But why do those reactions come about? They are not deliberately perverse. They come about because of long experience over many years of having a feeling about how these things actually work out in practice after a period of time. By their hesitancy to buy Government stock, by their threatening higher interest rates and by their not being satisfied with the Budget posture of the Government, the markets are not saying specifically that a £8·5 billion borrowing requirement is too much and that it ought to be £8·2 billion, £7·8 billion, £7·5 billion or whatever. I make no apology for saying this. I say freely that I have an interest as a banker, but that is probably sufficiently well known for me not to have to mention it every time I speak on a matter remotely related to that subject. But, having been a banker for nearly 20 years, I have at least some insight into the instincts which motivate the markets in which the Government have to operate.

I hope that it will be helpful if I make a few remarks on the psychology which sometimes is not readily understood by the authorities. When I say "the authorities" I mean not only Ministers but the Treasury, the Bank of England and all those others concerned with these problems. In fact, a few weeks ago in Committee, when I was talking on this same subject, I said that I thought it would be necessary quite soon to change the system of bank rate, to impose the restriction on bank lending by reintroducing the corset and to have a serious look at whether Government statements about keeping the PSBR under control were credible to markets. Two days after that the authorities did change the system of bank rate, and two weeks after that they raised interest rates, imposed restrictions on bank lending through the corset and made this proposal about national insurance surcharge. I think they were strategically correct to do those things, but I do not think that is the question at issue this afternoon.

What it illustrates is that there was an inevitability to which markets were moving because the Government had not sufficiently appreciated that their earlier statements about the financial balance in the economy were not regarded as credible. They may have been credible. I do not know. We do not get enough information to judge. That is one of the permanent problems of Parliament. As I have learned in the year that I have been a member of the General Sub-Committee of the Public Expenditure Committee, one of the difficulties is that anyone outside the Treasury finds it exceedingly difficult to get any sort of realistic, up-to-date information on which to make informed judgments about what is going on.

What do markets do in those circumstances? If they find that history shows that Governments have tended to be a little too optimistic in their estimates for public expenditure, or the buoyancy of the revenue, or whatever—and this has happened over many years—and if they find that Governments are likely to be even more over-optimistic in the year of a General Election, they will play safe and say "It looks to us as if the situation this year is a bit dangerous. We are not convinced by the figures which have been put forward. If the Government can make the sums add up and convince us about the arithmetic, we shall respond".

But it is not the fault of the markets. If someone is in debt he cannot blame those to whom he owes money. That is the basic problem of Governments today throughout the industrial world. Because of the recession, quite apart from Government policies, it has come about that quite substantial sums of money have had to be borrowed, rather than raised in revenue, in order to meet government outgoings, both in this country and elsewhere. The consequence of that is absolutely unavoidable by any Government, and particularly unavoidable by a Government such as ours, which wants to go on increasing public expenditure.

Nevertheless, the fact is that a Government, like any other body, are creditworthy in varying degrees. If they are very credit-worthy, and are conducting their affairs in a most cautious and conservative way, they will find it very easy to borrow money. In the latter part of 1977, when the Budget and financial posture of this Government were actually very cautious, they found it very easy to raise money. Today the Government are finding it very difficult to raise money, and the commentary of the markets is "We no longer believe that the Government's posture is sufficiently responsible".

How are the markets to know? This is the difficulty of the problem, because there is a severe shortage of information. I was hoping that in his introductory remarks the Chief Secretary would say something a little bit more up to date about his estimates for what the borrowing requirement now is. He implied that it might actually be a bit below £8½ billion and that if that were the case it might well prove in retrospect that it was not necessary to bring forward this measure at all. But the House of Commons, which this afternoon must take this decision on the new clause, is not in a position to make any informed judgment.

Therefore, as I said at the beginning, we are reduced to an element of shadow boxing about the detailed implications of fairly slight shifts in specific taxes rather than trying to understand the fundamental question whether such adjustments are needed in the first place on economic grounds. Apart from being self-evident superficial politics and an apology for the fact that they are not too happy about what they are trying to defend, I must say that I think the tactic of the Government to get through every embarrassing debate of this kind by a series of provocations and jibes at my right hon. and hon. Friends on the Front Bench, in relation to the details of a future Conservative Government's economic and tax policies, misses the point entirely. The Government do not do that themselves. Does anyone believe that the Government will stick to their public expenditure plans for the next three or four years as outlined in the public expenditure White Paper of last year? Yet that is the stated intention, category by category and subhead by subhead, for every Department which is spelled out in great and specific detail in relation to what Government expenditure will be up to 1980 and beyond.

But I am sure that no Labour Member or Opposition Member believes or expects the Government to stick to every detail of those proposals. What about the Budget? Although there have been one or two changes along the line, it is broadly the Budget which was introduced in April. That contained a series of tax proposals which were brought to the House in order that the House might grant the Government Supply. Does anyone seriously believe that major changes about the way in which those taxes will be raised will not be made in next year's spring Budget? Of course not, The fact is that the financial and detailed tax policies on public expenditure, on the level of income tax, on allowances and everything else, are changed at least from year to year, and very often more frequently. It is only three months since the last Budget, and yet a new tax has already been introduce after such a short time. To say that any Opposition have a responsibility to spell out the detail of some sort of draft public expenditure White Paper for their second or third years in office, and the details of their tax plans to meet the revenue, when they do not even know what is in this year's books, seems manifestly absurd.

Photo of Mr Giles Radice Mr Giles Radice , Chester-le-Street

Surely an Opposition party which says, first, that taxes ought to be cut further and, secondly, that the public sector borrowing requirement ought to be reduced ought to give at least some indication of where it will do that. That is precisely what the Conservative Party does not do. It does not do that because it thinks that it would be electorally unpopular.

Photo of Mr Ian Stewart Mr Ian Stewart , Hitchin

With great respect to the hon. Gentleman, nor do the Government say what they are going to do about tax changes which they have already said are necessary and overdue. It seems to me that a Government have far greater responsibility than an Opposition to spell out their specific plans. After all, if one looks carefully at the words of my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) or my hon. Friend the Member for Blaby (Mr. Lawson), and others who have talked about it, one will see that certain general outlines, which are what are needed, have been carefully explained.

Photo of Sir Frederick Burden Sir Frederick Burden , Gillingham

Does not my hon. Friend also agree that not only the Opposition but Government supporters did not know the impositions put upon the Government by the International Monetary Fund and what controls were imposed upon them? Therefore, how can Government supporters expect the Opposition to come up with details when they have not had an opportunity to look at the books—which I think will be ghastly?

Photo of Mr Ian Stewart Mr Ian Stewart , Hitchin

My hon. Friend raises a very important topic. Picking up a point which I have made already and which did not seem to attract any horrified response from Government supporters when I made it the first time, frankly, we do not know the financial situation of the country even now, let alone what it is likely to be in three, six or nine months.

As I said before, I was hoping to hear from the Chief Secretary how things were going, because they have changed. We know that many of the assumptions on which the public expenditure White Paper was drawn up—it was in draft this time last year, and it was produced six months ago—have changed considerably since then. Major assumptions about the level of employment and the level of wage settlements on which the Budget judgment was made have also changed considerably since the Budget was constructed. We are on a moving staircase, and no one knows how far it will have moved a number of months or years in the future.

Clearly it is an attempt to divert attention from the central issue, which is why the Government have to bring this measure before the House at this stage. We have heard trotted out the inevitable claim that this is all due to the irresponsibility of the Opposition. I refute that. I was always led to believe that the House of Commons was responsible for granting the Government Supply and that the money raised in taxes had to be voted to the Government by Members of the House of Commons for the time being, whatever their parties and whatever the constitution of the House at the time.

One of the consequences of the Government deciding that they want to hold on to office when they cannot command a majority in the House is that they cannot always carry their wishes in their original form on Supply. The Government will be voted down from time to time. They were voted down on income tax, and a little pressure behind the scenes has caused them to adjust their proposals to raise the national insurance surcharge.

There is nothing irresponsible about it. A Government can spend only the money which Parliament grants them. The mistake is on the Government's side for having decided in the first place to spend so much that it was doubtful whether Parliament would grant them the Supply to pay for it all. That is the reason why they find themselves in the present mess.

I can understand why Ministers use this argument. It is only natural that when they have to bring in an unpalatable fourteenth Budget only two months after their thirteenth, they will look for scapegoats and for a reason. It is natural to say "It is the fault of all these wicked Conservatives, Liberals and the rest who have caused us to do this."

I am convinced that that argument is being used only to disguise what the Government would have had to do, anyway. Does anyone say that without the amendments on income tax, the Government would have avoided having minimum lending rate raised to 10 per cent. and putting very severe restrictions on the money supply through restraint of bank lending? Of course not. All that has happened is that the Government have been given a fairly convenient handle to say "This is the package which we are bringing forward, and it is all due to this wretched House of Commons which unfortunately we cannot control and which has not coughed up all the money that we want to spend."

Naturally, it is quite convenient for the Government to have an alibi. But do not let anyone be deceived when the truth is that they were moving inexorably to having to take such measures and that, although they might have been able to stave them off for a few more weeks, they would have had to take them sooner or later. So we find ourselves in July yet again debating new Budget measures which were not put forward in the spring Budget, and for the traditional reason that the Government got it wrong.

I listened carefully to the remarks of the Chief Secretary, when I thought that he would try to justify his proposal. I thought that he would explain the need to raise this £300 million through the national insurance surcharge. However, he rather brushed that aside and said that he did not think that anyone would want to question whether the Government should do it if it proved eventually to be needed. The only justification for introducing additional revenue-raising measures of this kind at this stage in the year is if there is some danger that the PSBR figure of £8·5 billion is likely to be breached. If there is such a danger, the situation is very much more serious than the Chief Secretary has led us to believe. If there is no such danger, I am not sure whether there is any economic ground for introducing a measure of this kind with the inevitable side effects that it will have.

As I said before, there have been considerable changes in the aggregates since the Budget judgment and since this estimate of £8·5 billion borrowing requirement was made. I do not know whether the Government have yet taken into account the figures and fed them into their computer. But if they talk, as Ministers do, about the pleasing reduction in unemployment and if official comments are that this is going better than expected, and if they talk about the level of earnings being higher than they had hoped, presumably the arithmetic on which they made their original calculations has to be revised.

I think that no case has been made by the Chief Secretary that this money needs to be raised. Certainly he has not made the ease that it needs to be raised in this way. Therefore, the Opposition are entirely justified in voting against these measures.

6.7 p.m.

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

I was interested in part of what the hon. Member for Hitchin (Mr. Stewart) said, especially when he told us about the psychology of bankers and the way in which apparently they reacted to certain situations.

We can be reasonably certain about one matter. Whatever problems Britain faces, according to the press, more often than not the workers are to blame. Sometimes it is the employers who are to blame. But it is never suggested that it is the bankers who are to blame. No one ever blames the money market. The money market is suggested to be some kind of sterile intermediary which is completely neutral.

The hon. Member for Hitchin did not tell us—and I wish that he had—why, on the occasion of which he spoke, those institutions suddenly, like a close-knit monopoly or oligopoly, went on strike. That is what they did. If a group of workers had done that, they would have been holding the country to ransom.

Here we had what is supposed to be some kind of free market in buying Government securities. That is the image that is put across—the so-called market mechanism determining the buying and selling of Government securities. Whether we like it or not, we have an oligopolistic set-up. They decided that they would go on strike to force down the price of securities in order to get a higher return and therefore enhance their profits at the end of the day, irrespective of the impact that this would have on the country or on the British people.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Before the hon. Member gets carried away too far by his curious language, will he say whether he is aware that amongst the institutions which at that time were reluctant to buy gilt-edged securities were trade union pension funds? Is he attacking them as well?

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

Whether trade union pension funds or the institutions which handle trade union pension funds—and that is what the hon. Member is talking about; he means the insurance companies which handle trade union pension funds—

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

I do not know of any trade unionists who themselves handle their pension funds in the way that the hon. Member suggests. In any event, I do not care who the institutions are. I am saying that they went on strike and refused to buy Government securities.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

Did the hon. Member say that he did not know of any trade unionists being represented on the boards of pension funds? I remind him that the British Rail pension fund, for example, certainly has trade unionists among the members of the trustees of that fund. Since he has commented on the so-called strike of the City in not buying gilt-edged securities, perhaps he would like to apply his mind to the British Rail pension fund which has been buying antiques and works of art rather than Government securities.

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

I did not say that trade unionists were not represented on certain boards or management committees which manage pension funds. I was talking about the institutions, whether they are representing the funds of trade unions or the advisers whom the trade unions use. The trade unionists are not involved in the day-to-day management of pension funds. I wish that they were. In the bulk of cases, they have no control over their own pension funds at all. Certainly this is the case in the vast majority of companies. If the hon. Member can show me a particular trade union that is knowingly part of that monopolistic or oligopolistic set-up, my strictures would apply to them just as much as they apply to any other part of the market. I am not reluctant to say that.

The hon. Member for Hitchin was apparently telling us that either he or the market did not have much idea of the current situation in terms of the public sector borrowing requirement, or the rate of growth of the money supply. Perhaps he should ask his hon. Friend the Member for Blaby (Mr. Lawson) who has told us that in his judgment the total of the PSBR should fall roughly between £4 billion and £8 billion.

If one looks at any of these statistics one will find that they vary month by month. One needs to look only at the increase in the supply of money, whether it is measured M1 or M3, and one sees that the actual figure can be plus £90 million in January and become minus £900 million when seasonally adjusted because of seasonal variations. All kinds of issues arise. We have not been told the kind of seasonal factors that are used to adjust the figures. But most people will accept that it is very difficult to predict the growth of the money supply.

Day after day Conservative Members come to the House demanding more and more public expenditure when it suits them to do so. They want more money for industries in which they have constituency interests. I do not complain about that. They also want more and more money for defence, the police force and the armed forces' pay and so on. Eeven if some of those demands were met it would make it much more difficult to predict the final outcome.

I oppose militant monetarism, even though I believe that there is a consensus on this between the two Front Benches. However, I admit that they are more militant on the right-hand side, especially when they are worried about trade union pension funds.

Certainly the cuts in public expenditure, which many of us opposed, have left a legacy for local authorities, the Health Service and other parts of the public sector, where it will be very difficult to predict the result. Predictions were made of the outturn last year which proved to be up to £2 billion out.

There is also the general atmosphere. We have created an atmosphere in which cuts of any kind will be very uneconomic anyway. Many cuts in the Health Service, roads and so on have already proved uneconomic, and here again it is very difficult to predict the final outcome.

Photo of Sir Frederick Burden Sir Frederick Burden , Gillingham

Does the hon. Member realise that this year the Government are raising £8·4 billion on the home markets? Since the Government came into office in 1974 they have raised $8·55 billion. which all has to be repaid in dollars. Of this, $4·62 billion was raised last year when North Sea oil was flowing. The cost of interest alone is $621 million and this has to be found somehow. Where is the interest coming from to pay for the increasing loans that the Government are raising, and when will these loans be paid back?

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

The hon. Member must accept that at a time when we have at least 1·5 milion unemployed, we cannot avoid having a considerable public sector borrowing requirement—unless we adopt the measures that have been advocated by some of us on this side of the House. It is just not on. A total of 1·5 million unemployed is an indictment of the capitalist system. Despite everything that has been said, there is unemployment in West Germany, just as there is throughout Europe and other parts of the capitalist world. Given 1·5 milion unemployed, and having to pay them not to produce, we must inevitably have a public sector borrowing requirement. In fact it is surprising that the PSBR is as low as it is.

Accepting that PSBR is necessary, one must borrow money. One can argue until the cows come home about whether it is better in terms of the balance of payments, and interest rates for the Government, local authorities and nationalised industries to borrow abroad or in this country. Certainly I do not want to see North Sea oil revenue dissipated in this way. The hon. Member for Cornwall, North (Mr. Pardoe) was right to raise the question of revenue from North Sea oil not being dissipated by large tax handouts.

It worries me that at present we have a growing and very serious import bill on finished and semi-finished manufactured goods. In terms of the balance of payments this will be masked by North Sea oil revenue. We shall tend to sit back and say that we have got our balance of payments right. But we shall be wasting the heritage of North Sea oil, and masking a very serious and critical problem of our manufacturing industries being caught in a spiral of contraction and decline. At the same time we shall be taking; more imports of finished and semi-finished manufactured goods with the resultant impact on jobs.

I do not know what hon. Members opposite feel about the PSBR. Do they feel that we should be able to run the economy without a PSBR at all at a time when we have 1·5 million unemployed? Are the Opposition still living in the nineteenth century, do they want to return to the days of Gladstone, or have they caught up with modern ideas? If we consider our national income and our economic problems, I believe that our public sector borrowing requirement is far lower than that in other countries. It has been calculated that if we had full employment in Britain, we would be running a considerable surplus in our Budget and that we would not have a PSBR of £7 billion or £8 billion, or whatever the figure is.

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

Does the hon. Gentleman accept that a country with a rate of growth in GNP has a much more arguable case for a higher PSBR, and that where the rate of growth is nil or declineing the argument against having a large and rising PSBR is questionable?

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

There is a difficulty in sustaining that argument. If the PSBR is cut in the way proposed by the Conservatives, it will increase the level of unemployment and eventually with it the PSBR. Alternatively, there will be no system of unemployment pay or supplementary benefit. Is that what the hon. Gentleman is advocating? If the PSBR is cut, it will create further unemployment. That in turn will create higher total levels of unemployment pay and supplementary benefit and will involve loss of tax revenue. In other words, one will return to a situation in which in any case one will require a higher PSBR.

In this debate we have heard a good deal about the figure of £440 million, which is the amount which the Government must now recoup. We should consider what will happen if the Tory Party has its way in its own Budget proposals. The hon. Member for Cornwall, North said that he did not know what the Tory Budget proposals were. I accept that we do not know how they intend to raise the revenue to implement their proposals, but certainly the Conservatives made it clear in their Budget proposals that there would be massive tax handouts to those on £10,000 a year plus, including the indexation of capital gains. The hon. Member for Blaby said that he did not know where the Conservatives would get the money from but said that if they were returned to Government they would find £350 million from somewhere.

The hon. Member for Blaby can find this all set out in the Official Report of 18th May this year, in column 293. The Tories want to hand out to those earning £10,000 a year plus—the richest sector in our society—about £1,100 million. This is set out in that debate and the figure arrived at, including indexation of capital gains, was £1,100 million. That was the additional handout to be made by the Tories to those earning over £10,000 a year. I do not necessarily call that irresponsible, but it is certainly a blatant example of serving the class interests that Tories are here to represent. Let us not use trivial words such as "irresponsible" or phrases such as "naughty boys", but let us state clearly that the Tories are here to represent a certain class interest.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

Will the hon. Gentleman comment on the fact that it is said to be the prime objective of the Labour Party to make a massive redistribution of wealth and power in favour of ordinary working people? Is that a class programme?

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

Yes, it is. I am happy that he at least on the Tory Benches admits that that is what the Tory Budget is all about and that it is aimed at serving class interests. He then says that it is the cornerstone of the Labour Party's manifesto that we exist to bring about a fundamental and irreversible shift in the balance of wealth and power in favour of working people and their families. The aim is precisely that. If people are earning more than £10,000 a year, the Tory Members are here to represent them. However, if they are in the position of 99 per cent. of the population and earn less than £10,000 a year, they will know where to put their cross in a General Election.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

Is the hon. Gentleman not being a little unfair to the Labour Party's manifesto? Will he say what proportion of the British people come within the category of working people? My guess is that it is about 99 per cent. In that case, from whom and to whom are we distributing?

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

I believe that if there is £500 million or even £1,100 million to spare, it should all go to those who earn less than £10,000 a year. We could argue until the cows come home the definition of "working people". We have often been told in these debates of innovators earning £10,000, £20,000, £30,000 or even £50,000 a year and that the Tories intended to give another £5,000 a year to such people. However, the only innovators who are mentioned are the pop singers, golfers, and tennis stars. We are told that ever since those people left these shores Britain has ceased to remain a great country.

Mr. Bugden:

Is the hon. Gentleman saying that he, or any politician, is capable of making a moral judgment as to which sector of the economy should flourish and which should die?

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

I would suggest that, because of the kind of planning that we envisage, we would lay down priorities. Within those priorities it could well be that, for example, brothels, bingo palaces and betting shops would be given less resources than would manufacturing industry, hospitals and schools. If that were the result, we would be happy to say that certain sections of the community should die and that others should expand and flourish.

The point of my remarks is to emphasise that it is indefensible to give the bulk of the £1,100 million to those earning £10,000 a year plus. People in that category are in any case already receiving massive tax handouts from the Labour Budget. Since we are now to implement the proposals of the Boyle report following the investigation into top salaries, the judges and chairmen of boards will receive massive tax handouts. I do not know whether judges and chairmen fall into the category of working class. I shall have to have time to think about that. Having had massive tax handouts, having heard about the Tory proposals, and also having heard of the indefensible increases that are about to be paid to them, those people must be laughing all the way to the bank.

Photo of Sir Frederick Burden Sir Frederick Burden , Gillingham

The hon. Gentleman appears to think that a top salary of £10,000 a year is unacceptable. Is he suggesting that that should be the net top salary or the salary before tax and that those earning anything above that figure should have that money taken away from them so that it may be distributed elsewhere? If that is the hon. Gentleman's view, should he not start with the Labour Cabinet?

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

I know that the hon. Member is very busy, as we all are, with other matters. However, if he had looked at the amendments that have been tabled, he would have realised that what many of my hon. Friends were saying was that the tax rates above earned income of £4,500 should remain as they were. We said that, given the opportunity, we would vote for that, whether it applied to Cabinet Ministers, Members of Parliament, or anyone else. We did not get the opportunity to vote on it. We got the opportunity to vote only against even more massive tax handouts.

Even before the Opposition amendments, 57 per cent. of the handouts under the Budget were going to go to those earning over £4,500 per year anyway, which is the average wage. But if we add the £1,100 million, if the Tories had got away with that, 70 per cent. of all the tax handouts would have gone to those earning above the average wage. It is a pure example of serving naked class interest.

My right hon. Friend said that £440 million, set against the total cash flow of the public sector, was not very much. It is £150 million more than we are spending on hospitals capital expenditure. It is almost a quarter of what we spend on law and order and protective services. That is something that Opposition Members might like to note. They are always calling for more to be spent on those. It is about 25 per cent. or more of what we spend in Northern Ireland. It is a considerable amount when one thinks in terms of hospitals and schools.

Opposition Members have put forward this picture of public expenditure and the public sector, and the suggestion that because of the cuts in public expenditure last year and the failure of local authorities and hospitals to spend up to their cash limits, that is the base from which we ought to begin. I wonder whether they visit hospitals and schools in their constituencies to see the impact that these expenditure cuts are having. I wonder whether they know that in the county of Avon, parents are having to pay for children to go to the public baths to take swimming lessons. That is the kind of level to which we have come down. It is not simply the Government cuts, but Tory local authorities have cut back even more than the Government have demanded.

We all know the situation in the National Health Service. Do Opposition Members want more cuts in the National Health Service, more cuts in education and more cuts in the social services? We are still waiting for a reply.

I say to my right hon. Friend that £450 million is a sizeable sum. It could be used to build many hospitals and many schools. But the Tories prefer to give it, in massive tax handouts, to those earning £10,000-a-year-plus. I hope that all their constituents realise exactly what they are doing.

We are told that in order to pay for this £450 million the Tory way out would be to increase taxes on expenditure, to increase VAT. I do not think that one can make the assumption that an increase in VAT will not create unemployment. One has to do one thing or the other. If there is an increase in VAT, either working people have to be able to put up their wages and incomes to offset it or they have to cut their expenditure.

If working people have to cut then expenditure, it must lead to unemployment. We could go into a recondite argument whether it would lead to more unemployment or less unemployment than the proposals being put forward by the Government. I do not particularly like the Government's proposals in terms of their employment effects. On the other hand, I know that VAT or any kind of tax on expenditure hits low-paid families and those least able to look after themselves far more than it hits people such as ourselves, who sit in this most exclusive club in Europe, and the other wealthy members of our society.

Let us be quite clear about it. We have a retail price index, and it measures the effect of increases in prices. It is based nowadays on an average expenditure of about £70 per week. But price increases have a far bigger effect on those receiving a wage below that sum than they have on those receiving more. This is why the rationale of the Boyle report—if one can call it that—is nonsense, because those on £20,000 to £25,000 a year are not affected in the same way by increases in the prices of food, housing and electricity as those earning only, say, between E45 and £55 per week. It is high time that we made that absolutely clear.

Therefore, I would be completely opposed to this switch from income tax to value added tax.

Photo of Mr John Evans Mr John Evans , Newton

Is my hon. Friend aware that the Tory Party is constantly going on about the impositions that are placed upon the small business man? The Tories try to pretend that they are the party of the small business man. Is my hon. Friend aware that one of the greatest impositions which the small business man faces is value added tax, and that if one varied the rate from 10 per cent. and increased it to 11 per cent., 12 per cent. or 13 per cent., one would be further adding to the already dreadful problems of VAT which the Tories imposed upon the small business man?

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

My hon. Friend has struck a very important note, which I hope will be listened to with care.

The hon. Member for Cornwall, North—it is a pity that he is not present now—said that he would like to reduce income tax, as I understood him, at all levels. He went on to say that he thought it quite wrong, and never intended that families below a certain level of income should pay income tax at all. I think that we would all agree with that. But what is the justification for their paying VAT, either? Why is it that it is such a wonderful thing to say that the wage earner, most often the husband, ought not to be paying income tax on his wages, but that his wife can be taxed like hell when she goes to the local shops to buy anything? That is all right, presumably. I have never met a more arrogant piece of male chauvinism in my life.

That is what it really means. That is what people are really worried about. They are not worried about the harassed housewives who have to go out and do the shopping—put the prices she has to pay up to any level. What they are worried about is the psychological effect on the husband because of the pay packets and the possible effects on votes, and so on.

I know that many millions of women go out to work, but basically we are talking about a male wage earner or salary earner, and that it is quite wrong for them to be paying tax, but, on the other hand, that we can keep pushing up prices in the shops to whatever limit. That is what we are saying.

I say to Opposition Members and, indeed, to my right hon. Friends on the Front Bench, that I believe that there is more frustration and anger felt as a result of increases in prices in the shops than there is by deductions for income tax from wage packets by those who receive them, whether they are wage or salary earners.

We must get this absolutely clear. Taxes on what we spend, as I have said, hit low paid families first of all, and those least able to look after themselves, such as pensioners and those on unemployment benefit and supplementary benefits and so on, 10, 50 or 100 times harder than they hit those on £25,000, £30,000, or £40,000 a year, and some of those who, for example, will be getting massive increases out of the Boyle report.

There is no way in which we can base value added tax on the ability to pay. We start from the premise that we must raise £X thousand million in tax. Our second thought should be that the method must be based on ability to pay. Those with higher levels of income and more wealth should make a bigger contribution than those with lower incomes and less wealth.

That should be the basis on which we raise taxation, but it is not the basis for the Tories. To judge by their outburst, it is not even the basis for our friends the Liberals. They say that we should cut income tax because the pop singers are losing their incentives, that we should cut income tax, especially for those earning more than £10,000 a year, and raise the money by an expenditure tax, so that the wives of working people will become more frustrated and angry as prices rise.

I can suggest a number of ways in which my right hon. Friend could have raised the £450 million. He could have cut defence expenditure to that extent, just like that, because we are already spending as a proportion of our national income far more than any other NATO country on defence.

The hon. Member for Gillingham (Mr. Burden) made a valuable point about the amount we are paying in interest on dollar loans. Will he give as much thought to the fact that we are paying West Germany £600 million, £700 million or £800 million a year in hard-earned foreign currency to keep British troops in West Germany, and have been doing so ever since the last war?

Photo of Sir Frederick Burden Sir Frederick Burden , Gillingham

The hon. Gentleman clearly disagrees with the Prime Minister and the Government. Only a few days ago the Prime Minister stated that our defence position was such that defence expenditure this year must be increased by 3 per cent. Therefore, the hon. Gentleman is clearly at loggerheads with the Government on this issue.

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

I honestly thought that it was common knowledge that about 50 or 60 of us on the Labour Benches were at odds with the Government on defence expenditure. It is one of those issues—and there are many—on which there is no Opposition party in the House. There is a consensus militant monetarist group and there is the Tribune Group. Whether we are right or wrong, we have consistently called for cuts in defence expenditure to bring it down to the same level as that of our NATO allies as a proportion of our national income.

When we talk about the public sector borrowing requirement or public expenditure, the Tories always say that we should do only what we can afford within our national income. But when it comes to expenditure on defence the sky is the limit.

Photo of Mr John Evans Mr John Evans , Newton

They want a blank cheque.

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

My hon. Friend is right.

There is another possible way of raising the revenue needed. We are still giving large subsidies to firms in the form of stock relief. I do not know how long we shall keep this up. I think that in one year the amount involved was between £2,000 million and £3,000 million. It has built up into a considerable sum over the two to three years it has been running.

The argument originally was based on levels of inflation of 20 per cent. or 22 per cent. We have now brought the level of inflation down considerably, and we should now seriously think of stopping the tax relief given on stocks. That could make an important contribution towards the £450 million that the Government now require.

But the basic point I want to get across is that if the Tories had had their way they would have given another £1,100 million to those earning more than £10,000 a year and in order to serve the naked class interests that they are sent here to serve.

6.44 p.m.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

The hon. Member for Bristol, North-West (Mr. Thomas) is, as is well known, in favour of higher public expenditure. I understand from him that he is not averse to obtaining more revenue from those whom he terms the rich. I imagine that he would include in that description the propertied class, of which he is a member. But I think that he is wrong to say that the money should best be raised by a further Increase in the national insurance surcharge, because that must inevitably have a very damaging effect on employment.

I could not understand what the hon. Gentleman was saying when he told us that he would have liked to see the public sector borrowing requirement increased. I assume that he means increased as a natural consequence of increasing public expenditure.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

What the hon. Gentleman does not seem to appreciate is that if the PSBR is increased more money must inevitably be borrowed from those who have it, and if that happens there will be less money available for industry and business, which must be damaging to employment prospects in both industry and business.

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

I take the hon. Gentleman's point, but is it not the case that the banks and the finance houses, and so on, are absolutely swollen with funds that they cannot get rid of? I do not accept the argument about competition for funds. There are plenty of funds available, but we do not have the mechanism to channel them in the right direction.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

If the hon. Gentleman believes that, he will believe anything. What those with funds know is that the Government have a great deal of money to borrow, and they believe that the likelihood is that the Government will have to borrow even more than they said they would. The figures for public expenditure so far this year are well above those for the similar period last year. The difficulty that the Government will find themselves in is that not only is the PSBR very large but there is a lack of confidence in the City and among those with money about to question whether that sum will not prove to be more than £8·4 bilion. If that is so, the Government will be in serious trouble.

However, that is pure speculation. Nobody knows what the borrowing requirement will prove to be. But the Government are in a very exposed position in having to depend largely on outside supplies of capital to carry out their programme.

I know that it is customary to bandy words about in the House and to call some hon. Members monetarists and others Keynesians, but from where I sit I think that Governments have become far too dependent upon borrowing money from those who have it. In other words, I think that the PBSR has for a long time been much too large.

It cannot altogether surprise those who are now responsible for our affairs if they see that those with money in the City are less anxious to lend money to the Government than they were because they see that the Government will have to borrow so much. The Government should not be surprised by the City's reluctance to provide money to them. It is very difficult for the Government to obtain their money when they try to carry out their programme dependent rather upon a game of musical chairs, when the third chair is possessed by those who can make up their minds whether to take that chair out of the game. That is a very difficult position for anyone who has to borrow money.

I believe that the hon. Gentleman was wrong to think that the impact of the national insurance surcharge would have no great effect on employment. I believe that it will. We are not talking of large sums of money, but many companies would like to take on more employees and will be discouraged from doing so because they see the trend in the Government's always putting more expense on companies.

Companies have also noted the effect of the Employment Protection Act. They have seen that whenever there is a crisis the Government put an extra strain on those companies which provide profitable opportunities for labour.

The present unemployment position is very serious. I am surprised that the hon. Gentleman did not refer to it. I know that there is a seeming improvement in the unemployment figures, but I believe that the worst aspect of unemployment is not widely known. People who have been unemployed for more than six months do not receive unemployment benefit, and many are entirely dependent on supplementary benefits.

In October 1973, a total of 62,000 people had been unemployed for more than six months. In April this year the figure was 284,000. In October 1973, a total of 142,000 people had been unemployed for more than 12 months. In April this year the figure was 332,000. What is worse is that the number of those who have been out of work for more than six months is increasing substantially each quarter. More than 616,000 people have now been unemployed for more than six months. That represents 44 per cent. of the total number of unemployed. That is very serious. Any measure that makes it more difficult for firms to employ people must be regarded as very dangerous, and I am sure that that is the case with this measure.

The number of those who have been unemployed for more than six months is the highest proportion of the total number of unemployed since the war. I see no reason to believe that it will improve in the near future, and certainly this measure will do nothing to improve it.

I regard the efforts of the Department of Employment, through the temporary employment subsidy and the youth opportunities programme, as very much cosmetic operations. They do not begin to reach the root of our unemployment problem. The Department is inaptly named. It should be called the Department of Cosmetics. Elizabeth Arden would have been proud to set up the Department of Employment, although I am not sure that she would have chosen the Secretary of State for Employment as managing director. It is a Department of cosmetics and nothing more. It is concerned not with dealing with unemployment but with dealing with the unemployment statistics.

The unemployment situation today is very serious and ought to be regarded as such. There are many more fundamental reasons for the very sorry state of unemployment today than the Department is prepared to admit. One of the worst aspects is that, compared with previous cycles, there is no easy or early opportunity of expansion in the economy. I do not believe that we have reached the trough of an economic or a trade cycle. We are in a much more serious position, not just because of the fall of world trade but because of the very low and declining level in the activity of our business. I very much hope that I may be proved wrong, but the figures show that return of capital employed in business and industry has deteriorated during the last 10 years. The real reason for the high and permanent levels of unemployment today is the very low level of return which industry and business can earn on their assets.

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

A number of us on the Government Benches would agree with many of the points that the hon. Gentleman has made in the last few minutes. He is seriously concerned about the global depression that has taken place. Will he take on board the fact that during the last 20 years the rate of return on capital employed in all the developed nations of the world has shown a marked longterm decline?

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I accept that, but the figures also show that the decline has been more marked in this country than in any other country of which I am aware, and there are interesting statistics available on that. One of the more interesting statistics was included in the chart in the recent White Paper on nationalised industries, which showed the decline in the rate of return on capital. The net return on capital in the business sector was 11 per cent. in 1965. By 1976 it had fallen to 3½ per cent.

The return on capital employed in nationalised industries was a good deal lower. But the most interesting work done has been by Dr. Frank Jones and others, which shows the real rate of return on assets if one takes into account the effect of inflation, or stock appreciation. The figures show that if one takes the added value basis, there was a net loss of £2,000 million, which represents 3·8 per cent. of the total assets of industry in 1976. We cannot go on running down our industrial assets in that way.

If Government policies result in an even heavier weight upon industry and business, it will be impossible to improve the return available to industry and there is no reasonable expectation that industry will employ more people. It cannot do so if it is running its affairs at a loss. I believe it to be very unhealthy that industry should be so dependent on tax arrangements such as stock appreciation in order to show itself in some form of profitability. If that is what the working lives of people depend on—through some artificial accounting device—it is a very serious situation indeed.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I am just coming to the point that the hon. Gentleman made. I want to make some further remarks about the fall in capital and about the amount that the Government take out of business at present.

In 1973 the Government took, in taxation and national insurance surcharge, 24·7 per cent. of all the cash flow of a company. In 1976 this figure had reached 31·4 per cent., and I say again that it is not possible to expect industry or business to expand if the Government take more of the cake of industry every year. On any comparison, whether with Japan, the United States or West Germany, the fact is that the Government take more of the cash flow than any other country, and the figures are irrefutable.

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

And it gives a great deal more back.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

On the contrary. Let us consider the experience of those who provide capital for industry. In 1973, they had a return of about 7·8 per cent. of the total cash flow in business and industry. In 1976 this figure had shrunk to 1·9 per cent. I do not think that it is possible to have those two movements going along side by side. We cannot have the Government taking a higher share of the cash flow of industry year after year and those who provide the finance for industry getting a smaller return. How can we expect investment in our industry and business to proceed if an increasing proportion is taken up by the Government and a smaller proportion is available to be ploughed back? It is simply not reasonable to think that that can proceed.

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

We are at odds on a matter of fact. What seems to have happened over the past few years is that the net contribution of top corporate taxation to the total revenues of the Treasury has been declining and the public contribution to the revenues of private corporate enterprise has been increasing. In other words, the so-called private corporate enterprises have become a net charge on the public revenue during the past few years.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

The hon. Gentleman is partly right, but only in a small degree. It is true that manufacturing industry pays very little corporation tax. On the other hand, it has not had many profits with which to pay tax. However, I do not deny that manufacturing industry has certain advantages. For instance, it is able to offset its investment against taxation. I agree that that is favourable. I am talking about the cash flow that is available to every company in Britain. The proportion that I am talking about that the Government take is that paid by employers on behalf of employees both in income tax and in the national insurance surcharge.

There is no other modern industrial country in which employers pay such a high proportion of employee's incomes in the form of tax. There is no other country that leaves so little after the deduction of taxation to companies either to plough back or to provide for the return on capital. The consequence of the dual process—namely, the Government taking more and those who provide the capital in industry receiving less—is plain. Not only has there been no investment; the propensity of industry and business to expand their business has declined markedly. That is why the level of imports is as high as it is presently. That is why it has been growing for many years.

I anticipate what the hon. Member for Birmingham, Selly Oak (Mr. Litterick) will say—that the level of imports is growing in other countries as well. I do not deny that that is so, but the level has grown far more in Britain, and far more in manufactured products, than in other countries.

It would be foolish to ignore the trend of imports into Britain. The proportion was 6·7 per cent. of GNP in 1960. It was 10·5 per cent. in 1970 and it is now 17·7 per cent. It is growing inexorably. Even if it were possible by some magic means to reduce the level of imports, if we were more price competitive, the fact is that we are now apparenly unable to meet the demand of our domestic market.

In the past Governments have tried to rectify the situation by increasing the general level of demand. That has been done by increasing the public sector borrowing requirement and increasing the deficit. That has always led to a difficult financing position. It has always led either to highly inflationary borrowing or, what is worse, to the printing of money. It has been done on many occasions since the war and it is being done again now.

The Government are printing money at a very fast rate. Hon. Members on both sides of the House have seen the process before. It is inevitable that the effects will be seen next year. They will be seen in the level of inflation and in price increases. They will be seen in the level of industrial activity. Demand will in-increase sure enough, but it will be taken by imported products, and manufactured products at that. When that happens it it is unlikely that those who have won a larger stake in our market will be easily beaten off in future.

There is no way out of that position for the Government. To place upon industry the incubus of an extra national insurance surcharge seems to be the height of folly.

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

I believe that that is the third time that the hon. Gentleman has said that what we call the social costs of employing labour are excessive in Britain. Surely he knows that it is a fact that the social costs of employing labour in every other member State of the Common Market is much higher.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I do not think that the hon. Gentleman is correct in making that assertion. I am comparing what industry has to pay to the Government in Britain in the form of direct taxation and the national insurance surcharge with that taken by Governments in other countries. I merely say that the total level is demonstrably much higher in Britain than anywhere else.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

If the hon. Gentleman is interested, I shall send him the figures. The facts are as I say.

We are using the revenues of North Sea oil to finance the imports of large stocks of manufactured goods. As our industry is so run down by high taxation, personal taxation, it is unable to provide the goods that we need and is unable to export. That is what is happening. Curiously enough, that happened earlier in Holland during the Dutch natural gas boom. There was just the same effect in the Dutch economy. I have heard it said that if only we could work at half the pace of the Dutch we should have no problems. However, if the Dutch were presented with problems stemming from their natural gas discoveries, we should not hold out too much hope in our own future for the expenditure of revenue from North Sea oil.

I regard the stage that we have now reached as extremely serious. I am certain that the measure before the House will do nothing to assist industry. I very much fear the consequences of what may occur next year. I am sure that the only solution to our problems is for the Government to take less of the national cake and to allow industry and business and individuals to earn more and to keep more of what they earn. That seems to be the route that has been followed by the economies that have been successful in the world and its absence here is the reason for our being so markedly unsuccessful in recent years. I am much concerned that this measure will do nothing but harm to industry, the economy and the country as a whole.

7.8 p.m.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

I do not think that I have ever risen to speak on so narrow an issue that has been prefaced by such a wide-ranging debate. We have discussed almost every aspect of British and world economic problems. I suggest that that is a consequence of the narrow issue before us relating to the national insurance surcharge.

As the House will appreciate, we have a problem because important as the issue is there are only three Labour Members who have indicated any wish or intention to speak. I suppose that there is an obligation on each one of us at least to try to expand our remarks to fill the time that is available.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

As applied to the House of Commons.

I was most interested in the comments of the hon. Member for Horsham and Crawley (Mr. Hordern). I think that he is almost entirely wrong. I agree with those who have said that there is an air of unreality about the debate. That is because we are attributing a significance to marginal factors that they do not possess.

Is it suggested that if we move a tax rate up or down the implications will be disastrous? Is it said that if the Treasury once more makes an inaccurate assessment of the public sector borrowing requirement that might spell great fortune or disaster depending on whether it is plus or minus? I cannot believe such suggestions. Further, I cannot believe the more general point made by the hon. Member for Horsham and Crawley, that the cause of all our troubles is that the rates of personal and corporate tax are too high, that we are sapping the enterprise and vitality of the men in charge of our industries, and that if only we would lift the burden we would have an economy transformed.

That must be an extremely ridiculous argument, although it may have a percentage of truth. It must be ridiculous if only we consider our own history. Let us not go back into medieval times of pre-1939; let us start at 1945. What was remarkable about the period to the end of the 1960s was that, despite levels of taxation and all the bad things about which the hon. Gentleman talked, the British people enjoyed a slow but regular increase in their living standards. That happened in every year from 1945 almost to the end of the 1960s, with the exception of the one year of the Korean war.

There are obvious explanations for that situation. In the presence of the right hon. Member for Down, South (Mr. Powell), I hesitate to mention fixed interest rates, but I think that it can be argued that fixed interest rates were a contributory factor, for various reasons. There was technological advance of all kinds in the consumer sphere. There was the American balance of payments deficit. That was enormously helpful, because, by the doctrine of the benign neglect of the balance of payments, it was allowed to underpin developments in deficit countries, and so on.

Since 1970 there has been a disastrous change in our fortunes. This has nothing to do with our present economic dilemma. It represents what my right hon. Friend the Chancellor of the Exchequer calls the real economy. Certain situations in industry today cannot be explained in terms of levels of taxation.

In my area there is a dominant industry, of which I am immensely proud. When I went to my constituency in 1945, I thought that it would be down and out. That industry makes cups and saucers. I thought that the underdeveloped parts of the world would make just such things. Yet it is one of the most dynamic industries in this country. Its export ratio is enormous. Its output is growing. Its employment is growing as its investment grows. That is because the old families have been superseded by dynamic managers who pay enormous taxes.

Now that my hon. Friend the Member for Bristol, North-West (Mr. Thomas) has left the Chamber, I can say that one of those people, as chairman, earns £140,000 a year. No one bothers about that unduly, except some of the more Maoist elements in my constituency. The fact that I looked at my hon. Friend the Member for Ealing, Southall (Mr. Bidwell) was purely fortuitous. I was trying to get some relief from the tightness of my collar.

That is one example, but there are others. They survive within the tax framework about which the hon. Member for Horsham and Crawley was speaking. For example, Alfred Herbert announced today that it is to sack another 700 employees.

Some years ago the heads of a number of firms in the machine tool industry came to the House of Commons to talk to the west Midlands group of MPs. I said—and I think we all agreed—that if they were the leaders of the machine tool industry, God help us. I hope that the hon. Member for Horsham and Crawley is not a machine tool manufacturer in addition to his many other great attributes. These people have similar tax burdens.

What has happened to British Leyland? Other car manufacturers manage to thrive. We are in a world situation. The right hon. and learned Member for Surrey, East (Sir G. Howe) mentioned the steel industry. I should like to talk about that industry at great length, but I shall not. The structural changes in the world situation are frightening. Merely to say that we have a tax problem which is crippling industry is about 1 per cent. right and 99 per cent. wrong.

If we accept the logic of a great deal of what has been said, not only by the hon. Member for Horsham and Crawley but by others, about the need to reduce taxation, I think that we must link that with the main point made by the hon. Gentleman. We know that there are two significant factors on the British scene relating to income, taxes and so on. One is the propensity to import. If we have a massive decrease in personal taxation or a reduction in corporation tax, if such tax is being paid, what will happen to our import bill? Obviously, business men will import more manufactured products. That fact should clearly indicate to any Government that, even if it were fiscally possible, it is not practical to reduce personal taxation now.

There is another aspect. We have not only a massive propensity to import but a frightening propensity to save. The result cannot be explained—certainly not in O-level textbooks on economics. On Friday we shall know what the first quarter's personal savings ratio is. It is remarkable that, although there were one or two special circumstances, in the last quarter of last year we saved over 16 per cent. of our personal disposable income. That was exactly twice the norm for the period of the 1950s and 1960s. For example, we know that the Germans are reluctant to make cuts in personal taxation, because they are offset by increases in savings.

I do not think that cuts in personal taxation are the way to recovery. They do not increase demand, for the simple reason that we tend to save money. They do not increase demand in this country—that is another myth that has grown up—because we merely increase the employment prospects of people in other countries. Those who talk about making cuts in expenditure to help to reduce the public sector borrowing requirement do not understand the difficulties that we face in this sense.

I do not want to go on too long. I want to raise only one other important point, if I may have the permission of the hon. Member for Wolverhampton, South-West (Mr. Budgen). I return to the question of financing the public sector borrowing requirement. I agree that there are difficulties, but what staggers me is that people who are experienced in the ways of the City say that what we have to face, if we are to deal with the City, is an element of psychopathology. In other words, they say that the money is there. It is no use anybody saying that the money is not there, because if we are talking only of pension and insurance funds we are talking about an aggregate sum, available annually, of £7,000 million.

The money is available, but there are certain operators of the funds who refuse to let the Government have the money. It is as simple as that. I would not go as far as to say, as do some of my hon. Friends, that such people go on strike.

It is remarkable that both in 1976 and this year the financial institutions have had money running out of their ears and yet they have held back from buying gilts. They have done that because they want to get the best return from the Government.

This raises problems that relate not only to finance and the public sector borrowing requirement but to social issues which, if these institutions are not careful, might have serious consequences for them. They argue that they must do the best for the people for whose pensions they are responsible or who have insurance policies that will attract reversionary and terminal bonuses, and so forth. But when I examine the overall situation my conclusion is that the disposal of these funds is far too important to be left to investment fund management. I go as far as that, although I do not believe that anybody could accuse me of being a member of the Tribune group or of being too Left wing.

Photo of Mr Sydney Bidwell Mr Sydney Bidwell , Ealing, Southall

Not even a probationary member of the Tribune group?

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

I am not even a probationary member. A total of £7 billion is going into property. To a large extent it is going to purchase existing properties and forcing up prices. A margin of the funds goes into new industrial property and into equities. It is the dominant influence on the movement of the Financial Times index.

More than half of the money—probably £4 billion plus last year—is going into the purchase of gilt-edged securities. It is understandable that if the rate of interest offered by the Government is negative the institutions might be reluctant to let their money go. That was certainly true in 1976. It is indefensible that they should refuse to finance the Government's public sector borrowing requirement when a real rate of return of interest exists. That is especially so when they can enjoy capital gains.

If the financial institutions adopt this arms-length approach to the Government some measure of control of the institutions is inevitable. We should never forget that this has always been the accepted role of the banking system. Whenever the Government need short-term finance, three-month IOUs or Treasury bills have always been made available for Government purposes.

These are some of the issues that we should be discussing instead of wondering whether we should have a surcharge of 2½ per cent. or 1½ per cent. I am glad that the Chancellor of the Exchequer is not trying to raise any more to meet the £140 milion that he is prepared to lose in the general financial statistics.

I have made my contribution in terms of minutes, but I shall take 30 seconds more. If we believe that by the wave of a magic wand of a fiscal or monetary kind we shall solve the great problems of the economy, we are living in cloud-cuckoo-land.

7.27 p.m.

Photo of Mr Peter Brooke Mr Peter Brooke , City of London and Westminster South

Membership of Standing Committee A on the Finance Bill is not an unmixed blessing, but one blessing that it did confer was the occasional opportunity to listen to the hon. Member for Stoke-on-Trent, Central (Mr. Cant). One of the disadvantages of the Committee was that the hon. Member did not speak as often as some of us would have liked. One of the pleasures of this evening is that he has felt that he has had an opportunity to expand his remarks.

I did not welcome everything that the hon. Member said. He referred to past references by the Tribune group to an industrial investment strike and accused my constituents of a gilt edged investment strike. I shall not take up that argument, because it is not directly connected with the debate. It is a subject that I should enjoy debating with him at some other time.

I shall make one brief constituency point. It is related not to the City of London but to Westminster, South. The Financial Secretary received a letter from me on behalf of constituents who belong to the charity The Friends of the Elderly. They complained to me—and I passed on the complaint to the Financial Secretary—that in order to run the nursing wings of their homes they have to maintain a part-time staff of 200 nurses. There is no way in which they can recruit enough nurses as direct employees. Consequently, in the course of the year they may employ 50 or 100 agency nurses to fill the gap.

The complaint is that if they employed those agency nurses directly they would be spared the national insurance surcharge, because they are running a charity, but because they are buying in a service they are obliged to pay that surcharge to the agencies that supply the nurses.

The Financial Secretary wrote to me explaining with impeccable logic why the scheme could not be modified. I regret that his head had to prevail over his heart. I am sure that he understood the thrust of the argument. Inevitably, as a result of the motion the amount that they will have to pay will rise, and that will exacerbate the problem.

How many other representations have been made to the Treasury on this subject? If the answer is "None" or "Very few", I hope that tonight's debate will provoke others who are affected to get in touch with me or, more relevantly, with the Treasury. Then we shall know how large a problem this is for charities, and we can then address ourselves to finding a way round the fiscal burden which I am sure in his heart the Financial Secretary would prefer to see removed.

I begin my main comments by congratulating the Chief Secretary and the Financial Secretary. In Standing Committee we had the usual debate on the regulator clause—clause 8—on the state of the economy. That took place on 23rd May. At columns 248 to 258 my hon. Friend the Member for Hitchin (Mr. Stewart) made a notable speech, which inspired the hon. Member for Stoke-on-Trent, Central to rise on a point of order and say: We are hearing such an interesting speech of great authority that, even though the Chief Secretary and the Financial Secretary are not listening, I hope that at least they will read it."—[Official Report, Standing Committee A, 23rd May 1978; c. 255.1 I congratulate the Chief Secretary and the Financial Secretary on having read it, because clearly they have. Everything that my hon. Friend the Member for Hitchin said in that speech has come to pass. My only regret, since they followed his advice so slavishly, is that he did not on that occasion advise them how to make up the tax revenues. Had he given them advice on that point, and had they accepted it, we would not have been having the discussion we are having this evening.

Nothing that the Government did in response to my hon. Friend's speech can undo their mistake in putting the public sector borrowing requirement so close to its permitted limits in the Budget in April. Putting it so close, of course, offered the Government an insurance policy, in that they could charge the Opposition with irresponsibility if my right hon. Friends altered it by imposing additional tax cuts. However, it also put an obligation on the Government to restore the revenues so lost because their Budget strategy was too nicely balanced.

My hon. Friend the Member for Hitchin referred to yesterday's debate on unemployment. I heard the opening and closing speeches in that debate and I heard the speech by the hon. Member for Chester-le-Street (Mr. Radice). The only intervening speeches that I heard were those which were broadcast on "Yesterday in Parliament". I spent part of that intervening period last night with the hon. Member for Stoke-on-Trent, Central, listening to the presentation made by the British Steel Corporation.

Two of the speeches that were broadcast on "Yesterday in Parliament" were those by the hon. Members for The Wrekin (Mr. Fowler) and Birmingham, Selly Oak (Mr. Litterick). Both coincided in blaming the lack of historic industrial investment for our present economic ills and unemployment. Yesterday's debate is important today because of the impact that the national insurance provisions will have on investment. Last year, manufacturing investment, excluding investment in steel and metal manufacturing, was surprisingly and creditably 14 per cent. up on the previous year. With this year's predictions the forecasters agreed that the econometric facts were against a further increase of investment of that sort, but they acknowledged that, even so, business men were expecting to raise their figures, and they came to the conclusion that if that was how business men felt they, the commentators, should go along with their optimism.

My misgiving about these provisions and the way in which the Government are seeking to restore their lost revenue is that they will hit precisely at this optimism and at industry's capacity to invest. My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) referred to the prognostications of my constituents at Phillips and Drew about company liquidity in present circumstances and as a result of these measures.

Take the specific example of Guest, Keen and Nettlefolds, which was cited by my right hon. and learned Friend. These provisions will cost GKN almost £5 million if it maintains its present employment levels. That is a massive sum to take out of the resources that are available for investment, quite apart from the extra liquidity problems that it creates. I have here The Times's list of the 1,000 largest companies, which records the numbers of people which each of those companies employs. The figure that I have quoted for GKN could be repeated again and again.

It is a considerable irony in these matters of investment and unemployment that Labour Governments have a disastrous penchant for employing payroll taxes at the wrong time. Yesterday and today my right hon. and hon. Friends quoted the relative growth rates for the 17-year periods of Conservative and Labour rule since the war, which show to the advantage of the Conservatives and the disadvantage of the Labour Party. Today is not the first time that a Labour Government have got it wrong. They got it wrong before on selective employment tax, which was introduced to discourage the service industries when it was clear to any seeing eye that we were entering a post industrial society in which service industries would predominate.

If service industries had not been discouraged as they were between 1966–70 we would be in a much better position now to provide employment through those industries. Now the Government, by the measure that is being proposed this evening, are to clobber industrial investment at a time when industrial expectations and intentions are already beginning to look fragile. The method by which the Government have chosen to recover the revenues is singularly unfortunate.

7.37 p.m.

Photo of Mr John Cronin Mr John Cronin , Loughborough

The hon. Member for City of London and Westminster, South (Mr. Brooke) made an interesting speech. I particularly liked the ingenious way in which he introduced his constituency point about agency nurses. On the whole, they are probably a somewhat undesirable institution, but they fill many gaps and it is unfortunate that we must have so many of them.

The hon. Member made a pessimistic point about the effect of the surcharge on investment. It amounts to only 3½ per cent. on the total employer's national insurance contribution, which is a relatively small part of the total cash flow. Investment usually comes not from immediate cash flow but from funds which have been accumulated over the years from rights issues and from direct loans from banks and other financing authorities. The hon. Member is being a little pessimistic even in the short term in suggesting that the surcharge will appreciably affect investment. In the long term it will be a boost to the consumer. His argument that it will seriously affect investment—the right hon. and learned Member for Surrey, East (Sir G. Howe) made the same point—is far from proved.

It is unfortunate that investment has not increased, but there is no way of inducing industrialists to invest against their will. Anyone who has attended many Committee debates on the Finance Bill knows that many attempts have been made—usually without effect.

I am glad that my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) drew attention to people's propensity to buy goods from abroad. That is one of the most unfortunate aspects of our economy. Sooner or later the Government will have to heed the warnings of those who think that at least some protectionism is desirable. That is now becoming a respectable economic dogma. The Cambridge school favours some protection. It is absurd not to protect ourselves from the exports of countries which take little or nothing from us—preeminently Japan.

I am glad that the Chancellor has reduced his original proposal for a 2½ per cent. increase in the surcharge. The tax cuts meant an increase of £440 million in the PSBR and a 1½ per cent. increase will supply £300 million. The remaining hole of £140 million is negligible against the thousands of millions involved in the Budget, and could easily be lost. The experience of the past few years suggests that it is well within the possible errors of Treasury forecasts.

The amendments made in Committee on 8th and 10th May, which necessitated this surcharge, show the Opposition's irresponsibility. It was a purely vote-catching gesture, but it is inappropriate when the economy is so delicate. The Opposition behaved like bulls in a china shop, prancing about and destroying the delicate balance of the Budget strategy.

The tax reduction was certainly not welcomed by sober people in the City and the world's money markets. Immediately afterwards, the stock market rocked and the performance of the pound was impaired, so the Opposition certainly did not have the approval of those financial experts.

I favour the reduction of income tax, with certain provisos. It is too high. It bears too heavily on the management classes, on whom—let us be under no illusion—we depend for our exports, for increasing productivity and for industrial efficiency. It bears too heavily on workers generally—the majority of trade unionists have to pay too much tax—and it bears most heavily of all on people on low incomes, many of whom should pay no tax at all.

There is no case for cutting income tax while the economy is so delicately balanced. There would be a good case for doing so when it has improved. Nothing will improve the economy more than increased productivity and overseas sales. That will require much better leadership in industry, which is sadly lacking. Much more effort should be put into exports and much more money into investment. That would enormously improve the economy, and income tax could be cut without deleterious effects. The yield from lower rates of income tax in real terms would be much higher than from income tax at its present high levels.

I am glad that the Chancellor chose to increase the surcharge rather than to take the other measures suggested by the Opposition. I do not know why they are so against the surcharge. When the amendment is enacted, the surcharge will be practically the lowest of any European country. Why do they fear it, when it is taken comparatively lightheartedly by other countries and apparently does not seriously affect their economies?

I reject the suggestion by the right hon. and learned Member for Surrey, East of an increase in indirect taxation. What he is saying is that it is more sensible to increase inflation, which would be the immediate consequence. That is the height of irresponsibility, when we have just succeeded in getting inflation under control. The right hon. and learned Gentleman is affected by the obsessional disorder of the Tory Party that income tax must be reduced at all costs and is prepared to increase inflation simply to achieve that end.

The right hon. and learned Gentleman and his immediate followers are somewhat muddleheaded. He strongly advocates an increase in indirect taxes, yet he and his leader led their supporters into the Lobby to vote against the increased petrol tax.

I am glad that the Chancellor did not contemplate cutting Government spending to pay for the improvement in income tax. Public spending is still far too law. Too little is spent on education and on the Health Service. The £50 million provided for the NHS in the Budget is derisory. The Opposition constantly say that they will reduce income tax and cut public expenditure, but do not say where the cuts would be made. Reducing income tax would benefit the high-income groups which are their tradiditional supports, but would have an unfortunate effect on most other members of the population.

I shall now put to the hon. Member for Horncastle (Mr. Tapsell), who is listening so courteously and attentively, the question which has been asked many times but without response. What would his party cut in public expenditure if it came to power? Would the Tories cut capital expenditure or current Government expenditure? If their intention is to cut capital expenditure, does that mean that there would be cuts in hospital building, in educational building and in road building? What are they thinking of cutting if it is to be capital expenditure?

If the Tories were to cut current expenditure, that would entail an immediate increase in unemployment. The Government's current expenditure is always labour-intensive, so there would be an immediate increase in unemployment.

Photo of Sir Nicholas Fairbairn Sir Nicholas Fairbairn , Kinross and West Perthshire

I am interested in what the hon. Gentleman says about unemployment. I take by way of illustration a typical farming estate in my constituency. The proposed increase in the national insurance surcharge will cost £4,000 in respect of those there employed, which means that at least two people will have to lose their jobs on the highest agricultural salary in order to pay it. That will have an immediate effect on employment. There is no way to increase productivity or income. Two people have to be sacked. There is no other way. Is that what the Government want?

Photo of Mr John Cronin Mr John Cronin , Loughborough

I think that the Government have had a choice of evils here. Obviously, the surcharge will have some effect on employment. The Chancellor said, two or three weeks ago, that the higher increase then proposed would cause the loss of about 5,000 jobs some time next year. On the same basis, presumably, the diminished increase will cause an increase in unemployment of about 3,000, but one hopes that in the Chancellor's next Budget steps will be taken to prevent that.

The hon. and learned Member for Kinross and West Perthshire (Mr. Fairbairn) is behaving a little oddly in complaining about an increase in unemployment, small though it be, brought about by this surcharge, because the only reason for the surcharge is the decrease in taxation for which he and his party voted. The small evil which arises is a direct result of his own vote and the vote of his right hon. and hon. Friends, which, as I say, I regard as thoroughly irresponsible.

If current expenditure were cut—if that is the Opposition's policy—apart from the effect on employment there would be an immediate reduction in the level and standard of public services. There would be cuts in services for the sick and there would be cuts in education.

Perhaps the hon. Member for Horncastle will consider this, too. Are the Opposition considering cutting retirement pensions or other social security benefits? There is an equation here which cannot be escaped. Cuts in Government expenditure have to be counterbalanced somewhere else.

Photo of Peter Tapsell Peter Tapsell , Horncastle

Since the hon. Gentleman has been good enough to put certain questions to me, may I say that my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) set out the position of the Conservative Party on all these matters in considerable detail in the debate on the White Paper on public expenditure? The essential point which I put to the hon. Gentleman, which is the answer to the questions he now raises, is that over the past four years the wealth of this country has not increased at all. Manufacturing output is now lower than it was when the Government came to power. We can generate wealth to provide the money to improve the Health Service, for example, to which the hon. Gentleman referred, only by providing incentives for people to generate wealth, and to do that we have to reduce direct taxation.

Photo of Mr John Cronin Mr John Cronin , Loughborough

The hon. Gentleman has made a good political point, but there is no escape from the fact that he still does not say what would be cut. All he says is that direct taxation should be reduced, that will give the incentives, and everything will improve in the economy. There is no evidence for that. We have had the Royal Commission on the taxation of profits and income, and there have been reports by various committees on the question of incentives and income tax. There is no real evidence that cutting income tax produces more incentives to better work.

Photo of Mr John Evans Mr John Evans , Newton

The hon. Member for Horncastle (Mr. Tapsell) makes a valid point when he says that manufacturing productivity has declined since this Government took office. Will my hon. Friend bear in mind in that connection that when we joined the EEC we were told that that would give the solution to all our industrial problems, but in the period since then the deficit in manufacturing terms between ourselves and the original Six has grown enormously. Is not some of the responsibility for the decline in our industrial capacity to be laid at the door of our membership of the EEC?

Photo of Mr John Cronin Mr John Cronin , Loughborough

My hon. Friend is rather ingenious in exhibiting his anti-EEC propensities and trying to hang them on to me.

Photo of Mr John Evans Mr John Evans , Newton

No, hang them on the hon. Member for Horncastle (Mr. Tapsell).

Photo of Mr John Cronin Mr John Cronin , Loughborough

I was in favour of our joining the EEC, and I am still in favour of our remaining in the EEC, but it never occurred to me at any time that our joining the EEC would be some sort of magic wand which would transform our economy. There is much in the EEC, in its economics and its budgeting, which is deplorable and must be improved. I am with my hon. Friend there, but I think it most unwise to consider leaving the EEC. We have to improve it from within. To that extent, I entirely agree with my hon. Friend.

In spite of the suggestion from my hon. Friend the Member for Stoke-on-Trent, Central that we on the Government Benches have an unlimited right to take up the time of the House in view of the relative paucity of Members attending the debate, I shall not presume to follow that line but shall keep my speech within reasonable bounds. I am sure that we are to hear some interesting contributions from hon. Members on the Opposition Benches who are showing a tendency to rise on their toes at any moment.

My final point is that this debate has served a valuable purpose. It has made quite clear that it is not possible to cut direct taxation without fiscal and economic effects which are hurtful to large sections of the community. There has thus been revealed the bogus nature of Opposition promises that they could cut income tax with impunity, and do it easily, if they got power. It cannot be done without harm to the economy and without seriously reducing the standard of living of most people, apart from the very richest.

7.59 p.m.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

It is a convention of the House that whenever a Member gets to his feet he remarks that the debate has been interesting. I regret to say that I am unable to follow that convention. I suspect that it is said because most of us, with our self-preoccupation and inclination to self-congratulation, assume that any debate in which we take part must be interesting.

The truth today is quite otherwise. This has been a boring and irrelevant debate, and it has been boring and irrelevant primarily because, in the brief periods when they have been in the Chamber, hon. Members on the Government Benches have made no attempt whatever to keep to the subject under discussion. There has, however, been one considerable advantage in the rambling, meandering irrelevancies which we have heard from Labour Members, for they have revealed their bigoted preoccupations of the moment. For instance, I note that the hon. Member for Loughborough (Mr. Cronin) pinned his colours to the new mast of protectionism. I shall not take up that point, because I do not think it is in any way related even to the measures as a whole which were forced upon the Chancellor at the beginning of June.

But I should like to take up the point raised by the hon. Member for Bristol, North-West (Mr. Thomas), who has not been in the Chamber since he made his speech. He attacked the Tory Benches generally—not only the Tory Benches, because the right hon. Member for Down, South (Mr. Powell) is also present—for what he described as their militant monetarism. The hon. Gentleman should understand, as should all right hon. and hon. Members below the Gangway, that militant monetarism is no longer the faith of a small and insignificant sect of the Tory Party. Militant monetarism is now the common ground of politics.

It is wholly inconsistent for Labour Members to cheer when the Minister of State is rolled on. I am very pleased to see the Minister of State in his seat now. He has an extremely good peroration which he adds to nearly every one of his speeches on the economy—his two or three paragraphs about Barber and the corruption of the financial institutions. It is a very good piece. Yet at the same time as those hon. Members shout and cheer when they hear that peroration, they particularly attack the City and the financial institutions when they say that those institutions have become militant monetarists. They go on to take the point that was put forward by the hon. Member for Stoke-on-Trent, Central (Mr. Cant) and say that there has been a strike of capital. They also go on to threaten the financial institutions in more or less a specific way with some form of political or State direction or nationalisation.

Let us just look for a moment at the attitude of the City. My hon. Friend the Member for Hitchin (Mr. Stewart), as always, accurately portrayed the views of the City. It must be understood that the Minister of State is right when he speaks about the way in which the financial institutions were corrupted. But the City learnt its monetarism in the hardest of schools. It did not learn its monetarism, as many of us do, by reading the articles of Mr. Sam Brittan or having a look, as we did in the past, at the articles of Mr. Peter Jay and saying "Ha ha, that was quite a nice, useful attitude. Let us adopt that for a couple of days or weeks and see whether we cannot bash the Government with a few of those theories". Oh no, the City learnt its monetarism by personal disaster.

For instance, we start at one end with the less secure financial institutions, such as the secondary banks and the more rocky property companies, which went bust—not just Mr. Stern who personally went bust for £100 million, but those quite respectable secondary banks and property companies which found themselves in the lifeboat. Or again, there was that accepting house which found itself very severely troubled as a consequence of the crash within the secondary bank and property markets. Perhaps the best illustration of how the highest and most responsible financial institutions were so hit by the disaster which taught them their monetarism was when the chairman of the National Westminster Bank had to make a public statement explaining that his bank had not been severely hit by the losses on property. That is an illustration of how they in the City learnt their monetarism in the hardest school. It was not just a matter of picking up a political theory with which to belt a political opponent.

Photo of Mr John Evans Mr John Evans , Newton

The hon. Gentleman has rightly drawn attention to the enormous crash which took place in the City, when all these financial experts got their fingers badly burned. I am sure that he appreciates that those of us who do not understand the financial world read about that with great interest. However, would he lay the blame for this crash at the door of this Government or at the door of the previous Tory Administration?

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

I made it quite plain that I accept the argument put forward by the Minister of State. I accept that the increase in the money supply under the previous Administration was a great mistake. I accept that it had an appalling effect on the financial institutions 18 months or so after the increase in the money supply was at its highest level. What I am simply saying is that it is impossible for hon. Members such as the hon. Member for Newton (Mr. Evans) to shout with pleasure and glee when the Minister of State makes his usual entertaining turn and at the same time attack the financial institutions, because those financial institutions have also learnt in the hardest school that monetarism which the Minister of State demonstrates so eloquently in his frequent turn.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

If the hon. Gentleman were to study that entertaining turn again I think he would see that my criticism of the City is that it has not learnt through post-war history. If one looks at what happened in 1945, one will see that Labour Governments have usually been much more financially correct in money supply and every other way than Tory Governments. I would have thought that the City would learn that lesson by now—that we are much more responsible in these matters than Tory Governments.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

It may well be that the City takes the view that in some respects it prefers Labour financiers. That may be a view which some members of the City hold, although I think that it is wrong. But that does not mean that they suspend all critical judgment when they see the money supply M3 increasing at 16½ per cent., well above a target which has been announced.

I conclude my description of how the City was hit by a description of the life of a provincial stockbroker. Essentially I am a provincial person. I do not pretend to know very much about the way in which the personal lives of those who do business in the City work out. But I know from my own experience how during the crash—

Photo of Mr John Cronin Mr John Cronin , Loughborough

I should like to improve the hon. Gentleman's personal experience. I can assure him that the City was much more appalled when the increase in money supply was 24 per cent. in one year and 28 per cent. the next year in the last two years of the Government of the right hon. Member for Sidcup (Mr. Heath).

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

I regret to say that I do not understand the relevance of that intervention. I thought that I had dealt with that point at least twice in my earlier remarks. If I may, I shall proceed in an attempt to try to keep at least within the broad compass of this debate. Provincial stockbrokers who are now being attacked were in 1974–75 sacking half their staff, selling off their few shares at about one-quarter of the price which they had paid for them, selling their insurance policies and withdrawing their children from private education. Labour Members may say that they ought not to have children in private education.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

Or shares. I understand that argument. But the fact is that there are people in this country who control the financial institutions and who learnt their present preoccupation with monetarist beliefs through personal disaster. That is a far more cogent and eloquent lesson than reading any of Milton Friedman, or Peter Jay or Sam Brittan. I hope that those hon. Members who cheer the Minister of State will be consistent in their application of monetarist principles.

Government supporters are also inconsistent when they say "We note with pleasure the way in which the City on occasions is now ambivalent in its attitude towards the Tory Party, and we say that because of the disasters of the past." Yet they say in the same breath "The City is so inconsistent and so unpatriotic" because of the so-called investment strike which occurred after the announcement of the last Budget.

I go a little further and say that it is not merely the attitude of mind of the money markets which has now become monetarist. It is the whole philosophy of the Bank of England which has changed totally. I hope that I shall be forgiven if I repeat what I said on 8th May. On that occasion, I predicted that it would be necessary for the Government to take some corrective measures because I believed that the public sector borrowing requirement was too big and could not be financed within the monetary targets which had been announced.

I wish to emphasise that the City now follows the adherence or non-adherence to announced monetary targets because these are now the new indication whether the Government of the day are pursuing a sound financial policy. That philosophy was most of all set out by the Governor of the Bank of England in a speech which was supported in the March Bank of England Quarterly Review. The Governor said: Our first order of business must, therefore, be to restore confidence in the framework of the system. The crucial economic decisions, for example, to undertake investment, involve an act of faith in the future. That faith has been undermined by uncertainty—uncertainty in particular about the future value of money, externally and internally. In times past other features of the economic system such as fixed exchange rates, or Gladstonian budgetary principles were thought to provide a guarantee of stability. Those restraints have now gone. The main role, therefore, that I see for monetary targets is to provide the framework of stability within which other policy objectives can be more easily achieved.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

I see the right hon. Member for Down, South (Mr. Powell) indicating his disagreement. It may be that he is right in saying that there are other and better disciplines upon the economy than the publishing of monetary targets. But a published monetary target is a discipline upon the economy.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

My reason for the dissent which the hon. Member observed is that the trouble with monetary aggregates—the money supply figures—is that, like coral, they are evidence of something which has happened already and which can no longer in that form be corrected. What is done at the time will produce its effect in monetary figures one, two or more years ahead, so that this is a sort of gauge by which it is impossible to steer.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

I do not wish to argue which of the various monetary or fiscal disciplines is best. I suspect that the right hon. Member may be right in his preference for Gladstonian principles of budgetary control. I suspect, too, that he is right in saying that our first preference should be for a balanced Budget. But if that cannot be achieved immediately, the publication of monetary targets is a useful second preference, and some discipline is better than no discipline. That has now been accepted as a discipline by those who lost large sums of money through the last financial crash. We do not know whether it is the right discipline, but it has been accepted by them as the discipline.

It is no good Government supporters who sit below the Gangway screaming with pleasure as the Minister of State does his turn. He will do it tonight, and it will be a very good turn.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

No. We are not to have it. It is an off night.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

Then it will come on another night, and it will be just as good when it comes. We look forward to it.

The fact is that monetarism rules and, contrary to what the hon. Member for Bristol, North-West says, it is no longer a minority view. It is the view now of the Government, of the Opposition and of the financial institutions. It must be understood that monetarism is not undemocratic in the sense that it is impossible to have Socialism if a policy of monetarism is being pursued. It simply means that if we are to have a Socialist Government with high spending—and the people are entitled to elect a Socialist Government with that platform—the Socialist Government of the day must raise a very much higher proportion of their expenditure by proper taxation. It means that there cannot he Socialism with the very high public sector borrowing requirements thought possible a couple of years ago.

It was extremely interesting to hear the hon. Member for Stoke-on-Trent, Central speak about the need to subject the financial institutions to some form of political direction. Those who have their money controlled and invested by the financial institutions should understand that the hon. Member's speech was very significant.

There are wild men in every party. No doubt 10 years ago there would have been a wild man in the Labour Party who would have advocated State direction of the financial institutions. But the hon. Member for Stoke-on-Trent, Central is no wild man. He is a man of mature years. He is a well-read, learned man of kindly disposition and of moderate views. He has been a self-proclaimed monetarist for many years. He is a very much on the moderate Right wing of the Labour Party. When he reveals in a rambling speech his inner preoccupations and suggests that it may be necessary to control the financial institutions by legislation and by State interference, it means that that mood is becoming prevalent and very important within the Labour Party. It means not that it is likely to be in the next manifesto but that it is one of those ideas which could easily and quickly be adopted by the Labour Party.

It means that the future of every working person in the land is at risk. All of us have our future security potentially at risk at the hands of inflation. All of us know that whichever Government we happen to elect may corrupt the coinage and make our future almost completely insecure. But most of us have some sort of hope that these fears of inflation may be balanced by the hope of having some sort of independently-funded pension. These pensions will be subject to political control if even the moderate wing of the Labour Party has its way, and every working person in the land should know that this is a real threat.

It is true, of course, that there are scaremongers on the Opposition Benches. There are some who too quickly and too irresponsibly shout "Communist" at Government supporters. I hope that I am no scaremonger, and certainly the hon. Member for Stoke-on-Trent, Central is no Commie or irresponsible young politician on the make on the Left wing of the Labour Party. He represents the solid decent right of the Labour Party and when he articulates suggestions like the one he has made tonight, the working people of this country should be very careful.

8.20 p.m.

Photo of Mr John Evans Mr John Evans , Newton

The hon. Member for Wolverhampton, South-West (Mr. Budgen) started his speech by condemning this debate as irrelevant and a complete waste of time. Therefore I had hopes that there would be a little sparkle and champagne in his speech. Unfortunately, he did not live up to expectations.

The hon. Member's comments about my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) and the Labour Party in general are in line with the hysterical comments coming from the Tory Party about the Labour Party. I am not surprised. Any party which has no policies whatsoever in any field whatsoever generally resorts to hysterical abuse of its opponents. In that respect the hon. Member was true to form.

One aspect of his speech interested me greatly. He dealt with the City, the collapse of the various financial institutions and the role of the Bank of England's lifeboat fund. I do not want to raise the disasters of Lord Barber and the previous Tory Administration. Both sides of the House are now unanimous in believing that the financial activities of the last Tory Government were utterly and totally disastrous. There is no need to repeat that fact.

We are constantly told by commentators from the Conservatives Benches, the Government Front Bench, the various financial institutions and financial columns of the serious newspapers that the City is full of experts. We are told that there are experts in every financial field, who perform wonders throughout the western world. Yet these same experts got themselves into an almighty plight between 1972 and 1975 when financial institutions were collapsing around their ears like derelict tenement buildings in Glasgow.

Those of us who represent the ordinary people of this country—

Photo of Mr John Evans Mr John Evans , Newton

Some of us represent more ordinary people than others. This applies particularly to those Labour Members who represent huge working-class areas. Also, some of us come from the same class as the ordinary people whom we represent.

I wonder whether we ordinary people are right to place any more faith and trust in the financial experts who made such a mess in 1972, 1973 and 1974. While we accept that the then Tory Cabinet was making a mess of things, the fact is that the experts in the City did not have to go along with them. They did that of their own free will, and they collapsed.

I turn to the national insurance surcharge. I am not at all happy at the imposition of an extra 1½ per cent. At least I am relieved that it is not to be 2½ per cent. I accept the argument that the surcharge can and probably will produce some unemployment if it stays on very long. I accept that it does not come into operation until October. I suspect that this is part of a package deal produced for the benefit of the City to persuade it to invest in Government funds.

I recognise that any financial charge that is likely to increase unemployment is bad in itself. But when we are faced with 1½ million unemployed people, anything that is likely to add to that unemployment is to be deplored. This probably will increase the pressures on employers to work more overtime, rather than employ more labour. I know that some of my hon. Friends have suggested that there should be legislation about overtime, but of course that is not possible and in some respects the idea is nonsense. However, there is no escaping the fact that the surcharge will increase the pressure to work more overtime rather than employ more labour.

Unfortunately we on this side of the House have no choice in the matter. We deplore the strategy of the Tory Party on the Finance Bill, and we deplore the cuts that were made in income tax. But now we are faced with a situation in which the Government must seek to restore the overall Budget strategy. Therefore, tonight we must go into the Lobby to support the imposition of the surcharge. We do not like it particularly but at least we like it a little better than we like the cuts in income tax.

While we would all like income tax to be cut as part of a national strategy, it cannot be cut, in fairness, in the way that the Opposition have forced upon the Government. I would far sooner have seen income tax cuts given to lower-paid workers. I would have liked to see the introduction of a lower tax band so that those on lower incomes would pay income tax at a much lower level than they do now. I accept that the present lower tax band is far too high. But the Opposition did not put forward that kind of strategy—a lower band of, say, 20 per cent.—because they were more concerned with people at the top end of the income scale. They show very little concern for those at the lower levels.

The Chancellor and the Prime Minister have both made it clear that the surcharge will not come into operation until October. I hope that it will be removed altogether after we are returned to office following a General Election in October. I hope that one of the first things that we shall do when we are returned—as we shall be—is to remove this surcharge.

The Opposition constantly attack the Government's plans and strategy, but we expect the Tories to offer some alternative strategy. Today's debate on the narrow issue of the increase in national insurance surcharge follows yesterday's important debate on unemployment. It has been suggested that the increase in the surcharge will result in a higher rate of unemployment. A total of 1·4 million people are unemployed in the United Kingdom, 6½ million in the EEC countries, and 15 million in the OECD countries. However, despite speeches from the Opposition Front Bench yesterday amounting to over an hour in length, the House was given not one constructive concrete suggestion about how to reduce unemployment. All we had were the usual slogans about reducing taxation, as though that would automatically improve employment, and we also heard that public expenditure should be reduced even further.

The people of this country have a right to hear what areas of public expenditure the Conservatives wish to cut. If the Conservatives intend to cut subsidies to private industry, to denationalise certain sections of publicly owned industry, and to abolish the National Enterprise Board, it is obvious that unemployment will rise. One has only to bear in mind the cost of maintaining a man in unemployment to appreciate that this covers a huge area of public expenditure.

In yesterday's debate on unemployment the hon. Member for Aberdeenshire, East (Mr. Henderson) asked my right hon. Friend the Secretary of State for Employment whether it was correct that the cost of supporting a married man with two children would be £4,000 per annum in transfer costs and loss of revenue. My right hon. Friend replied: On a quick mental calculation, I believe that the figure of £4,000 produced by the Treasury is an initial cost. I think that the average cost of sustaining a man in unemployment is lower than that—namely, about £50 to £60 a week."—[Official Report, 4th July 1978; Vol. 953, c. 273.] If we take the figure of £50 to £60 to maintain a man in unemployment, and if we had the good fortune to reduce unemployment by as much as a million, we would save in unemployment costs £2·5 billion. Surely all parties should be united in trying to slash that aspect of public expenditure. We could also benefit from the productive capacity of the individuals concerned, who would add to the wealth of our economy.

Whenever the House discusses industrial strategy, taxation and fiscal policy, the Tories harp on the constant theme of cutting public expenditure to the bone. However, if we cut public expenditure we all know that that will lead to considerable increases in unemployment. I challenge the Opposition Front Bench to tell the people of this country whether they intend to cut social security payments, pensions and unemployment benefits and whether they intend to operate those schemes nationally, as have the Labour Government. The country is entitled to an answer to those questions.

When we examine the amount of money involved in the cuts which the Tories allege they wish to make, we must face the consequences of that action. Where exactly do they intend to make those cuts? I ask the hon. Member for Blaby (Mr. Lawson) to say whether they intend to cut the social transfer payments. That seems to be the only major area in which they can achieve the level of cuts which they have in mind.

The Conservatives could—and probably will, if they ever have a chance to do so—increase the rate of VAT. However, that action, although perhaps all very well in theory, will hit the poorest section in the community. I may be accused of being paranoic about the EEC, and I appreciate the arguments within the Community to increase the level of VAT in the United Kingdom, but I sometimes wonder whether it may be part of the EEC strategy to increase VAT in this country to the level at which it stands among our European partners. We all know the budgetary ramifications of such a move for the EEC. However, I repeat that any increase in that tax must hit the poorest sections of the community. So far I have not mentioned VAT on food, which I recognise is zero-rated.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

We are considering VAT as it now exists in this country. It is not just a question of food being zero-rated, because the present VAT was specifically designed so that it did not fall on those items which were of greatest importance to low-income families. It is not just food; it is a number of other items as well.

Therefore, the effect on those families of putting up VAT will be less significant, for the reason I have just mentioned, than putting up the employer's contribution, which will fall on all things, including food and other items of greatest importance to those families on the lowest incomes.

Photo of Mr John Evans Mr John Evans , Newton

I do not think that the hon. Gentleman was present when I began my speech. I made it clear that I was not in the least happy about the introduction of the surcharge. I made the point that the surcharge was an alternative to what had been put forward. But the hon. Gentleman must accept that there are many items which bear VAT which the poorest sections of the community have to purchase. After all, if the poorest sections of the community do not pay income tax at all because they are the poorest sections, if they are asked to pay increased VAT on other articles, obviously they are hit the hardest. That would seem to me to be completely logical.

I doubt whether an incoming Tory Government would maintain VAT as it is presently constituted. In my view there would be pressures from the present Opposition Benches to spread VAT to a much wider range of goods. That would seem to be the logic of reducing direct taxation and increasing consumer spending. That would be a natural pressure and something that would result from policies which the Opposition suggest they would adopt.

The other aspect of the question of increasing VAT is the effect that that would have on the retail price index and the cost of living. As far as we are concerned, we have to acknowledge and support the Government's strategy on wages policy. It may be that some of us do not like some aspects of the Government's policy, but at least it is one which the present Administration have pursued with some success with the trade union movement over the past three years.

Anything which increases the cost of living, anything which makes it more difficult for people on lower incomes to make ends meet, will increase pressure upon trade unions to ask for bigger and bigger wage increases. This is one part of the strategy which the Opposition have completely and utterly ignored. They tell us that when they are returned to power they will abandon wage controls completely, but that story is one which I seem to have heard before. I believe I heard it in 1970, and yet within about 18 months the incoming Tory Government introduced a statutory wages policy.

We are faced with the difficulties of a situation in which the right hon. Lady the Leader of the Opposition talks about freedom for those in the industrial private sector, but with rigid cash limits for those in the public sector. It would seem that the right hon. Lady is not thinking through very clearly her policy in this respect. I do not know whether she is classifying the miners and the power workers as being in the private or the public sector. She has not spelt that out. But she knows full well that there are a number of workers involved in the public sector who will simply not acquiesce in her wishes in this respect.

It would appear to me to be an extremely divisive solution to our problems if the right hon. Lady is saying that two sections of workers shall be treated differently. Those in the private sector will presumably be able to obtain as much as they can screw out of their employers, irrespective of what it does to the cost of the goods which they produce, whereas those in the public sector will be restricted by rigid cash limits which will be laid down by the Tories and which presumably—again because of their demands for cuts in public expenditure—will be considerably less than the present cash limits on public expenditure.

We have to recognise that one aspect of the policy which the Government are pursuing is the need to restore that package. I have already said that I do not like some aspects of the package. I accept completely that the proposals put forward by the Opposition were divisive. If they had simply been meekly accepted by this Government, they would have made things much more difficult for the workers and their trade unions.

I think it also fair to say that one of the aspects that has not helped the Government at present has been the acceptance of the Boyle report on top people's pay. That will have repercussions within industry. The skilled workers who have been claiming that their differentials have been very badly eroded over the past three or four years will be looking with very great interest at the Boyle report and the Government's views on it.

One area at which we should be looking is the re-establishment of an incomes board. It seems that those who have had the benefit of that type of board—the top people, the police, firemen and, not so very long ago, teachers—have done rather well out of having some independent body to look at their remuneration.

Again, it may be that one of the many disasters of the previous Tory Administration was to abolish the National Board for Prices and Incomes. I would imagine that one of the things that will flow from a re-elected Labour Government is a very long, hard look, after discussions with the TUC and the CBI, at the question of the restoration of that board. Although Opposition Members did not like the Price Commission, it is doing an excellent job and is very well supported by the people.

Opposition Members will have to accept that if we are to have any sort of compact between the Government—irrespective of which party is in Government—and the workers and their trade unions, it is essential that it be based on a policy of fairness, and it must be seen to be fair by those in industry who actually produce the wealth. The speeches made by some Opposition Members seem to suggest that it is the financiers, the entrepreneurs and the insurance brokers who produce the wealth of this country. Without being doctrinaire and without being classified as a Red, I hope, I would remind Opposition Members that it is the workers who produce the wealth. One of the factors at which Opposition Members should look is the very sad management that we have had in Britain since the end of the war. It is that which has been our greatest failure.

I am sure that we all accept the argument that it is absolutely essential that we increase productivity and try to move from a low-wage, low-productivity economy to a high-wage, high-productivity economy. Unfortunately, however, until such time as we have management that is capable of organising our industry and of going out and winning orders throughout the world—no matter that we have the best workers in the world—with the type of management from which we too often suffer, we shall have very considerable difficulties.

Finally, it seems to be suggested that if the Opposition are returned to power at the next General Election, we shall go back to a free-for-all, and that those with the greatest muscle will be able to win the greatest rewards, and those with the hardest faces will be able to create the biggest fortunes. Let me remind the Opposition of something that was said a long time ago. If by some mischance the Tory Party is returned to power and we go back to a free-for-all, the Tories should never forget that the trade unions are also part of the "all", and they will defend their workers, come what may.

8.44 p.m.

Photo of Sir Nicholas Fairbairn Sir Nicholas Fairbairn , Kinross and West Perthshire

The hon. Member for Newton (Mr. Evans) said that he represented ordinary people, presumably on the assumption that there are others in the House who represent some other breed. I do not know whom the hon. Member regards as ordinary people. Perhaps they are high-wage trade unionists who live in council houses, or it may be others—I know not. Perhaps it is the inefficient managers as opposed to the efficient workers, as he calls them, as if managers do not work and those whom he classifies as workers do.

I want to deal with the ordinary people whom I represent. I represent people who work on farms, who work in shops, who work in hotels, who run garages and services in a vast rural area and who earn very much lower wages than those whom the hon. Member represents. I regard them, as I regard all mankind, as ordinary people. We in Scotland regard ourselves as all Jock Thompson's bairns and we do not make condescending distinctions, such as who is ordinary and who is not.

The people whom I represent and about whom I have told the House write to me regularly and say that if there is one element above all others which prevents them from employing other ordinary people it is, first, the national insurance contribution—not the surcharge, but the contribution in the first place—and, secondly, the vast number of statutory rules which Socialism imposes in its fantasy that humankind can be perfected and arranged by edict—

Photo of Sir Nicholas Fairbairn Sir Nicholas Fairbairn , Kinross and West Perthshire

I receive letters every week from ordinary people—

Photo of Mr John Evans Mr John Evans , Newton

What about VAT?

Photo of Sir Nicholas Fairbairn Sir Nicholas Fairbairn , Kinross and West Perthshire

Do not mock employment—that comes ill from Labour Members below the Gangway. If you wish to make a mockery of small firms, stand up and interrupt me.

Photo of Mr Oscar Murton Mr Oscar Murton , Poole

Order. The Chair makes a mockery of nobody.

Photo of Sir Nicholas Fairbairn Sir Nicholas Fairbairn , Kinross and West Perthshire

If each of those people could employ one more man or one more woman, or perhaps two more, the employment scene would be transformed. We must be absolutely clear that a sur- charge such as that proposed will ensure a reduction in employment. I gave an illustration earlier showing that on a typical farming estate the increase in the surcharge will mean an increase in costs of £4,000, which means that two workers must go because that is the cost of their wages. The increase cannot be met in any other way and there is no saving that can be made except by the sacrifice of employment. That is a miserable prospect, particularly for rural areas.

One fallacy that was raised tonight was that public expenditure, or employers' expenditure, is different from other types of expenditure. All public expenditure comes out of the pockets of ordinary people. It comes not from Santa Government or from rich employers who get it from the people, but from those who make the wealth. Those who make the wealth are those who work, whatever their station in life and whatever their job.

What I find most offensive is that all money spent by public bodies is spent infinitely less thriftily and diligently than money spent by individuals in their own interests. Outside the door of this Chamber is a box half the length of a coffin which has been made by the Department of the Environment at a cost of £874. Those who take the trouble to ring up a funeral undertaker, as I did, will find that a coffin in English oak, with brass handles and a lid, and lined with satin, would not cost £190. It is the waste of public money that causes taxes on the individual. It is important that we understand that the tax that the State takes from individuals affects ordinary people.

I am not so interested in financial institutions, and I am sure that I do not understand them, but I understand those who set up businesses, little shops, farms and factories to earn their living, and I understand what motivates them, which is the fact that they can make their enterprise work, make it profitable, and hand it on.

The seed corn of employment, the seed corn of the generation of wealth, is essential, for it is the pence that count, and not the pounds. The imposition that we are considering ensures that that flame is being damped, if not extinguished.

8.50 p.m.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

It is an ironical paradox that it is less than 24 hours since the House was bitterly disputing whether we should impose a guillotine to restrict the time available for discussing matters of major importance. Now we are coming to the end of this debate with a relief that is shared by the few who have attended it, and which is exceptional.

It is a debate which has been reminiscent of that feast in the gospel which could be kept going only—indeed, could be got started only—by bringing them in from the byways and hedges, a function which in this context is performed by the Whips. The wide area which the debate traversed was mainly very well known territory. But there was one little patch to which the hon. Member for Wolverhampton, South-West (Mr. Budgen) most usefully drew attention. It occurred in the speech of the hon. Member for Stoke-on-Trent, Central (Mr. Cant), where he found himself arguing that if the institutions would not lend money to a Government who had an embarrassing public sector borrowing requirement presently measures of some sort must be found to compel them to lend.

I do not think that that was at all an isolated or chance thought which the hon. Gentleman was ventilating. I have heard it before, and I dare say that we shall hear more of it again. Certainly, the hon. Member for Wolverhampton, South-West was fair in saying that it was not a Communist thought. Indeed, it is not a particularly Left-wing thought. It is a very old thought.

Since the earliest records of history the folly has been indulged in by kings and princes of forcing the bankers to lend to them money which they would not part with voluntarily. Perhaps before the policy is developed on the lines which the hon. Member for Stoke-on-Trent, Central was adumbrating it might be wise to look at some of the historical precedents.

In particular, I was reminded of that great emperor, that almost universal emperor Charles V, and his relations with Fugger, the banker of Augsburg. They had a long relationship, though not an entirely happy relationship. It was a relationship during which vast sums were advanced unwillingly by Fugger to the Emperor Charles V. But in the end it was not Fugger who went broke. It was Charles V. For once show that they can borrow only by compulsion and there will be very little credit left to a Government.

However, my only purpose in claiming the attention of the House for a few minutes at the close of this debate was to say that my hon. Friends and I do not propose to seek to deny this Ways and Means Resolution to the Government. I want briefly to indicate our reasons for having come to that conclusion.

This debate goes back, as so many debates seem to have done in the past two months, to the fateful night of 8th May, when the House temporarily took charge of the Budget and the Finance Bill and altered the Bill beyond the intentions of its parent. In referring to the deed of 8th May in a debate on 14th June, when an unsuccessful attempt was made to impose a cut upon the salary of the Chancellor of the Exchequer, I said that the debate of 8th May had raised two separate questions which ought to be kept separate. The first was whether the Budget and the Finance Bill had given sufficient priority to the reduction of direct taxation at the standard and higher rates. The second question, which was essentially separate from the first, was whether the public service borrowing requirement ought to be increased. I said that a decision upon the one did not carry with it a decision upon the other.

I proved to be mistaken in thinking that only two questions were raised. It turned out that a third question was raised or, at any rate, a different question was interpolated between the first, which we decided against the Government on 8th May, and the second, on which we believe that the Government should have their way, which is taking place tonight.

In that interpolated debate, the whole question of the Government's monetary management was raised and I expressed the belief that, in present circumstances, anything like a public service borrowing requirement of £8½ billion was unmanageable and a constant threat to monetary stability and that the events that immediately preceded that debate went a long way to support that view. Thas was the ground for censuring the management of the Chancellor of the Exchequer. It is not the subject of this debate which, in reality, is very narrow.

Throughout the whole of this Parliament, my hon. Friends and I have contended that the Government were attempting to borrow too much and that the public service borrowing requirement was not merely excessive but grossly excessive. We have therefore thought it our duty, consistently with that, not to support attempts to increase that borrowing requirement. That, after all, is elementary consistency. We are still of that mind. It is a point of view of which we have made no secret in the Province which we represent and a view which we have frequently stated and restated in financial debates in the House. Consistently with that view, we could not deny to the Government the opportunity to replace such a portion as they think necessary of the revenue that was diminished on 8th May.

Of course, those on the Opposition Front Bench, who are in some ambivalence in this matter, for they, too, have uttered statements adverse to the present size of the public service borrowing requirement, say that it is not the replacement of £300 million of revenue or the reduction of the potential borrowing requirement by £300 million to which they are opposed. They say that they are opposed to the way it is intended to be done—opposed simply to the method.

We are always in the difficulty in the House in financial debates that Oppositions do not have their choice of methods, but after listening to most of the debates on and since the Budget, I am prepared to say that whatever method the Government had brought forward this evening and whatever had been the object of a Ways and Means Resolution to replace £300 million of revenue, the Opposition would have found reasons for disagreeing with it.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

That is most interesting. It is unfortunate that our procedures do not allow us the opportunity of testing the claim of the hon. Member for Blaby (Mr. Lawson). It is unfortunate that we cannot have the opportunity of seeing the Government bring forward proposals for an increase in, for example, the petrol revenue. It would be interesting to see the reaction to that proposal. Alternatively, they might come forward with a proposal to increase the duty on wines and spirits, or tobacco.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

Yes, of course, something quite impracticable and over-hitting in the context of the Budget. The Opposition are safe in saying "Of course we would agree to a major increase in VAT". They are safe in saying that as they know that the Government have no intention of doing so. They are prepared to be against tax proposals. They are prepared to be in favour of tax proposals so long as they can be reasonably sure that the Government will not bring them forward.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

I am sorry to keep causing the hon. Member for Worthing (Mr. Higgins) to rise to his feet. However, he is getting a good deal of exercise. I cannot resist the recollection of a former Leader of the Conservative Party, who threatened to go to the country, but only when he was sure that he would win the impending Division.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

If the right hon. Gentleman genuinely believes what he has just said, why does he not join us in voting against the Government's proposal? If the Government still feel that they need to recoup the money that was denied to them, we can vote on the alternatives that they put forward until we get the right one.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

I do not happen to think that that would be a satisfactory way in which to legislate, in which to enact a Finance Bill. I do not believe that the hon. Gentleman thinks it satisfactory. Nor do I believe that when he was a Treasury Minister he would have thought it a good method with which to conduct a dialogue between the two sides of the House.

The House is faced with the question "Are you or are you not going to replace the major part of the revenue which, in order to rearrange the priorities in the Budget, you decide to reduce?" In other words, is the House prepared, whatever its views about the size of the net borrowing requirement and the difficulty of predicting the outturn of the net borrowing requirement, to increase the requirement by £300 million?

It would be inconsistent with all that I have said in the coursce of this Parliament and all that I have said on behalf of my hon. Friends as well as myself if we were to take that point of view. I believe that tonight the Government should get their Ways and Means Resolution.

9.3 p.m.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

The right hon. Member for Down, South (Mr. Powell) intervened late in the debate to announce that the Ulster Unionists are prepared, as I understand it, to support the resolution and the clause that goes with it. That must raise in the mind of the Chief Secretary the tantalising possibility that the Government might have been able to get their 2½ per cent. surcharge proposal through the House after all and need not have surrendered without a shot having been fired.

I cannot, however, allow the right hon. Gentleman to say that the Opposition would have opposed anything put forward to fill the gap, or even that part of the gap which the 1½ per cent. surcharge is now to fill, namely, two-thirds of the reduction in revenue produced by the income tax cuts of 8th May to which the right hon. Gentleman referred.

As my hon. Friend the Member for Worthing (Mr. Higgins) said, we made it clear from the beginning that we were prepared to accept the reduction to be recouped through, if need be, value added tax. I cannot recall one previous occasion when an Opposition have said "If you put forward a proposal to increase value added tax, we shall let it go through; we shall not oppose it."

The right hon. Member said that such a proposition is wholly impracticable and that that is why we put it forward. Far from its being impracticable, because of the regulator powers to raise value added tax by order, of which the House is well aware, it is considerably easier and quicker to recoup the money through value added tax than through the national insurance surcharge.

However, the right hon. Gentleman made one important point, for which I am grateful, when he echoed his successor, my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen), who is not in his place, by drawing the attention of the House to the remarks made by the hon. Member for Stoke-on-Trent, Central (Mr. Cant), who called for direction of investment. He called for the Government to have considerable powers of decision over where people's pensions and savings should be invested.

I think that my hon. Friend the Member for Wolverhampton, South-West and the right hon. Member for Down. South were right to draw attention to that point. It is such an important point that I think it is incumbent upon the Financial Secretary, when he replies to the debate, to say whether it is Government policy for there to be direction of investment. Indeed, because many hon. Members and people outside are worried about talk of this kind—as has been said, the hon. Member for Stoke-on-Trent, Central is normally sound and moderate—I hope that he will go further and assure the House that in no circumstances will the Government take or exercise these powers.

This debate on the Ways and Means Resolution for Government new clause No. 26 has turned out to be something of a general and, as one of my hon. Friends said, meandering economic debate. Therefore, I think that it might be helpful if I try not to meander, but to begin by returning to the specific subject of the payroll tax increase, which we are debating.

According to the Chief Secretary, when he opened the debate this afternoon, the clause and the increase in the payroll tax would not have been necessary had it not been for what he liked to call the irresponsibility of the Opposition. Therefore, it seems established that Labour Party policy is that to cut income tax is irresponsible. I am sure that that will be of great interest to the whole country when the time for a General Election comes.

However, to put the Chief Secretary's allegation in context, it might be worth recounting a brief history of the events which have led us to debate this new clause to raise the payroll tax, which was first imposed by the present Government last year, from 2 per cent. to 3½ per cent.

The possibility was first mentioned by the Chancellor in his thirteenth Budget Statement on 11th April, only to be dismissed. The terms in which he dismissed it were quoted by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), but they are so telling that it is worth quoting again from the Budget Statement. The Chancellor said: I do not believe it would be right to increase it so soon after it has been introduced, and at a time when unemployment is our major problem. It would increase industrial costs at a time when it is essential to improve our competitiveness and it would ultimately be largely passed on in higher prices at a time when the fight against inflation is at a crucial stage."—[Official Report, 11th April 1978; Vol. 947, c. 1204.] I stress the words "at a time", which occur three times in the Chancellor's Statement, to show not merely that he was opposed to this tax but was opposed to it in particular at this particular time. Therefore, it is absurd for the Government to turn to us and to say that at this particular time it would be wrong to increase VAT. The very undesirability of taking tonight's step at this particular time was the main reason why the Chancellor rejected the proposal put forward by the Liberal Party to increase the payroll tax.

At any rate, we then move on to 8th May—that historic day mentioned by the right hon. Member for Down, South—when, to the evident fury of the Prime Minister and the Chancellor, the Opposition cut the basic rate of income tax by 1p in the pound, making it clear at the same time that the £340 million that that would cost this year should be recovered elsewhere—preferably by trimming back the massive £4,000 million increase in public expenditure planned for this year. I think that my hon. Friend the Member for Hitchin (Mr. Stewart), in a most enlightening speech, demonstrated to some of the sceptics that this is indeed the real figure by which public expenditure is planned to increase this year. At any rate, that was the big money which the Government were so cross about losing.

The Prime Minister fulminated that we have destroyed what he called his family Budget. Of course, we do know one thing about the Prime Minister. It is that when he talks about the family he is absolutely sincere in his devotion to that cause. Anyone who has made his son-in-law ambassador in Washington clearly has a profound belief in the family.

What some of us on the Opposition Benches find difficult to understand, however, is why he imagines that the mil- lions of people who pay income tax at the basic rate—the vast majority of income taxpayers of this country—do not have families too, even though those families might not be as well placed as the Prime Minister's family.

The Chancellor of the Exchequer also complained, but on different grounds. He complained that we destroyed his carefully judged Budget strategy. I must say that the pristine perfection of that strategy was hard to discern from the beginning. After all, the minimum lending rate was put up by 1 per cent. on Budget day itself. Despite this, there was a total collapse of confidence. Within a matter of days, Government stocks fell by £1,000 million, equities fell by £2,000 million, and the pound fell to its lowest level for nine months.

All this happened within a few days of the Chancellor's carefully judged Budget strategy. Indeed, there was a further 1¼ per cent. increase in minimum lending rate before the Committee stage of the Bill, which is now on Report, even began. In short, it was quite clear that the strategy was a mess from the beginning, that markets were understandably shocked at the £3 billion increase in the public sector borrowing requirement, at a time of some slight recovery in the economy, at the incompatibility between the public sector borrowing requirement and the money supply target, and at the lunacy of attempting to have monetary and fiscal policies which were pulling in diametrically opposite directions.

The question was, what was the Chancellor going to do? In the debate on 8th May, before the House had reached a verdict, he said that if we cut the basic rate he would watch the situation closely".—[Official Report, 8th May 1978; Vol. 949, c. 817.] It is true that he also warned that he might increase corporation tax, that he might increase stamp duty, or that he might even—this was the third of the possibilities he mentioned—increase the national insurance surcharge which employers pay—the payroll tax. But his only commitment was to "watch the situation closely".

As confidence ebbed away further in the succeeding days and weeks, particularly following the revelation that the rate of growth in money supply in 1977–78—again, long before the cut in the basic rate—had exceeded the central target figure by about 50 per cent. and was accelerating, the Chancellor continued to play the part of a pathological voyeur, watching the situation but not actually doing anything himself. Indeed, when I asked him, at Treasury Question Time as late as 25th May—more than a fortnight after the income tax cuts—whether he intended to recoup the money either by trimming back public expenditure by £500 million or by finding some increases in taxation other than income tax, all that he could do was to mutter about the margin of error in the public sector borrowing requirement. He clearly implied then that he was hoping to do nothing by way of fiscal changes.

Then, very suddenly, a fortnight later, after almost two months of dithering, with the money supply clearly out of control and a 1976 style sterling crisis looming, it was announced outside the House on 8th June that there was to be a further increase in minimum lending rate, to 10 per cent. It was also announced that there were to be savage controls on bank lending and that there was to be a 2½ per cent. increase in the national insurance surcharge—the payroll tax—to 4½ per cent.

So important was this 2½ per cent. addition to the payroll tax that the Government insisted on going to the brink, to a confidence vote, on which the Government's very existence depended, in order to defend it the following week. That was not so, of course, for the 10 per cent. minimum lending rate. That was intended to be so ephemeral that the Chancellor stated in the debate on his salary on 14th June that he expected MLR to be cut in a matter of days—those were his words. Three weeks have elapsed since then, but MLR is still at 10 per cent. I do not know how many more days we shall have to wait. Perhaps tonight we may be told.

The irony is that instead of the 2½ per cent. national insurance surcharge enduring and the 10 per cent. MLR disappearing, the 10 per cent. MLR has endured and the 2½ per cent. surcharge has disappeared. It has gone as suddenly as it emerged, to be replaced by a 1½ per cent. surcharge to make a total payroll tax of 3½ per cent., if the clause goes through, as no doubt it will.

There is no explanation of this sudden change. There is no explanation for the abandonment of the doctrine that every penny of revenue lost in the tax cuts of 8th and 10th May must be recouped. Now only two-thirds is to be recouped, leaving a shortfall of £140 million. What about that? The Chancellor is still watching it, we were told today. The only explanation for the change, for why the 1½ per cent. increase is suddenly all right when a few days ago 2½ per cent. was regarded as essential, is the apparent desire of the Government to please the Liberal Party. This desire and attempt to please the Liberal Party, I admit, requires a considerable amount of nimble footwork.

The hon. Member for Cornwall, North (Mr. Pardoe) said very proudly in the debate earlier today that the Liberals always make clear exactly what their policies are. They do indeed, but it is never the same policy twice. In September 1976 the hon. Member said that we needed a progressive and graduated expenditure tax. He had an attack of the Meades then. A short while later his right hon. Friend the Leader of the Liberal Party called for a 20 per cent. value added tax. Now the Liberals' new policy, for the moment, as enunciated by the hon. Member for Cornwall, North, is a regionally variable payroll tax. But at what rate is this payroll tax to be levied? This is an important part of the Government's equation.

We know from the behaviour of the Liberals that they regard a 2 per cent. payroll tax as monstrous. At the end of 1976 they voted against it not once, but twice. They voted against the Ways and Means Resolution and against the relevant Bill on Second Reading. But a 4 per cent. payroll tax is intolerable, and that was what drove the Government to the very brink in the confidence vote, when they won by a majority of only five. It seems, however, that between the two there is a 3½ per cent. payroll tax, which, for some special reason, is the very quintessence of Liberal economic wisdom. This is the reductio ad absurcham of fine tuning elevated into a political principle.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

The regionally graduated payroll tax has been Liberal policy for the 12 years during which I have been in the House, and earlier than that. The progressive graduated expenditure tax is still Liberal policy, and not a touch of the Meades. We decided on that before the Meade committee reported. I am afraid that the hon. Gentleman has not been reading either the long-term or short-term policies of the Liberal Party, which happen to coincide.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

I wonder whether, to complete the picture of all the taxes which the Liberal Party would like to see imposed on the long-suffering British people, the hon. Member will tell us whether the 20 per cent. VAT which the leader of the Liberal Party advocated—

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Yes he did. He said it in October 1976.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

—is still Liberal policy. There is a certain amount of wriggling going on now, but let us leave the Liberals to wriggle and return to the Labour Party. Seldom, if ever, have a Government been more irresolute. It has been a diary of dither, a course so erratic that even the Hampton Court maze looks like a straight line in comparison.

This tax that we are debating was first adumbrated by the then Chancellor of the Exchequer, Mr. Selwyn Lloyd, in the Budget of 1961, as I am sure the right hon. Member for Down, South will keenly recall. That was at a time when unemployment was only 1½ per cent.—very different from today. The Chancellor then felt that there was a case for using such a payroll tax as a regulator, to make more economic use of that precious and scarce resource, labour.

He was violently attacked by the then Shadow Chancellor, the right hon. Member for Huyton (Sir H. Wilson), who said: The idea amazes me.…Has he considered the effect that the new proposal will have on industrial relations? Does not he feel that the workers will consider themselves to have been cheated when they think that employers can afford, or can be made to afford, to pay the labour tax to the Government—while, at the same time, those same employers are refusing to give them wage rises?"[Official Report, 18th April 1961; Vol. 658, c. 986.] One begins to understand why this tax commends itself to the present Prime Minister—because anything of which his predecessor, the right hon. Member for Huyton, disapproved is almost bound to do so. However, as a result of criticism, not only by the right hon. Member for Hunyton but from outside the House, the proposal was never implemented.

As was said then and has been said many times today, it is a tax on jobs, running—if the amendment goes through—along with the existing surcharge of 2 per cent. at a total of £2½ billion in a full year, or about 15 times as much as the temporary employment subsidy. There can be nothing more bizarre than taxing and subsidising jobs at the same time. Moreover, it is jobs with a future which will be taxed heavily—some of them destroyed—in order to save temporary jobs, which in most cases have no future at all. So much for the Government's industrial strategy.

Labour Members who are concerned about import penetration should also remember that the surcharge is a tax on exports and not on imports—unlike VAT, which taxes imports but not exports. The Chancellor pointed this out on 22nd July 1976. Introducing the first round of this tax, he said: Any price increases resulting from the national insurance increase will also be felt by exports, which is not the case with VAT. With the present level of competitiveness, such a price increase can well be afforded by British industry."—[Official Report, 22nd July 1976; Vol. 915, c. 2021.] I doubt whether that is the view of British industry at present.

Photo of Mr Ronald Thomas Mr Ronald Thomas , Bristol North West

Does the hon. Gentleman not also agree that VAT or any tax on expenditure must, ipso facto, hit those least able to afford it—especially the low-paid, pensioners, the unemployed and those on supplementary benefits?

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Again the hon. Gentleman is wrong. As my hon. Friend the Member for Worthing pointed out, VAT does not fall on the four basic essentials of food, fuel, transport and housing. The payroll tax falls on precisely those industries, along with all other industries. Again, therefore, the picture is the very reverse of what the hon. Gentleman has just maintained.

Next, I take the effect on prices. There has been much argument about the effect on prices—whether it is as great as that of value added tax or not. I think that it is foolish to go into this question in fine detail, trying to work out exactly the percentage effect on the RPI, but one thing can be said with absolute clarity: in so far as the tax is passed on it will feed into prices, and in so far as it is not passed on it will be a tax on employment and lead to more unemployment. Those are the two effects, and it must be one or the other. The Government cannot maintain that neither effect will occur.

Moreover, as has been said, the surcharge has to be introduced at a rate higher than the corresponding rate that would have been needed for VAT, for the very reason that VAT could have been adjusted by order, by the regulator, straight away in May, with almost a full year to run. Indeed, to take up a point made by the right hon. Member for Down, South, the regulator could have been used also for the excise duties, and this would to some extent have made up for the fact that without any increase the excise duties fall year by year in real terms in times of inflation.

It could have been done by the regulator immediately in May, within a week, as was done when the Chancellor so unwisely reduced VAT from 10 per cent. to 8 per cent. in July 1974. That could have been done within a week, whereas this surcharge does not come in until October, six months through the year, so that there has to be a higher rate in order to bring in the same amount of revenue.

But, of course, that is the whole point of this surcharge. All the economic arguments are against it, but the great point is that it does not come in until October, and the effect will not be felt until after October. That is what lies behind this proposal, and nothing else. It is an attempt to defer any impact until after the General Election. Everything else has been subordinated to that one objective.

Although, as I said earlier, we should have accepted increases in VAT or excise duties, those would still have been a second-best to savings in public expenditure. But the present Government, and any Labour Government—we have seen this time after time—will always prefer to clobber the private sector. I do not think that the full extent of the way this tax does that is fully appreciated. Ninety per cent. of the burden of the surcharge falls on the private sector. Almost in an aside, prompted, by my right hon. and learned Friend the Member for Surrey, East—he would not otherwise have said it, and it was not in his opening speech today—the Chief Secretary mentioned that cash limits will be adjusted upwards, that the rate support grant will be increased, and central Government employees will not have their pay block cash limits confined, but they will be increased as a result of the imposition of the surcharge.

In other words, the surcharge will not fall on the public sector at all, save on nationalised industry, whereas it falls totally and without remission on the private sector, 90 per cent. of the total burden falling on the private sector.

That is not surprising. It is characteristic of the Labour Party. For the benefit of the House, which is filling up a little more than was the case earlier during the debate, I shall quote from the Labour Party's last party-political broadcast. This was an important statement of the Government's policy: The Labour Party's aim is the common ownership of the means of production

Hon. Members:

Hear, hear.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Hon. Members opposite cheer. Wholesale nationalisation is still clearly the Labour Party's policy, as enunciated in its last party-political broadcast. A tax which falls as to 90 per cent. of its burden on the private sector is a further way of pursuing that policy.

The Chancellor of the Exchequer, of course, does not use precisely those terms. He is somewhat less open. When speaking on 13th June to the conference of the National and Local Government Officers' Association, he said this on the question of public expenditure: And if we had curt public expenditure, the loss of jobs in the public sector would have been shattering and immediate. Evidently, for the Chancellor, it is quite all right for the private sector to suffer a loss of jobs. What he cannot tolerate is any loss of jobs in the public sector.

I do not wish to detain the House much longer, but there is an important point here which should be examined. I refer to the argument which we heard during the debate that cuts in public expenditure necessarily and of themselves cause unemployment. I am surprised to hear that from the Government Benches, because we all remember the Prime Minister's teach-in at the Labour Party conference of 1976, when he made that very remarkable speech in which he said that increasing public expenditure was no way of creating more jobs and that it would just create more inflation. Obviously, if increasing public expenditure is no way of creating more jobs, then, by the same token, cutting public expenditure will not destroy jobs.

However, let us forget about the Prime Minister's doctrine, although he was absolutely right, and look at what has actually happened. It is a very striking record. In the two years between 1973–74 and 1975–76, public expenditure rose, at constant 1976–77 prices, by £6¼ billion. Over the next two years, between 1975–76 and 1977–78, public expenditure fell, on the same price basis, by £4 billion. Yet what happened to unemployment over that period? In the first two-year period it rose from 600,000 to 1 million, an increase of 400,000. Over the second two-year period it rose from 1 million to 1·4 million, also an increase of 400,000. In other words, the trend of unemployment was in no way affected, even though in the first two-year period public expenditure was rising very rapidly, while in the second two-year period it was cut with unprecedented severity at the behest of the International Monetary Fund.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

The hon. Member for Cornwall, North should calm down. I know that he finds it difficult to do that, but if he does not want to listen to what I am saying, I draw his attention to an interesting and important article in the current issue of the London Business School's Economic Outlook. I know how carefully he reads these documents, and I know what great respect he pays to them. He should do so with this one. There he will see an article called "The lessons of 1976–77: A case study in fiscal policy." It is demonstrated there, I should have thought beyond any reasonable doubt—even beyond the reasonable doubts of the hon. Member for Cornwall, North—that between 1976–77 and 1977–78, when the bulk of the public expenditure cuts came, the rise in unemployment was the lowest since the present Government took office.

Photo of Mr Martin Flannery Mr Martin Flannery , Sheffield, Hillsborough

The hon. Gentleman's economics really are dazzling. Does not he realise, if he is honest about it, that unemployment has increased all over western Europe and, indeed, throughout the western world? Is it not a fact that when unemployment increases, a compassionate Minister will see to it that public expenditure is bound to be increased in order to keep those people alive? Is it not a fact that increased public expenditure must follow increased unemployment if we are compassionate in any way at all?

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

I do not think that the hon. Gentleman was listening to what I was saying. I was saying that the lowest rate of increase in unemployment which has occurred during the whole of this Government's lifetime occurred when they were making the biggest cuts in public expenditure. That is the important point. What is also important is that all the predictions made by the Chancellor—and others who supported him at that time, such as Lord Kaldor—about the employment effect of public expenditure cuts, were proved wholly and totally wrong. I shall not detain the House tonight by quoting, although I could, in order to demonstrate this. Moreover, those of us who said that there would not be these unemployment consequences, which of course none of us wanted to see, were proved absolutely right.

Those unemployment consequences did not occur. So let us have no more of this myth that cutting public expenditure of itself causes an increase in unemployment, because it has not happened.

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

I am not asking the hon. Member to do it now, but perhaps he would look at the distinction between public investment and public current expenditure. If he does, he will see that it presents a rather different picture.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

As another Government supporter is telling the hon. Member, it is usually alleged that the employment consequences of cutting capital expenditure are simply passed on to the construction industry, for example, so I do not think that the distinction is an important one. Be that as it may, the striking fact is what happened, and people have to adjust their theories about how the economy works to accord with what happens rather than try to paint a false picture of what happens to accord with their pet theories.

Of course, the tragedy now is that the Government are undoing all the good which was done at the behest of the International Monetary Fund—that package of which public expenditure cuts were an essential part and which, as I say, led not to adverse effects on unemployment but to beneficial effects on the rate of inflation. All this is being undone as a result of the decision, at current prices, to increase expenditure by £4 billion this year alone.

I ask right hon. and hon. Members to imagine the tax cuts which would have been possible if public expenditure were not roaring ahead at the present rate this year. If it were not roaring ahead at the rate that it is, with a £4,000 million increase this year alone, we would not now be debating this misbegotten measure, and I invite the House to reject it.

9.36 p.m.

Photo of Mr Robert Sheldon Mr Robert Sheldon The Financial Secretary to the Treasury

We have had what the hon. Member for Blaby (Mr. Lawson) called a rather meandering debate. I think that it has been a very wide-ranging debate, but one of the kind to which we are well accustomed as a result of the number of general discussions of this type which we have on the Floor of the House.

In this Ways and Means Resolution, we have the proposal to increase the national insurance surcharge by a further 1½ per cent., which will produce about £360 million in 1978–79, £900 million in the full year, and reduce the PSBR by £300 million. As we know, it is to come into effect on 2nd October. The purpose of it, of course, is to replace the income tax reductions which were carried in Committee against the wishes of the Gov- eminent. Those reductions cost £520 million in the full year and £440 million in the current year.

The amendments made in Committee to reduce the basic rate of income tax for the income tax year 1978–79 from 34 per cent. to 33 per cent. as well as the amendments made on the thresholds of the higher rate bands have no statutory force until the enactment of the Finance Bill. If they are confirmed, they will take effect as from 6th April 1978.

A number of further pieces of information will be available in the press release published today by the Inland Revenue. A certain number of further details will be available for hon. Members and others as a result of that.

The right hon. Member for Down, South (Mr. Powell) drew attention to the fact that in these debates the Opposition normally put down their amendments for political reasons to express attitudes which they wish to convey both to their supporters outside and to adherents to their general philosophy. The early debates in Committee called for a greater measure of responsibility because the Opposition were then in a position to secure implementation of the amendments which they had put down. I note that the right hon. Member for Down, South and others followed through the logic of that power which Oppositions rarely have in the responsibility, which he accepted, to make sure that the Budget judgment itself was not vitiated and that the money which had been removed as a result of those income tax amendments was made good in other ways. We note that the Opposition will not support this measure. It is very difficult to understand how our parliamentary processes could proceed if Oppositions behaved in this way.

These changes will have hardly any effect on the retail price index this year. By the end of 1979 there will be an increase of less than 1 per cent. During the first half of 1979 the demand effects of the NIS increase will not be much different in size from the effects of additional income tax changes for which the Opposition voted. Thereafter there should be a net contraction. Of course, the Budget of 1979 will give us the opportunity to correct the situation that may arise then, and that is an opportunity of which we shall make full use in due course.

The construction of this year's Budget, as announced by the Chancellor, had two main features. The first was to create the conditions for a successful wage round. We felt that the changes introduced by the Opposition hardly improved the possibilities of that, and constrained us in our reactions.

The second feature was to remain within the ceiling of £8·5 billion for the public sector borrowing requirement. The whole House has accepted that it is right to keep within that ceiling. In fact, the right hon. and learned Member for Surrey, East (Sir G. Howe), in moving the first of the Tory amendments, said that he did not wish to increase the PSBR. Yet the purpose of his amendment was to do just that.

A lot of work goes into a Budget: account must be taken of economic, financial and fiscal matters. It was necessary to preserve the essential strategy that I have outlined, and the alternatives for doing so were that income tax would be left as it was, the national insurance surcharge, or a change in VAT and customs and excise duties. I list them in descending order of desirability.

The national insurance surcharge was a measure that had to be introduced to recoup most of the money that had been forgone as a result of the Tory amendments. I would have far preferred to see the original tax proposals passed intact, even though they have certain disadvantages, as some of my hon. Friends have pointed out. But the national insurance surcharge is better than VAT.

If we had increased the standard rate of VAT to produce the same amount of money as the NIS, starting in July, we would have needed a 2·8 per cent. increase in the standard rate. Had we introduced a uniform rate of VAT, that rate would have had to be more than 11 per cent. The unemployment effects arising from that would have been greater than those from the national insurance surcharge. Had we considered Customs and Excise duties there would have been further problems and difficulties.

The right hon. and learned Member for Surrey, East pointed out the decreases in payroll taxes in other countries. I do not think that we should go into a comparison of league tables in these matters. But certainly if we look at all our Continental competitors we see that the employers' national insurance contribution and payroll tax is much higher than ours. We are in the lower part of the table. The imposition that we are placing upon employers generally is far less than that placed on those in our competitor countries.

My hon. Friend the Member for Newton (Mr. Evans) pointed out that yesterday's debate dealt with a number of these points. In that debate we had contributions from the same side from the right hon. Member for Leeds, North-East (Sir K. Joseph) and the right hon. Member for Lowestoft (Mr. Prior). Those right hon. Gentlemen should normally be debating against each other, but yesterday they were in a debate dealing with the same motion. Students in the art of political compromise recognised that exercise for the vintage occasion it was.

The first one to shift his position was the right hon. Member for Leeds, North-East. He is the director of the Centre for Policy Studies. If we look at one of its outstanding publications—I suppose it can be regarded as near as anything to the Tory Bible on monetarism—written by Tim Congdon, it says on page 25: The best advice that an economist can give to a finance minister or Chancellor of the Exchequer is the quietest injunction 'Do nothing except control the money supply'. It was that which has formed the basis of the thinking of the right hon. Member for Leeds, North-East and of so much Conservative political and economic thinking in the past few years.

It was this stand that led to the silliest comment on economic policy which has been made this year—that made by the hon. Member for Blaby (Mr. Lawson), that the Bank of England should implement under legislative direction the control of money supply. That kind of extremist statement is the result of a period in the history of the Tory Party at which its members look back in horror and anguish. This happened on our own side when we look back at 1931. Conservatives look back to the year 1974 in a way that is not perhaps altogether dissimilar.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Let me say this in defence of my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph), since he is not present and the Minister is attacking him. I do not know whether the Minister informed my right hon. Friend that he would be attacking him. My right hon. Friend published a pamphlet two years ago entitled "Monetarism is not enough". It would be more sensible to build on the considerable common ground that exists on this technical matter rather than try to invent chimeras and then attack them.

Photo of Mr Robert Sheldon Mr Robert Sheldon The Financial Secretary to the Treasury

I shall be coming to the pamphlet "Monetarism is not enough". There has been a change. I have been a student of that change and I shall seek to record it. I believe it is right that we should note alterations in policy as they take place and as we approach the next General Election.

When we see the Tory obsession with the events of 1974, and when we see the products of the committees set up by Lord Carrington and the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), we can well understand why they dearly wish to hive off this problem to some other body—whether it be the Bank of England or somebody else—to regulate details of money supply. When awkward trade unionists say that they wish to do this or that, they can then be sent to the authority which is dealing with that part of the problem. But we know that one cannot hive off those political decisions because they rest in this House and will always return here.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

I am getting slightly schizophrenic on this subject. I have listened to the remarks of my right hon. Friend the Chancellor of the Exchequer, who is obviously a convert to the monetary pragmatism of the Bank of England, and then today I have heard the comments of my right hon. Friend the Financial Secretary, who is a faithful adherent to Treasury Keynesianism. I want to be a loyal supporter of the Government.

Photo of Mr Robert Sheldon Mr Robert Sheldon The Financial Secretary to the Treasury

I shall do my best to retain the loyalty of my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant), and I hope I shall succeed. We have seen in the Opposition a change from the dogma "Do nothing except control the money supply" to political reality when they are faced with the prospect of a General Election. We know that the right hon. Member for Leeds, North-East takes the view that monetarism is not enough. Then we are told by the right hon. Member for Lowestoft that there is no panacea or simple solution to the problem. But the right hon. Member for Leeds, North-East says that the Labour Party's attitude lies in monetarism, plus subsidy, and he says that the Tories want less regulation.

What are the subsidies which the right hon. Member for Leeds, North-East does not want? The right hon. Member for Lowestoft said that we must not cut off the temporary employment subsidy suddenly, nor must we cut off other subsidies that exist to improve employment opportunities. He said that we must examine these subsidies very carefully. We hear the language of the man who understands that an election is coming when he says "We had better be careful about what we say about cutting subsidies."

When the right hon. Gentleman talks about fewer regulations, what regulations is he talking about? A regulation for which the Opposition have expressed their utter contempt is the Employment Protection Act. The right hon. Member for Lowestoft gave an undertaking yesterday that there would be no repeal of it and no amendments to it without consultation, and that there would be stability. I do not know what is left of the aims of the right hon. Member for Leeds, North-East.

When the right hon. Member for Lowestoft talked about pay policy, he spoke of something between leap-frogging pay claims and a rigid pay policy. I think that that covers most of us, does it not? Most of us want something between leapfrogging pay claims and rigid pay policy.

The right hon. Member for Leeds, North-East listened to all this and he heard about the subsidies continuing, the regulations remaining and the pay policy that was implicit. He must have asked himself whether this was the great message for which he wandered into the wilderness for four years, searching for answers and whether this would be the result of the years of work which he dedicated to the Centre for Policy Studies. Were these the tablets for which he climbed Mount Sinai? I must say that it hardly seems to have been worth the effort. He could have packed a number of his hon. Friends into a room and come up with a solution that was not much different from that.

The hon. Member for Blaby, in asking for the income tax changes on 8th May 1978, justified them by saying that they were a boost to supply—not a boost to demand. The argument would presumably be that through incentives we would boost supply without having the changes of demand. I understand this argument. It is basically an argument that demand management is what Labour does and supply boosting is what Conservatives do. Either way it reduces the levels of taxation, but when the Conservatives do it, that is boosting supply, and when Labour does it, we are boosting demand.

These convolutions of thought by the hon. Gentleman are not acceptable. When we examine them, we see them for what they are. Tax cuts, whatever they are, whoever they are done by, result in people going out to buy goods that they otherwise might not have bought. We also hope that they will produce more goods.

We had an example of boosting supply by a Conservative Government; they did it in 1970. They cut income tax by sixpence in the pound. Of course, they would say, that was boosting supply, not increasing demand. We saw what happened on that occasion, in October 1970. The new Tory Government announced tax cuts, worth, at present prices, about £150 million in 1970–71.

Who received the benefits of those tax cuts? They were cuts in income tax and in corporation tax. What happened? Industry and production stayed essentially flat, right through to the end of 1971. Investment in manufacturing industry promptly started turning downwards, and unemployment, one and a half years later, had increased by 300,000. That was the result of the kind of boost that the Tories gave.

We have to ask the question: whose supply are we boosting? If we take the typical man—the Chancellor referred to him in his Budget Statement—earning £75 a week, we find that as a result of the Tory amendments supply was boosted to those people to the extent of £14 per year. The man getting £25,000 a year got a boost of £504. So whose supply were we boosting? If we are to argue that what we need is to provide a boost, then the boost needs to be to all those who are producing and not only to a particular section of them.

If the Opposition had wanted this boost to apply generally, they could, for the same amount of money, have tabled an amendment to increase the tax thresholds. That option was available to them. Approximately the same amount of money would increase the threshold by £50 for a single person and £80 for a married person. The Opposition did not do that. They brought about a selective increase to improve the tax position of those people they felt ought to get advantage.

My right hon. Friend the Chancellor of the Duchy of Lancaster is quite right when he says that we shall have to ensure that the high levels of taxation, which were essential and necessary as a result of the position over the past few years, will need to be altered. I accept that, and the Chancellor of the Exchequer accepts it. In the last few years we have seen the price that the country has—rightly—paid in order to ensure that where the living standards of so many people had to be restricted, there has been greater sacrifice called for from those who had the greatest ability to bear that sacrifice. That is what we did and what we have achieved.

If the result has been, as I believe it has been, to unite and knit together our country, it has been a price well worth the paying. If Opposition Members had remained in power with their divisive policies, which were only half way implemented and not fully implemented, we might have seen a much more dangerous situation in this country.

We do believe that income tax needs to be reduced. We look forward to seeing these further reductions in our next Budget. But these reductions need to apply to all taxpayers. The original Budget strategy was the one that we would have wished to see carried through. The Opposition decided otherwise, and we have had to come to the House with the next best alternative—that which is before us.

I ask the House to approve the motion

Question put:

The House divided: Ayes 284, Noes 270.

Division No. 2451]AYES[9.57 p.m.
Abse, LeoFaulds, AndrewMcMillan, Tom (Glasgow C)
Allaun, FrankFernyhough, Rt Hon E.McNamara, Kevin
Anderson, DonaldFlannery, MartinMadden, Max
Archer, Rt Hon PeterFletcher, L. R. (Ilkeston)Magee, Bryan
Armstrong, ErnestFletcher, Ted (Darlington)Manor., Simon
Ashley, JackFoot, Rt Hon MichaelMallalieu, J. P. W.
Ashton, JoeFord, BenMarks, Kenneth
Atkins, Ronald (Preston N)Forrester, JohnMarshall, Dr. Edmund (Goole)
Atkinson, Norman (H'gey Tott'ham)Fowler, Gerald (The Wrekin)Marshall, Jim (Leicester S)
Bagier, Gordon A. T.Fraser, John (Lambeth, N'w'd)Mason, Rt Hon Roy
Barnett, Guy (Greenwich)Freeson, Rt Hon ReginaldMaynard, Miss Joan
Barnett, Rt Hon Joel (Heywood)Freud, ClementMeacher, Michael
Bates, AltGarrett, John (Norwich S)Mellish, Rt Hon Robert
Bean, R. E.Garrett, W. E. (Wallsend)Mikardo, Ian
Belth, A. J.George, BruceMillan, Rt Hon Bruce
Benn, Rt Hon Anthony WedgwoodGilbert, Rt Hon Dr JohnMiller, Dr M. S. (E Kilbride)
Bennett, Andrew (Stockport N)Ginsburg, DavidMitchell, Austin (Grimsby)
Bidwell, SydneyGould, BryanMolloy, William
Bishop, Rt Hon EdwardGourlay, HarryMoonman, Eric
Blenkinsop, ArthurGraham, TedMorris, Alfred (Wythenshawe)
Boardman, H.Grant, John (Islington C)Morris, Rt Hon J. (Aberavon)
Booth, Rt Hon AlbertGrocott, BruceMoyle, Rt. Hon. Roland
Boothroyd, Miss BettyHamilton, W. W. (Central Fife)Mulley, Rt Hon Frederick
Bottomley, Rt Hon ArthurHardy, PeterMurray, Rt Hon Ronald King
Boyden, James (Bish Auck)Harrison, Rt Hon WalterNewens, Stanley
Bradley, TomHart, Rt Hon JudithNoble, Mike
Bray, Or JeremyHattersley, Rt Hon RoyOakes, Gordon
Brown, Hugh D. (Provan)Hayman, Mrs HeleneOgden, Eric
Brown, Robert C. (Newcastle W)Healey, Rt Hon DenisO'Halloran, Michael
Buchan, NormanHeffer, Eric S.Orbach, Maurice
Buchanan, RichardHooley, FrankOrme, Rt Hon Stanley
Callaghan, Rt Hon J. (Cardiff SE)Horam, JohnOvenden, John
Callaghan, Jim (Middleton & P)Howell, Rt Hon Denis (B'ham, Sm H)Padley, Walter
Campbell, IanHowells, Geraint (Cardigan)Palmer, Arthur
Canavan, DennisHoyle, Doug (Nelson)Pardoe, John
Cant, R. B.Huckfield, LesPark, George
Carmichael, NellHughes, Rt Hon C. (Anglesey)Parker, John
Carter, RayHughes, Robert (Aberdeen N)Parry, Robert
Carter-Jones, LewisHughes, Roy (Newport)Pavitt, Laurie
Cartwright, JohnIrvine, Rt Hon Sir A. (Edge Hill)Pendry, Tom
Castle, Rt Hon BarbaraIrving, Rt Hon S. (Dartford)Penhaligon, David
Clemitson, IvorJackson, Colin (Brighouse)Perry, Ernest
Cocks, Rt Hon Michael (Bristol S)Jackson, Miss Margaret (Lincoln)Price, C. (Lewisham W)
Cohen, StanleyJanner, GrevillePrice, William (Rugby)
Conlan, BernardJay, Rt Hon DouglasRadice, Giles
Cook, Robin F. (Edin C)Jeger, Mrs LenaRees, Rt Hon Merlyn (Leeds S)
Corbett, RobinJenkins, Hugh (Putney)Richardson, Miss Jo
Cowans, HarryJohn, BrynmorRoberts, Gwilym (Cannock)
Cox, Thomas (Tooting)Johnson, James (Hull West)Robertson, George (Hamilton)
Craigen, Jim (Maryhill)Johnson, Walter (Derby S)Robertson, John (Paisley)
Crawshaw, RichardJohnston, Russell (Inverness)Robinson, Geoffrey
Cronin, JohnJones, Alec (Rhondda)Roderick, Caerwyn
Crowther, Stan (Rotherham)Jones, Dan (Burnley)Rodgers, George (Chorley)
Cryer, BobJudd, FrankRodgers, Rt Hon William (Stockton)
Cunningham, Dr J. (Whiteh)Kaufman, Rt Hon GeraldRooker, J. W.
Davidson, ArthurKelley, RichardRoper, John
Davies, Bryan (Enfield N)Kerr, RussellRose, Paul B.
Davies, Rt Hon DenzilKilroy-Silk, RobertRoss, Stephen (Isle of Wight)
Davies, Ifor (Gower)Kinnock, NeilRoss, Rt Hon W. (Kilmarnock)
Davis, Clinton (Hackney C)Lambie, DavidRowlands, Ted
Deakins, EricLamborn, HarryRyman, John
Dean, Joseph (Leeds West)Lamond, JamesSandelson, Neville
Dell, Rt Hon EdmundLatham, Arthur (Paddington)Sedgemore, Brian
Dempsey, JamesLeadbitter, TedSelby, Harry
Dewar, DonaldLee, JohnSever, John
Doig PeterLever, Rt Hon HaroldShaw, Arnold (llford South)
Dormand, J. D.Lewis, Ron (Carlisle)Sheldon, Rt Hon Robert
Douglas-Mann, BruceLitterick, TomShore, Rt Hon Peter
Duffy, A. E. P.Loyden, EddieShort, Mrs Renée (Wolv NE)
Dunn, James A.Luard, EvanSilkin, Rt Hon John (Deptford)
Dunnett, JackLyon, Alexander (York)Silkin, Rt Hon S. C. (Dulwich)
Eadie, AlexLyons, Edward (Bradford W)Sillars, James
Edge, GeoffMabon, Rt Hon Dr J. DicksonSilverman, Julius
Ellis, John (Brigg & Scun)McCartney, HughSkinner, Dennis
English, MichaelMcDonald, Dr OonaghSmith, Cyril (Rochdale)
Evans, Fred (Caerphilly)McElhone, FrankSmith, Rt. Hon. John (N Lanarkshire)
Evans, loan (Aberdare)MacFarcuhar, RoderickSnape, Peter
Evans, John (Newton)McGuire, Michael (Ince)Spriggs, Leslie
Ewing, Harry (Stirling)Maclennan, RobertStallard, A. W.
Steel, Rt Hon DavidTomney, FrankWhitlock, William
Stewart, Rt Hon M. (Fulham)Torney, TomWilley, Rt Hon Frederick
Stoddart, DavidTuck, RaphaelWilliams, Rt Hon Alan (Swansea W)
Stott, RogerUrwin, T. W.Williams, Alan Lee (Hornch'ch)
Strang, GavinVarley, Rt Hon Eric G.Williams, Rt Hon Shirley (Hertford)
Strauss, Rt Hon G. R.Wainwright, Edwin (Dearne V)Williams, Sir Thomas (Warrington)
Summerskill, Hon Dr ShirleyWainwright, Richard (Colne V)Wilson, Rt Hon Sir Harold (Huyton)
Swain, ThomasWalker, Harold (Doncaster)Wilson, William (Coventry SE)
Taylor, Mrs Ann (Bolton W)Walker, Terry (Kingswood)Wise, Mrs Audrey
Thomas, Jeffrey (Abertillery)Ward, MichaelWoodall, Alec
Thomas, Mike (Newcastle E)Watkins, DavidWoof, Robert
Thomas, Ron (Bristol NW)Weetch, KenWrigglesworth, Ian
Thorne, Stan (Preston South)Weitzman, DavidYoung, David (Bolton E)
Tierney, SydneyWellbeloved, James
Tiley, JohnWhite, Frank R. (Bury)TELLERS FOR THE AYES:
Tinn, JamesWhite, James (Pollok)Mr. James Hamilton and
Tomlinson, JohnWhitehead, PhillipMr. Donald Coleman-
NOES
Adley, RobertFairbairn, NicholasKershaw, Anthony
Aitken, JonathanFairgreve. RussellKilfedder, James
Alison, MichaelFarr, JohnKimball, Marcus
Arnold, TomFell, AnthonyKing, Evelyn (South Dorset)
Atkins, Rt Hon H. (Spelthorne)Finsberg, GeoffreyKing, Tom (Bridgwater)
Atkinson, David (B'mouth, East)Fisher, Sir NigelKnight, Mrs Jill
Awdry, DanielFletcher, Ales (Edinburgh N)Knox, David
Bain, Mrs MargaretCookes, Miss JanetLamont, Norman
Baker, KennethForman, NigelLangford-Holt, Sir John
Banks, RobertFowler, Norman (Sutton C'f'd)Latham, Michael (Melton)
Bell, RonaldFox, MarcusLawrence, Ivan
Bendall, VivianFraser, Rt Hon H. (Stafford & St)Lawson, Nigel
Bennett, Sir Frederic (Torbay)Fry, PeterLester, Jim (Beeston)
Bennett, Dr Reginald (Fareham)Golbralth, H[...] T. G. D.Lewis, Kenneth (Rutland)
Benyon, W.Gardiner, George (Reigate)Lloyd, Ian
Berry, Hon AnthonyGardiner, Edward (S Fylde)Loveridge, John
Bitten, JohnGilmour, Rt Hon Sir Ian (Chesham)Luce, Richard
Biggs-Davison, JohnGilmour, Sir John (East Fife)McAdden, Sir Stephen
Blaker, PeterGlyn, Dr AlanMacCormick, Iain
Boscawen, Hon RobertGodber, Rt Hon JosephMcCrindle, Robert
Bottomley, PeterGoodhart, PhilipMacfarlane, Neil
Bowden, A. (Brighton, Kemptown)Goodlad, AlastairMacGregor, John
Boyson, Dr Rhodes (Brent)Gorst, JohnMacKay, Andrew (Stechford)
Braine, Sir BernardGow, Ian (Eastbourne)Macmillan, Rt Hon M. (Farnham)
Brittan, LeonGower, Sir Raymond (Barry)McNair-Wilson, M. (Newbury)
Brocklebank-Fowler, C.Grant, Anthony (Harrow C)McNair-Wilson, P. (New Forest)
Brooke, Hon PeterGray, HamishMadel, David
Brotherton, MichaelGrieve, PercyMarshall, Michael (Arundel)
Brown, Sir Edward (Bath)Griffiths, EldonMates, Michael
Bryan, Sir PaulGrist, IanMather, Carol
Buchanan-Smith, AlickGrylls, MichaelMaude, Angus
Buck, Antony Budgen, NickHall-Davis, A. G. F.Maudling, Rt Hon Reginald
Budgen, NickHamilton, Archibald (Epsom & Ewell)Mawby, Ray
Bulmer, EsmondHamilton, Michael (Salisbury)Maxwell-Hyslop, Robin
Burden, F. A.Hampson, Dr KeithMayhew, Patrick
Butler, Adam (Bosworth)Hannam, JohnMeyer, Sir Anthony
Carlisle, MarkHarrison, Col Sir Harwood (Eye)Miller, Hal (Bromsgrove)
Chalker, Mrs LyndaHarvie Anderson, Rt Hon MissMills, Peter
Channon, PaulHaselhurst, AlanMiscampbell, Norman
Churchill, W. S.Hastings, StephenMitchell, David (Basingstoke)
Clark, Alan (Plymouth, Sutton)Havers, Rt Hon Sir MichaelMoate, Roger
Clark, William (Croydon S)Hawkins, PaulMonro, Hector
Clarke, Kenneth (Rushcliffe)Hayhoe, BarneyMontgomery, Fergus
Cockcroft, JohnHenderson, DouglasMoore, John (Croydon C)
Cooke, Robert (Bristol W)Heseltine, MichaelMore, Jasper (Ludlow)
Cope, JohnHicks, RobertMorgan, Geraint
Cormack, PatrickHiggins, Terence L.Morgan-Giles, Rear Admiral
Costain, A. P.Hodgson, RobinMorris, Michael (Northampton S)
Crawford, DouglasHolland, PhilipMorrison, Charles (Devizes)
Crouch, DavidHordern, PeterMorrison, Hon Peter (Chester)
Crowder, F. P.Howe, Rt Hon Sir GeoffreyMudd, David
Dean, Paul (N Somerset)Howell, David (Guildford)Neave, Airey
Dodsworth, GeoffreyHunt, David (Wirral)Nelson, Anthony
Douglas-Hamilton, Lord JamesHunt, John (Ravensbourne)Neubert, Michael
Drayson, BurnabyHurd, DouglasNewton, Tony
du Cann, Rt Hon EdwardHutchison, Michael ClarkNott, John
Durant, TonyIrving, Charles (Cheltenham)Onslow, Cranley
Dykes, HughJames, DavidOppenheim, Mrs Sally
Eden, Rt Hon Sir JohnJenkin, Rt Hon P. (Wanst'd&W'df'd)Page, Rt Hon R. Graham (Crosby)
Edwards, Nicholas (Pembroke)Jesse!, TobyPage, Richard (Workington)
Elliott, Sir WilliamJohnson Smith, G. (E Grinstead)Parkinson, Cecil
Emery, PeterJones, Arthur (Daventry)Pattie, Geoffrey
Evans, Gwynfor (Carmarthen)Jopling, MichaelPercival, Ian
Ewing, Mrs Winifred (Moray)Joseph, Rt Hon Sir KeithPeyton, Rt Hon John
Eyre, ReginaldKaberry, Sir DonaldPink, R. Bonner
Prentice, Rt Hon RegSinclair, Sir Georgetrotter, Neville
Price, David (Eastleigh)Skeet, T. H. H.van Straubenzee, W. R.
Prior, Rt Hon JamesSmith, Dudley (Warwick)Vaughan, Dr Gerard
Pym, Rt Hon FrancisSmith, Timothy John (Ashfield)Viggers, Peter
Raison, TimothySpeed, KeithWakeham, John
Rathbone, TimSpence, JohnWalder, David (Clitheroe)
Rees, Peter (Dover & Deal)Spicer, Michael (S Worcester)Walker, Rt Hon P. (Worcester)
Rees-Davies, W. R.Sproat, IainWall, Patrick
Renton, Tim (Mid-Sussex)Stainton, KeithWalters, Dennis
Rhodes James, R.Stanbrook, IvorWarren, Kenneth
Ridley, Hon NicholasStanley, JohnWatt, Hamish
Ridsdale, JulianSteen, Anthony (Wavertree)Weatherill, Bernard
Rifkind, MalcolmStewart, Rt Hon DonaldWells, John
Roberts, Wyn (Conway)Stewart, Ian (Hitchin)Welsh, Andrew
Rossi, Hugh (Hornsey)Stokes, JohnWhitelaw, Rt Hon William
Rost, Peter (SE Derbyshire)Stradling Thomas, J.Whitney, Raymond
Royle, Sir AnthonyTap8ell, PeterWiggin, Jerry
Sainsbury, TimTaylor, R. (Croydon NW)Wigley, Dafydd
St. John-Stevas, NormanTaylor, Teddy (Cathcart)Wilson, Gordon (Dundee E)
Scott, NicholasTebbit, NormanWinterton, Nicholas
Shaw, Giles (Pudsey)Temple-Morris, PeterYoung, Sir G. (Ealing, Acton)
Shelton, William (Streatham)Thatcher, Rt Hon MargaretYounger, Hon George
Shepherd, ColinThomas, Dafydd (Merioneth)
Shersby, MichaelThomas, Rt Hon P. (Hendon S)TELLERS FOR THE NOES
Silvester, FredThompson, GeorgeMr. Spencer Le Marchant and
Sims, RogerTownsend, Cyril D.Mr. Michael Roberts.

Question accordingly agreed to

Resolved,That for the percentage specified in section 1(1) of the National Insurance Surcharge Act 1976 there shall be substituted a higher percentage applying to all persons by or in respect of whom the surcharge imposed by that Act is payable.