§ There has been a considerable amount of agitation—I might almost call it a drive—in favour of deliberately unbalancing the Budget in order to take a substantial slice off the Income Tax. That proposal has been supported by eminent economists, powerful journalists, and, if my information is correct, by some hon. Members of this House. But not to keep the Committee in suspense, I say at once that I am not prepared to take that course. At the same time, a 58 proposal to reduce taxation is so attractive, especially when people are told by persons speaking as having authority that, so far from this being the broad road that leadeth to destruction, it is actually the straight and narrow path that leadeth to salvation, I think I ought to give the Committee some of the reasons which have led me to a decision that the proposal cannot be entertained. I can assure the Committee that I am not dismissing this idea merely because it is unorthodox. On the other hand, I am not impressed by the suggestion that its acceptance would be a proof of courage on my part. Courage does not always lie in taking the easiest and most popular course. In any case I am not concerned with the effect of any action that I may take upon my own reputation. As long as I hold my present office my duty is to do what seems to me best in the interests of the country, and it is from that point of view alone that I considered this question.
§ Let us see then what are the arguments for and against this proposal to reduce direct taxation by unbalancing the Budget. There are many variants of the suggestion, but I think there is a general argument which underlies them all, which I might put something like this: That the time has now come when trade recovery is on the point of materialising, and that a reduction of direct taxation would give such a psychological fillip to the country that the wheels of industry would start running again at such a rate that in a comparatively short time, say in three years, we might expect to find ourselves in possession of a substantial surplus of revenue. That programme is to be combined with a programme of public expenditure, and the combined programme is to be announced beforehand so that the public may be directed to pay attention only to what is to happen at the end of the period, and to disregard the question of whether at any intermediate stage there is a surplus or a deficit.
§ My first comment on that idea is that it seems a highly optimistic one. Suppose that I were to take a shilling off the Income Tax this year. That would cost £50,000,000. Then, according to the plan, I am to expect in 1934 that I shall draw somewhere about level, and that in 1935 I shall have a surplus of not less than £50,000,000, so that over the whole three 59 years the Budget is to balance. That means that an extra £50,000,000 has to materialise in 1934, and an extra £100,000,000 in 1935. If those results are to be produced out of Income Tax alone, as some people suppose, it would mean that the profits of 1933, this present year, would have to be increased by £250,000,000, and the profits of next year would have to be increased by £500,000,000. Of course, these vast figures are purely academic. We all know that any general increase of prosperity would affect the Budget in many ways. I dare say most of them would be favourable. But I put it to the Committee that, at least, these figures show the necessity of caution in accepting too readily the anticipations which are so hopefully attached to the idea of a three years' Budget.
§ As a matter of fact, however, everyone knows that you cannot possibly, in these times, forecast what is to happen over three years. Even one year may produce quite unexpected results, as the Committee has seen in the review I have given of the year that is past. If I were to pretend that I could lay out a programme under which what I borrowed this year would be met by a surplus at the end of three years, everyone would very soon perceive that I was only resorting to the rather transparent device of making an unbalanced Budget look respectable.
§ I am not disposed to deny that the reduction of direct taxation might produce a real psychological effect in stimulating business and encouraging the spirits of the country, provided it was covered by a surplus of revenue over expenditure. But I very much doubt whether it would produce that effect if there were no such surplus, and if the public realised, as they certainly would do, that what was spent to-day had presently to be paid for. I must, moreover, ask this question: What would happen supposing that the reaction to the reduction of direct taxation did not actually materialise, as is so confidently expected? Do not let us forget that we are not immune, that we cannot be immune, from those grim forces that hold the world in their grip. With world trade shrinking, with world prices falling, can we really persuade ourselves that by unbalancing our Budget we are going to reverse these world movements, and that 60 so rapidly that confidence would not wilt and falter while we were waiting for the upward turn? Suppose that we did unbalance our Budget for the purpose of reducing Income Tax, can we assure ourselves that, however earnestly we told the country that we were only doing it really to help the unemployed, we should be able to resist the demand which would assuredly arise for an extension of the process? If that were so, should we not very rapidly get back to the very position that this Government was returned to relieve, when uncertainty and apprehension about the future, and anxiety, would quickly smother all the hopes and expectations that have been aroused by our original action?
§ No Finance Minister, as far as I know, has ever deliberately unbalanced his Budget when he possessed the means of balancing it. Certainly my right hon. Friend the Member for Hillhead did nothing of the kind in 1922, when in his Budget Speech he proposed to suspend the Sinking Fund. On the contrary, he said then that the taxpayer must find the revenue to meet the expenditure. He did right. No Finance Minister would willingly abandon the primary bulwark against extravagance or forget that an unbalanced Budget may presently have to be balanced again. But although no Finance Minister voluntarily unbalances his Budget, sometimes external circumstances perform that task for him.
§ Look round the world to-day and you see that badly unbalanced budgets are the rule rather than the exception. Everywhere there appear budget deficits piling up, yet they do not produce those favourable results which it is claimed would happen to us. On the contrary, I find that budget deficits repeated year after year may be accompanied by deepening depression and by a constantly falling price level. Before we embark upon so dangerous a course as that, let us reflect upon this indisputable fact. Of all countries passing through these difficult times the one that has stood the test with the greatest measure of success is the United Kingdom. Without underrating the hardships of our situation—the long tragedy of the unemployed, the grievous burden of taxation, the arduous and painful struggle of those engaged in trade and industry—at any rate we are-free from that fear, which besets so many 61 less fortunately placed, the fear that things are going to get worse. We owe our freedom from that fear largely to the fact that we have balanced our Budget. By following a sound financial policy we have been enabled to secure low interest rates for industry and it would be the height of folly to throw away that advantage. If we were to reverse our policy, just at the very moment when other Governments are striving to follow our example and to balance their Budgets, after experience of the policy which we are now asked to adopt, we would stultify ourselves in the eyes of the world and forfeit in a moment the respect with which we are regarded to-day.
§ In my opinion, the pessimism about our financial prospects which lies at the back of all these proposals has no justification in fact. The decline in the yield in taxes reflects the decline in the national income, and that again is intimately associated with the fall in world prices and the fall in world prices affects the capacity of our customers to buy from us. There is also the fall in sterling prices and although it is impossible to say whether this long-drawn out fall in world prices has yet come to an end, at any rate sterling prices, which are so much more important to us, have remained substantially steady over the last 18 months. We may say that trading profits fell last year, but it is not true to say that the decline is progressive. On the contrary, the fall last year was only half what it was in each of the preceding years. The difficulties from which we are suffering to-day are due, as I have said, to the aftermath of the events of 1931. The remarkable fact is that last year's collection of Income Tax on the current year's charge, actually slightly exceeded the Inland Revenue estimate. The failure of the total yield to reach the figure which I had anticipated was due, as I have said, to a reduction in the collection of arrears and to some increase in repayments. I do not accept the position, then, that, financially, we are in peril if we continue to be guided by sound and well-tried principles of policy. Against the fall in revenue and the continued burden of unemployment we must set the great reduction in the interest charge and, with a real improvement in trade and employment, will come the possibility of a reduction in the rates of taxation.