AMENDMENT OF LAW.

HC Deb 21 April 1937 vol 322 cc1769-884

Question again proposed, That it is expedient to amend the law relating to the National Debt, Customs and Inland Revenue (including Excise), and to make further provision in connection with finance."—[Mr. Chamberlain.]

3.46 p.m.

Mr. Pethick-Lawrence

It has been my fortune to listen to a considerable number of Budget speeches, many while I have had the honour of being a Member of this House, and quite a number before I was elected, to which I listened from some of the galleries, and I am bound to say that never at the close of a Budget speech did I feel a greater sensation of sadness than yesterday. While my sorrow on this occasion was primarily for what had befallen this great nation, part of it was for the right hon. Gentleman himself in consequence of the Budget which he had introduced. We are all aware that this is probably his last Budget, and most of us realise what a grave disappointment the statement of the Budget must have been to himself. In fact, I think that in the broadcast which he delivered last night he gave expression to that feeling of disappointment. But I am sure, in my own mind, that not only was it a matter of disappointment, but that in making it he must have felt a considerable measure of misgiving, even if it did not go so far as a definite sense of shame. The fact is the right hon. Gentleman is not a happy sinner. In that he differs from a number of his colleagues on the Treasury Bench.

We have seen the Prime Minister illumined by the halo of a penitent when he has been confessing to his past lapses from virtue. The President of the Board of Trade, and still more his Parliamentary Secretary, seem never to enjoy themselves so much as when they are renouncing those Liberal principles which they learned at their mother's knee. We know how the Home Secretary delights in spinning a legalistic web around his as to hide them from the common gaze. But, of course, it is the right hon. Member for Epping (Mr. Churchill) who is most happy when he is displaying the conjuror's art. Many of us listened for years to his Budget speeches during the 1924–29 Parliament, and heard the wonderful patter which he developed and saw the sleight-of-hand with which he disposed of facts and figures like a conjuror dealing with peas under a row of thimbles.

Mr. Churchill

I hope the hon. Member managed to find the right one.

Mr. Pethick-Lawrence

The present Chancellor of the Exchequer is not like that. The Chamberlain tradition is too strong in him, and the Birmingham business outlook is never far away. He cannot be happy when he is trampling on the principles of financial orthodoxy. He could not, and I do not think he would if he could, display the arts of the right hon. Gentleman the Member for Epping, and if he were to try in that way to dispose of a deficit, I think we should all spot at once under which thimble it had been hidden. The right hon. Gentleman knows too well, better than a large number of hon. Members, the reckless improvidence of inaugurating a series of unbalanced Budgets in time of peace, under boom conditions, and he realises, too, more than most hon. Members, the aggravation of his offence which is involved in borrowing in the first year the whole fifth of the amount foreshadowed in the Defence Loans Act. He is only deluding himself if he thinks it had escaped undetected by us. But this is the first opportunity to bring it to notice, and he himself referred to it yesterday. The Chancellor has given us no assurance, because he is not assured himself, that the peak of which he spoke as coming in a year or two will not, when we get there, prove to be anything more than the summit of the foot-hills, with further peaks and higher peaks rising beyond. This is true, even though no major catastrophe undertakes us in the meantime.

Mr. Churchill

Overtakes.

Mr. Pethick-Lawrence

Yes.

Mr. Churchill

And undertakes, too.

Mr. Pethick-Lawrence

He is not deceived by the confident assertion of many of his colleagues that they are dealing with profiteering, or that he is really meeting the situation by making the State a partner with the profiteer. Finally, and most serious of all, the Chancellor knows quite well that one of the greatest dangers is the rising cost of living and that, under his financial methods, that cost of living is likely to go on rising ever more steeply, with the most grave consequences to the social and industrial life of the nation.

I now pass from the psychology of the Chancellor of the Exchequer to deal objectively with the facts. The Chancellor said yesterday and, of course, I agree with him, as do the Committee, that Defence expenditure is the dominating feature of the financial situation, but I wonder whether the Committee, even after that statement, realise the full significance of the figures. In 1932–33, only five years ago, the expenditure on Defence was £103,000,000. When the last General Election took place, and the Prime Minister told us that he was not contemplating any large increases in expenditure, that is, in 1935–36, it was still only £137,000,000. Last year, 1936–37, it jumped up by £50,000,000 to £187,000,000, and for the coming year it is a further £90,000,000 up, bringing the total to no less than £278,000,000; that is, nearly three times what it was in 1932–33 and more than double what it was at the time of the General Election when we were told that no large increase was contemplated. I do not propose to take up time by repeating the criticism which I made during the various stages of the Defence Loans Act. This matter of unbalanced Budgets, is, to all intents and purposes, a new device in this country in peace time, but it is well known to foreign nations. They have an ordinary budget and an extraordinary or capital budget, and although the Chancellor has adopted a slightly different technique he has, in fact, brought this exotic system of finance into this country.

When I pointed out on the Committee stage of the Money Resolution of the Defence Loans Act, the danger of this course, I was denounced as a pedant, a too strict financial purist. I think the general opinion of the House and the country was that I was a kill-joy who was trying to prevent the happy solution which the right hon. Gentleman had found for a difficult situation, and that I wanted to go back to the unpleasant and unnecessary method of taxation instead of adopting the easy method of a loan. When I said that it was purely illusory to think that you could throw on posterity the physical burden of armaments and Defence production and that the only difference was a psychological one, I was regarded by practical people as a mere theoretical economist. Those who have studied the Chancellor's Budget of yesterday are just beginning to wonder whether that criticism of me was justified. First and foremost are those who will suffer under the Chancellor's new impost—what he calls the National Defence Contribution. They are the first people to feel the pinch of the Chancellor's new method of finance, but, as I shall show later, they are far from being the only people. There is a very wide class among the poorest of the community who are being subjected to a hidden taxation by the Budget of the Chancellor of the Exchequer, and who are being pinched already. There is little doubt that they will find it out before long. I will go into that point in greater detail at a later stage of my speech.

I want to come to the Chancellor's action in borrowing the full £80,000,000 in the current year. The Chancellor told us that expenditure would rise steeply for the first few years, but he hoped that afterwards it would decline. If it is to rise to a peak somewhere in the course of five years, it is not likely that it will have risen to that peak in the current year. The Chancellor said as much in his speech yesterday. But he is borrowing the whole of this sum and he justified himself by saying that he expected to get, instead of £2,000,000 this year from his new Excess Profits Duty, some £20,000,000, possibly fortified by expanding revenue next year, though, of course, there will be other items of expenditure. I very much doubt whether that is anything like an adequate provision, particularly in view of the rising costs of manufacture, of armaments, the cumulative effect of the Defence programme, and the commencement of the interest which will have to be paid. I think it is very doubtful whether the Chancellor's provision even now, onerous though it is, will fully meet that large increase towards the peak, which is almost certain to arise if the programme of the Government is continued. It is not necessary to say more on that head.

One other matter with regard to the general situation of finance, and that is the effect of the Budget on the Funds. Directly the Chancellor produced his Defence Loan proposals there was a very considerable fall in the value of the Funds. The credit of the country fell from practically a 3 per cent. basis to what is very little better than a 3½ per cent. basis, and it has not recovered between then and now. I have always taken the view that the powers now in the hands of the Treasury are very considerable, and I am not at all prepared to say that the Chancellor cannot use his present powers to bring us cheap money again, but I do not think he will do that without at the same time raising the general commodity price level still further than it is at present. He will have to choose between the two evils, of letting the credit of the country down or of still further inflating by means of financial methods which will raise commodity prices. I leave that point for the present. We dealt with it very fully when we were discussing the Defence Loan.

I come now to alterations in the Income Tax. Everyone seems to have anticipated the 3d. increase, and I do not think that anyone is very excited about it. I still think the Chancellor would have been wiser if he had made one bite instead of two bites at the cherry. In the first place he would have avoided a deficit. I do not accept the view that the deficit was not a real deficit (because among other things there was some redemption of debt) for that leaves out of account the accrued interest on savings certificates. If I am right it was something like £9,000,000 in excess of interest actually paid on encashments. There has been a good deal of unnecessary and rather tiresome accounting, but I dare say Income Tax payers would have preferred to go to that trouble than to pay the additional amount last year. It is however a very small point. Having one rise of 6d. or two of 3d. is not a large matter.

I now come to what is, after all, the main feature of the Budget. That is what the Chancellor calls the National Defence Contribution, and is, of course, our old friend Excess Profits Duty resurrected from its grave and decked in new clothes. I think it will be called by that name rather than by the some- what grandiose title which the Chancellor gave it in his speech yesterday. If politics were simply a game of ins and outs, if in the view of the country it was simply a matter of "Beggar my neighbour," I and my friends would be thoroughly delighted with this proposal, for one reason because it was quite clearly greeted with the utmost dismay by nearly all the followers behind the Chancellor. And if it were really true that what it took from a certain section of the people was an addition to those from whom it was not directly taken then the persons for whom my hon. Friends and I more particularly speak would benefit by it.

But I have always taken a longer and a larger view of politics, and of the attitude which we ought to adopt here. I would like, therefore, to examine the proposal not from any mere party point of view, but from that of its real effect. So far as I can see the principles underlying the Chancellor's proposals are probably sound. What arises from the activity of the community and the greatly increased profits being made at the present time should not be held for the private advantage of a few. I and my friends would go a great deal further than that. We hold that while we want to preserve the initiative of the individual, the material benefit of all production should belong to the community, who are the originators of its creation.

Having said that, I am bound to confess that my experience of the working of Excess Profits Duty in its former incarnation was not very encouraging. Though the Chancellor and his officers have no doubt learnt a good deal from the mistakes made on that occasion, I confess that it remains to be proved whether in its new bearing and new form it will be very much more successful than it was in the old days. Let me remind the Committee of some of the defects that quite clearly emerged before the Excess Profits Duty was disposed of. It certainly did not prevent and it will be generally agreed that it actually encouraged the making of large and often windfall profits. In a great many cases those profits were not really tapped at all by the duty. The principal example is the case of the banks. The banks made very large actual working profits, largely through the inflation adopted at that time, but they were able to disguise those profits owing to the fall in the value of gilt-edged securities, which they were able to set against the profits they made in other ways. Therefore, they paid no or very little Excess Profits Duty during the War. When the War ended and the gilt-edged securites rose they really succeeded in securing the profits which they had made during the War and on which they had paid no duty. I do not know whether the banks will be in a similar position now, because I do not know the methods of finance and how the banks will be affected. But I hope that all that will be considered when the precise terms of this new Excess Profits Duty are being put into definite form. Of course, so far we have got in the Budget Resolution merely what you might call a token expression of that proposal and it conveys no information to us.

In the second place Excess Profits Duty during the War did not check but very much increased the rise in prices. I was interested to see that confirmed by the City Editor of the "Times," who said in his notes this morning: That duty largely defeated itself, because in calculating costs the liability to the duty was included and was passed on to the consumer. Thus the higher duty was raised the higher prices rose, which was a distinct disappointment to those who had advocated the tax in the belief that it would cut down prices. In the third place Excess Profits Duty in those days did not make for economy but for extravagance. It led to a very large amount of additional capital expenditure. The Chancellor of the Exchequer must not think that I am taking sides against his proposals. I am putting forward certain objections which were noted at the time with regard to Excess Profits Duty in its former state, and I shall be most anxious to see how far any of these difficulties is met in the form which it is now to take. No one will be more pleased than myself and my hon. Friends if we find that the Chancellor can carry through his proposals in a way which will effect the object which all of us to a large extent have at heart.

I want to put some questions which I think are uppermost in the minds of a great many hon. Members, and I particularly put them to the Financial Secretary, who I understand is to reply. The first question is, what exactly is meant by capital? That is a term which is used with a great many different meanings. It must be used in a very precise meaning in this proposal, because whether the basis of a tax is to be capital or whether it is to be the standard profit, in either case the amount of the tax depends on the capital in the business, and there are so many definitions of capital that it is most essential to know precisely what is intended by the Chancellor. Suppose that a firm or company believes that it is likely, in the course of the following years, to make a profit in excess of the amount to which it will be entitled without extra taxation; suppose that it, in order to meet that, deliberately increases its plant in such ways as to enlarge its capital basis very considerably and possibly even beyond its immediate requirements, that, as I read the Chancellor's proposals, might quite easily, in the current year and for a number of succeeding years, take it out of the category of payment.

The second question is: what precisely are profits? Perhaps that seems an easy question to answer, but there are many ways of ascertaining profits which perhaps will not be quite clear to the Committee. Are the profits to be ascertained before debenture interest is paid, and, secondly, before the preference dividend is allowed for; or are they to be the profits after paying at any rate debenture interest, and perhaps preference dividends? I presume that no question would arise as to the categories of ordinary and deferred shares, but I think that the question of debentures and preference shares will need careful examination.

Thirdly, we are to have, as I understand, both an Excess Profits Duty and an ordinary Income Tax. Which of these two comes first? Is the Excess Profits Duty to be taken first and the Income Tax reckoned afterwards, or is the process to be in the opposite direction? These are the major questions that I wish to ask. There are some other questions, perhaps of smaller importance, which the Financial Secretary might also answer as far as possible. How are the losses to be ascertained? Some of my hon. Friends behind me are of opinion that, in the mining industry in particular, a good many of the so-called losses really exist on paper only, because there is sometimes a deal between one company and another. I think this question also arises sometimes in the case of holding companies, but, whether that be the case or not, any information that can be given to us with regard to how the losses are to be ascertained will be of value.

I come now to another question which has interested me from an arithmetical point of view. That is, what precisely is the amount, on an average, that is going to be taken from these firms? The figures which the Chancellor has given us in the White Paper are perhaps a little unfair both to himself and to the public—not in the sense of being incorrect, but in the sense of suggesting that the tax is higher than it is. I have worked out the figures for his examples, and, with the exception of the nil case, it seems to me that the taxation on profits will amount to sums varying from 1s. 3d. up to 3s. in the £—in the majority of cases in the neighbourhood of 2S., not only on the excess profits, but on the whole of the profits made by the company or firm in the course of the year. If it be true that the debenture interest has to be deducted, and the tax is paid on the whole of the profit before that deduction, then, of course, the amount paid by the ordinary shareholders will be considerably in excess of 3s. in the £ for the year.

To pursue the point a little further, I would like to draw attention to the fact that there is, of course, no graduation in the case of the shareholders. Supposing that a person of not very large means, with al income of perhaps £400 or £500 a year, invested his savings quite recently in a company which is subject to this Excess Profits Duty, if his Income Tax had been raised by even as much as 1s. in the £ he would only have paid, as a result of that increase, a few pence, because, if he has a wife and children, he will, as a result of his various allowances, be paying very much less than the nominal standard rate; but if his savings are invested in such a company as we are talking about, he will get no abatement, and will in effect pay the whole 2s. or 3s. more in the £. Moreover, it will not be any answer to him to say, "But you are getting all these excess profits," because his investment has been made quite recently, and presumably the price he will have paid for his shares will be on the basis of the company's present yield.

There is, of course, a certain amount of ground for putting the burden of taxa- tion on this particular class of people, but I am not sure that there is complete ground for letting off a considerable number of people who are going to be let off. I am not sure that the debenture holders and preference shareholders, if I am right in thinking that they escape this burden, should go scot free, or that the whole rentier and landlord class should go scot free from this special contribution to defence. Then there are the accountants and lawyers. As far as I can make out, the people who really make a "fat thing" out of this are the accountants and lawyers, because the very great complications will lead to a good deal of additional accounting and legal work, and, therefore, their incomes will rise very rapidly. Why should they, in those circumstances, be entirely excluded from the working of the scheme? Then there are the city speculators and company promoters. I am not quite sure how the definition of profits is going to be drawn, and whether they will be included or not, but if they are not to be included, I should certainly be anxious to know the grounds on which the Chancellor can justify their exclusion. I am not pronouncing in any way a final opinion either for or against the proposals; I shall want to see them in much greater detail, to hear the arguments for and against them, and to satisfy myself first of all as to whether the proposals will achieve in practice the results and intentions adumbrated to the House yesterday, though I think that probably everyone is agreed that something ought to be done in this direction.

I pass to what in my opinion, in spite of what I have said about the Excess Profits Duty, is in some ways the most serious result of the whole system of finance for which this Government and the Chancellor of the Exchequer are ultimately responsible. That is its effect upon the cost of food in particular, and upon the cost of living in general. The Chancellor himself made it quite clear in his speech yesterday that the significance of this effect had not wholly escaped him. I would call the attention of the Committee to the figures which are really involved in this discussion. Up to the autumn of 1935—roughly up to the General Election—there was nothing abnormal in what was happening with regard to those figures. Every year there was a fall in the summer, and every year there was a rise in the winter. The hollows of one year and the hollows of the next year were roughly the same, and the peak of one year and the peak of the following year did not vary very much. But, commencing with the autumn of 1935, a very distinct change began to show itself. The figures in the winter of 1935 went up a great deal further than they had in the previous winter, while the fall was not so great in 1936 as it had been in the summer of 1935. Those changes were still more marked in the year that followed, bringing us up to 1st April of the current year. It would be quite wrong to base any argument on an expectation of what is going to happen in the course of the next few months or in the coming winter, but I think the Chancellor has not disguised from himself the fact that the figures will probably rise very considerably this winter. It would, however, as I say, be quite wrong to base an argument on mere expectation; all that we can legitimately do is to take the facts of the past, comparing the figures for 1st April this year with those for 1st April last year, and, if we like, with those for 1st April, 1935.

If I took the cost of food alone, which is what the ordinary housewife really notices when she goes out to buy, the figures would be considerably greater than those which I am going to select. I am going to take the cost of living as a whole, although there the change is less marked, because those are the figures which I think the Committee would be more willing to accept as a real criterion. The cost of living figure on 1st April this year stood at 151. Last year it stood at 144. That is a rise of seven points, or about 5 per cent., that is to say, 1s. in the £. If we go back to the previous year, we find that the figure on 1st April was 139. Therefore, since then there has been a rise of 12 points in the index figure, or about 8½ per cent., that is to say, no less than 1s. 8d. in the £. I come now to consider who are the people primarily affected by this alteration, and I do not think the Committee will have any doubt in their minds that the persons primarily affected are the very poorest section of the community. In the first place, there are the pensioners. There are the old age pensioners under the non-contribu- tory scheme; there are the War pensioners; there are the contributory pensioners and the other superannuated people; and, finally, there are the unemployed and their dependants, who are getting fixed sums according to a definite scale of money. Those are the persons primarily affected. I do not think I shall be far out if I say that the total amount that they receive in a year exceeds £200,000,000.

Those are, however, by no means the only people. There are a number of others with comparatively small incomes, and what they receive is definitely fixed in amount. There are the civil servants, there are widows and orphans who have a small amount of money invested and who are receiving a fixed and exiguous income. There is the country parson with his fixed stipend. When you add all those and a great many other classes of people with definitely fixed amounts, I very much doubt whether the grand total comes to less than £400,000,000 a year. If that is so, this tax of a shilling in the £ amounts to no less than £20,000,000, and a tax of 1s. 8d. amounts to over £30,000,000 a year. That is really the hidden tax which the whole method of finance of this Government imposes on these people. There are very large other sections of people who have a small amount of money received weekly who will also be affected in the first instance. Those are the ordinary wage-earners. Their wages are subject to revision but, until they are revised upwards, they will be suffering from this same grievance, and the only methed that a great many of these men and women have to get the necessary redress to enable them to stand in the same position, with the increased cost of living, as they stood before is by making trouble. Hon. Members opposite must not be surprised if there is an insistent demand which, if it is not met, will result in what they call industrial unrest, unless this clear and undoubted grievance is put right in proper time.

I said that the Government system of finance was responsible. It is responsible in two ways. In the first place, it is responsible—I do not think the Chancellor of the Exchequer will deny this—because of the large amount of indirect taxation, which has been one of the principal planks in the programme of the Government. The Prime Minister gave a broadcast last week in which he spoke of the responsibilities of Empire. I heard a great deal about the Empire and its great opportunities and I was looking for the responsibilities, not merely to the people in the Empire but to the world as a whole. I was grievously disappointed that the Prime Minister took no cognisance of what our responsibilities, as an Empire governing a very considerable portion of the world, were to those portions which are outside the Empire. But in the whole financial policy of this Government there has been a tendency towards excluding the outside world from the benefits of Empire trade which it has hitherto possessed. I am not thinking to-day of the political effect on the outside world, but of the economic effect on ourselves. Whatever may be the general views of the Government on tariffs—and views on tariffs have changed very considerably in the course of the last generation—I suggest to them that at this time of rising prices they ought to reconsider their whole tariff policy and see whether it is not possible to lower tariffs, at any rate so as to keep down the cost of the necessaries of life.

In the second place, there is the whole of their inflationary finance. May I read a short sentence from the "Scotsman"? If Government expenditure is defrayed largely from taxation, purchasing power will be kept down, to the benefit of the taxpayer in the long run for it will not be to his eventual advantage if he is left with more money only to find that it will purchase less. It is this inflationary finance which is largely responsible for the rise in the cost of living, and the proposal that I put forward, that a larger proportion should be met by taxation, did not find favour in the Government's eyes. The Government are therefore responsible, by their general method of finance and by their tariff policy, very largely for this rise in the cost of living. I want to know what the Chancellor is going to do about it.

What is he going to do for the widow? There is a story in the Old Book about Elijah. I do not know whether the right hon. Gentleman has heard the small boy's version, that Elijah went for a cruise with a widow. The real version is that be was able to benefit the widow by enlarging her cruse of oil. Is the Chancellor going to do anything for the widow corresponding to Elijah's magnanimous action? Apart from the widow, is he going to do anything for the pensioners? They have already suffered a diminution in their effective income of no less than 1s. or 1s. 8d. in the £ and, if it should prove true that there is to be a still further rise in the cost of living, will he or his successor propose an increase in the amount that the pensioners are receiving? If he does not do so, what is he going to do to help them to retain their position? If he does nothing, this National Defence Contribution will come not mainly from the classes on which the Chancellor thinks he has imposed it, but most of all from the poorest section of the population, the pensioners and the unemployed, and when they look at the Budget and its results they will rise up and curse him.

4.40 p.m.

Sir Robert Horne

In some of his comments the hon. Gentleman was a little wide of the mark. For example, with regard to the effect of the first announcement of the Defence Loan, I think he was somewhat astray in imagining that anyone thought the credit of the country at that time was being let down. He gave, as a symptom of the opinion that had been formed, that gilt-edged securities had dropped; but the reason is very obvious. When the Defence Loan was announced, it was calculated by wise and skilful people that much of the money was going to be spent on industries which would be actively employed in making munitions, and it was very tempting for them to shift their money from investments in gilt-edged securities into industrial securities and, as gilt-edged securities went down, so industrial securities went up. To-day the Defence Loan is even better advertised than it was then, and what has happened to-day is that gilt-edged securities have gone up again, but industrial securities have gone down, so that the explanation, instead of being so recondite as the hon. Gentleman suggested, is very simple and perfectly easily understood. I think that the Chancellor of the Exchequer was entirely right, both from the short and from the long point of view, in deciding at present to raise a certain amount of what is required for armaments by loan.

The Chancellor yesterday spoke rather wistfully of the five years that have gone while he has been Chancellor, and one can very well understand it. We entirely appreciate the fact that he cannot, as he said, remain many years longer in his post, but what a wonderful lustrum it has been during his office. In ancient Rome at the end of every five years public officers were required to make expiation. There is no reason for expiation on the part of the Chancellor of the Exchequer. In fact the five years that have gone and the record that he has achieved deserve the maximum meed of praise and admiration from the country. He has never been diverted from the strict path of financial virtue by any will-o'-the-wisp. He has never been deceived by any shining mirage, however realistic it looked. He has pursued an undeviating course of resolution and rectitude, with the result that to-day, from the condition almost of despair that existed six years ago, the country is now the envy of all the world. That result has been, if not entirely accomplished through his sound finance, certainly based upon the policy of the Chancellor of the Exchequer. We have more employment than ever in our history. That is a very remarkable record. It is true to say that while a certain amount of that employment is due to rearmament, a great deal of it had begun before rearmament started. A large amount of domestic civil business had begun to make progress before the munitions programme was commenced.

In addition to the increase of employment, the record of productivity from our factories in this country at the present time is higher than we have ever attained before, and the retail sales in the shops reached last year a new high record. Our exports have also steadily increased, and to-day they are £50,000,000 per annum more than they were five years ago. I do not say for a moment that we have reached anything like the figure that we had in earlier times, in 1929 for example, but it is true that from being displaced from our position as the leading export country in the world we have now re-attained that situation and are exporting more than any other nation. In these circumstances we could at the present time, as the Chancellor of the Exchequer indicated yesterday, have been in a position to remit taxation but for the unhappy fact that we have had to begin this great programme of rearmament.

The Leader of the Opposition yesterday seemed to me to make a rather equivocal statement about the rearmament programme, as though he was not in favour of it. I should have thought there was no question now about the necessity for that rearmament. If there was a lingering doubt in anyone's mind I should have thought it would have been dispelled by reference to the book issued by Marshal de Bono, with a preface by Mussolini, in which is revealed with almost stark indecency the plot which was framed against Abyssinia—contrasting in every line with the tale which was told at Geneva. So long as we have forces of that kind in this world, whose shadows lie athwart our path on the seas; with the means of keeping their people entirely ignorant of any of those things that they do not wish them to know, and with a capacity to call them to arms by a nod, so long in my view will it be essential for us to secure our own existence by adequate strength.

Of course, rearmament costs money and the Chancellor of the Exchequer has chosen several ways in which to meet the deficit on his Budget which otherwise could not have been met on the basis of existing taxation. So far as the extra 3d. on the Income Tax is concerned, that was inevitable. I am glad for my own part that the Chancellor of the Exchequer was not tempted to tax bachelors. There are two very good reasons, it seems to me, for the rejection of such a suggestion. In the first place, bachelors are already taxed in that they do not receive the family allowances which other people obtain. In addition to the loneliness from which they suffer they have the unhappy burden of supporting other people's children. There is another reason. The principle of English taxation is to tax success. The better you do the more you are taxed. A bachelor tax would be a tax upon failure. If ever such an impost were introduced in this country it would be necessary for the Chancellor of the Exchequer to set up a tribunal before which bachelors could appear, to indicate that they were neither passive resisters nor conscientious objectors but that they had done their best to obtain the felicity which so many other people enjoy.

I should now like to address myself to what is the leading feature of the Budget, the National Defence Contribution. So far as that is concerned I speak with insufficient knowledge and also in complete ignorance of the details of the proposal. Those details I have no doubt will be presented to us later in the Finance Bill. There are many things that one wants to have cleared up, and some of them are indicated in the questions which my hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) put. There are many obscurities about this matter. What will be the definition of capital? In dealing with the capital of a company will the capital include the reserves which have been previously set aside for the company's business? The Chancellor of the Exchequer said that the capital would represent the assets of the company, with certain adjustments. But everything depends upon the adjustments, and I should like the Chancellor of the Exchequer to disclose some of the adjustments, if possible.

Then there is the question of profits. How are the profits to be assessed? Will the National Defence Contribution be taken off first before Income Tax is assessed, or will Income Tax be taken off first before the National Defence Contribution is assessed, or will both be assessed simultaneously? We want answers to these questions. I should imagine from my recollection of the Excess Profits Duty that the National Defence Contribution will be taken off before Income Tax is assessed. I should think that that is the way it will be done, but in the newspapers this morning there are many doubts expressed on the point, and these ought to be cleared up as soon as possible. There is also the question of depreciation. Let me give one of the most prominent instances that I know. Take a wasting asset like a ship. The Treasury allows to be deducted before profits are attained 4 per cent. of the cost of the ship. It is written down by that amount. Will that practice be followed in regard to this duty before profits are ascertained? Next—and very important in the period in which we stand to-day—what will be done in regard to what the shipowners know as unabsorbed depreciation? What has happened during the last few years when shipping has been unable to earn even the amount of its depreciation, has been to accumulate this in the books of the shipowners as things that have to be worked off before profits can be arrived at in the future. Since 1928 a very large number of ships have failed to earn their depreciation, and I would beg the Chancellor of the Exchequer to take that sympathetically into his consideration, because it will mean either the soundness or ruin of shipping companies according as he decides. As the Committee well know, there has been a very long period of depression in the shipping industry. That industry depends on making enough in good times to carry it through bad times, which have nearly always been prolonged. It is everything to the existence of the shipping industry that they should be fairly dealt with in this matter at the present time. Will that unabsorbed depreciation be taken into account, and for how many years? I would suggest that it should be taken right back to the full amount that has been accumulated against the ships.

Before I go further I should like to say that I have, in principle, no objection at all to the view, indeed I support it, that where excess profits are being made owing to the country's needs in defence, those are a proper subject for extra taxation. But it seems to me that the project that we have before us goes very much further than that, because it includes not merely the people who make money out of armaments but a vast number of other firms who are not connected with the making of munitions at all. Many of these people instead of being benefited by the armaments programme are really being injured. Let me take a case; there are many of them. Let me take the case of an engineering firm. Engineering, as hon. Members know, has been very severely depressed for a number of years but has begun to revive within the last two years. Owing to the revival of domestic trade—the Chancellor of the Exchequer has laid stress upon this many times—before the rearmament programme began at all, these people began to do better. Some of them had been earning no profits at all when it started, and some of them were earning dividends of 2, 3 or 4 per cent. They were looking forward to the time when these lean years would be compensated for by a fatter year when it came along. Many of them have had their reserves so depleted that they must depend upon the fat years to bring up the reserves to what they previously were and what they ought to be for the proper running of their business. That kind of concern instead of being helped by the armaments programme has to pay more for its coal, more for its materials and more for its steel and it seems absurd and I think entirely unjust that they should be mulcted in 20 per cent. of anything that they make over 6 per cent., after a period in which they have been making very little indeed.

That is one instance. Take another. Take the passenger shipping lines. These shipping lines to-day entering the market for new ships have to pay 50 per cent. more for a ship of the same size than they had to pay a few years ago. They are replacing their fleets at an enormously greater cost. They are being hurt by the armaments programme, and so far as their passenger fares are concerned it is very difficult for them to increase them at all, still less to keep them up to any degree that would compensate for the increased cost which they are incurring. In these circumstances shipping companies which have gone for years without any return to their shareholders, confronted with a situation of that kind, are dismayed at the idea that after the 6 per cent. which they are going to be allowed to have they are to contribute 20 per cent. of what is over in another form of taxation, paying at the same time the ordinary Income Tax. It is an entire fallacy to suppose that all the people who are being hit or got at by this method of taxation have benefited by the armament programme. There is a large number of firms in the positions I have described, who are to be included.

There are some other points which I do not put in any dogmatic way, but which I wish to be considered. I hope an answer can be given that will let the Committee and the business people of the country know that something can be done. Let me take the Committee back to normal times and give an instance of which many parallels will be found all over the country. There were two companies, each making, say, between 6 and 10 per cent. One of the firms in a district where unemployment was not rife was not hit by the depression. It was catering for commodities not affected by the depression. It was still making, let us say, 10 per cent. The other firm in a depressed area was engaged in a totally different kind of business, severely hit by depression. It came down to the position in which it was earning no profits at all. It begins to revive and has an opportunity of earning over 6 per cent. Here is the situation between these two firms. One has to pay towards the National Defence Contribution starting on a standard basis of 10 per cent.; the other on a standard basis of 6 per cent. Why should that discrimination occur?

These two firms represent, roughly, businesses producing consumer goods and those producing what are known as capital goods. People producing consumers goods have gone through the depression, in some cases, untouched. Many districts where that kind of firm is established have had little unemployment. The basis industries are those which have been hit. They have had to struggle through a horrible time of depression and they are the people who would be worst hit under the new method of tax when the time of revival is reached. I ask the Chancellor of the Exchequer to take this into account. It represents a problem with which we have all been struggling to deal in the depressed areas. Firms in the depressed areas who have been able just to maintain themselves and reorganise their capital, paying no profits at all, have an opportunity of earning at the present time, when the demand for goods is considerable, perhaps 8 or 9 per cent. They are the people, who, having gone through the time of struggle and poverty, are now to suffer worse than those who have come through the depression in a far better condition. I put it to the Committee that that is a kind of thing which it is not easy to justify.

Take another matter, giving rise to another inequality. I will give you an instance of a company with which I am familiar. During the significant years which the Chancellor of the Exchequer has mentioned—1933–34–35—a great company with about £4,000,000 worth of capital has earned enough profits to pay only the preference shares. The ordinary shareholder has had nothing at all during those three years. The preference shareholder, on the other hand, has had his 6½ per cent. all the way through. This was the point which my hon. Friend the Member for East Edinburgh was making in the middle of his speech, that the preference shareholder would get off and the ordinary shareholder would be caught. Here is the situation. If, upon a revival, this year and the following year, the company in question is able to earn profits on which it can pay an ordinary dividend over 6 per cent., the ordinary shareholder who has had nothing during the past few years, will not only have to pay the dividend of the preference shareholder, but he will have to pay Income Tax on that ½ per cent. over the 6 per cent. which the preference shareholder is enjoying. There is something inequitable about that. When a person takes up shares as an ordinary shareholder, he normally takes into account the fact that the preference shareholder must be dealt with first and he judges that he will be able to make up for that on the equity in good times. But now under this arrangement he will be denied the opportunity of making it up in good times. I would remind the Chancellor of the Exchequer that there are many companies in which there is preference stock of 6, 6½, 7 and even 8 per cent. It seems to me improper that the ordinary shareholder, who got nothing at all in the depressed times, should have to pay the new National Defence contribution on the ½, 1 or 2 per cent. which the preference shareholder is enjoying. Some readjustment should be made.

I was struck by what my hon. Friend the Member for East Edinburgh said in speaking of the extravagance of the times in which Excess Profits Duty was in force. We can all recall instances when people ventured on expenditure in a lavish way in their businesses. When you asked them about it, you got the answer, "The Government pays half," sometimes "The Government pays 80 per cent." What was meant was that the Government would be taking Excess Profits Duty to the tune of 20, 50 or 80 per cent. in any case, and that, if the firms spent the money before the profits were assessed, they were doing so at the Government's expense. In any scheme of that kind, extravagance is unavoidable. People will undoubtedly be more lavish in their expenditure if they know that they have not got to bear the whole burden of it themselves. That is one of the detriments of a scheme framed on this basis. How you can get round it, I do not know. But great injury can be done. I calculate that under this project, taking both Income Tax and the National Defence Contribution together, many companies will have to pay as high as 45 per cent. There are private firms on whom Surtax is imposed who may have to pay up to 75 per cent. There is very little incitement to save money in those circumstances.

There is a further matter. Every Chancellor of the Exchequer of recent times has had brought before him the injury done to the trade of the country by taxing the money that companies put to reserve. It has always been the general idea that you ought to encourage people to put money to reserve as against a rainy day and for further development of the business, and that it was wrong to tax reserves as you did ordinary income. This project does nothing to clear away the difficulty, but it adds to the burden. It takes another 20 per cent from what is placed to reserves. This is a matter which is going to be most detrimental, not only to the old-established firms, but chiefly to the new enterprises. It will have an effect upon firms who are being induced to come to the distressed areas to start business. Any young and enterprising firm does not want to be a stick-in-the-mud. It wants to put money to reserve in order to expand business in favourable directions. But there is no chance of its expanding business in favourable directions if you take away 20 per cent. from any profit over 6 per cent. in a new business. This is one of the most serious features of this scheme. It ought to be very carefully considered.

I have not put forward these comments in any spirit of criticism. I am certainly not anxious in any way to make difficulties for the Government, but to help them if I can. I put these things forward, because they are affecting industry at the present time. I have talked with many people to-day and find that there are great perturbations in regard to them. Unless they can be alleviated in some way or other, I fear some check on the enterprise of the country. I turn from that matter to look a little more happily on other features of the Budget. It is a comforting circumstance that in the last year our revenue improved by £48,000,000. I am glad to think that of that amount £35,000,000 is represented by Import Duties arising out of the legislation in 1931 and the agreements reached at Ottawa. The right hon. Member for Caithness (Sir A. Sinclair) yesterday indicated that what was required for our prosperity in the future was a reversal of our fiscal policy. I should like to ask him how he could have raised £35,000,000 of money so easily and without any trouble to anybody. It used to be said that if such duties were imposed we should not be able both to collect revenue, and to protect our industry. We have done both. It used to be said that we should not be able to maintain our exports if we put a duty on imports. Our exports have gone up by £50,000,000 in the course of the last five years, and our imports have also gone up. I suggest to the right hon. Gentleman that he is somewhat mistaken in his point of view. But he goes further, and I think worse. Recently he said that in order to avoid war we ought to get rid of Imperial preferences. At the time when the right hon. Gentleman made this statement I had no figures, but I have made myself acquainted with the figures since, and I should like to draw the attention of the Committee to the fact that we imported last year from foreign countries £516,000,000 worth of goods. We imported £300,000,000 from our Dominions, but I am leaving them out for the moment. Is that being a bad neighbour to import over five hundred million pounds worth of goods? Is that any reason to incite people to war?

Look at the American figures. The United States of America, with two and a half times our population, only imports £490,000,000 worth of goods a year from outside countries as against our £516,000,000. Surely in the matter of trade we are the greatest benefactors of the world and the nation which of all others should most escape hostility. We are the best customers of the world. The matter becomes ludicrous when you look at the amount which these foreign countries take from us, £233,000,000 worth as against our £516,000,000. That is to say they gain a credit of £293,000,000 by traffic with this country. The unfortunate thing is that the right hon. Gentleman not merely deceives himself and other people who follow his views, but I am afraid he has been the means of deceiving other people outside. In a speech which Herr Ribbentrop made at Leipsic, in which he referred to the German claim for a return of her colonies, he said: England at the Ottawa Conference resorted to the policy of preference for the Dominions, and the Empire became a vast economic exclusive unit. I have given figures to show the extent to which we exclude foreign goods from this country. We provide the most open door there is. Take the figures for Germany. What happened last year? Last year we imported £32,000,000 of goods from Germany as against £21,000,000 which Germany imported from us. Is this what it is to be, an exclusive country, and is this a reason for giving back colonies which formerly belonged to Germany? But take the Empire as a whole. If you take all the countries engaged in the Ottawa Agreement—England, Ireland, Australia, the Union of South Africa and India—if you take them altogether, you find that whereas we bought £54,000,000 worth of German goods Germany bought only £42,000,000 from the Empire.

Mr. J. Jones

On a point of Order. Will the right hon. Gentleman realise in the figures he is giving the rate of exchange?

The Chairman (Sir Dennis Herbert)

That is not a point of Order.

Sir R. Horne

Undoubtedly the rate of exchange has been a considerable impediment to the business of the world, but as far as the rate of this country is concerned it has been more or less stable for some time past. I am not what you would call a rigid Protectionist, far from it. I think it is just as silly to say that you must put a tax on everything as to say that you should not put a tax upon anything. In the present conditions of the world I think we should see what we can do in the way of creating freer trade, but there are certain considerations in connection with that to which I must refer. It would be difficult, and I think it would be wrong on our part, to throw our shores open to countries which have a lower standard of living than we have, and which by that fact are able to sell their goods at lower prices in this country. That is a position which we must take up. It is therefore impossible to make any universal system of agreement until these standards are raised. In certain countries of Europe wages are only two-thirds of ours, in some cases only one-half, and in other cases less than one-half. In these conditions it would be impossible to make a uniform agreement with everybody.

I think it is plain that at the present time the United States are in the mind to make a trade arrangement with us. There you have two countries which are fairly comparable. Both of them have a high standard of living, and are in a position to do a complementary trade in many cases, and to exchange commodities in ways suitable to each other. That, I hope, will be taken up soon. I gather that the conditions are favourable, and I do not think I am wrong. But it is no good making a trade agreement if you have not at the same time made arrangements about currency. You can completely defeat a trade agreement by an alteration in currency. Take, for example, the United States of America. Under her law she is entitled to reduce the value of her dollar, and that would make a considerable difference in its relation to sterling. Therefore, I think that at the same time—and the time is propitious—we should enter into negotiations with regard to currency.

Already there is to the credit of the Chancellor of the Exchequer the achievement of the tripartite agreement between France, the United States of America, and ourselves, and that agreement has also been adhered to by Switzerland, Holland, and Belgium. It therefore includes important countries. Under that agreement it was arranged that these three countries should collaborate with each other in keeping stable the relations of the currency of each to the other, and that has worked very well. But it is not enough, and it has been shown recently not to be enough. It is not enough for this reason—that you can suspend it at 24 hours' notice. Nobody has any confidence in anything which can be got rid of so rapidly. When the rumour went round a fortnight ago that America was going to change the price of gold immediately there was a great flurry in the commodity markets, and some damage was done. I believe it also did some good in driving a large number of speculators out of the market. But you cannot have that kind of incident occurring often without injury, and it seems to me of the highest importance to the business of the world, and particularly to international trade, that some more definite arrangement should be made between the various countries for the regulation of their currency, an agreement definite enough to give confidence to the world as to the basis on which business would be transacted.

There is one other point with which I want to deal, and that is the question of prices. The hon. Member for East Aberdeen (Mr. Boothby) raised the point yesterday, not in a critical way, and it has been raised by the hon. Member opposite to-day. By his speech yesterday my hon. Friend led me to bring down to the Committee the report of the Macmillan Committee which reported in 1931. This was the final effect of their recommendations to the Government: Our objective should be, so far as it lies within the power of this country to influence international price levels, to raise prices a long way above the present level, and then maintain them at the level thus reached with such stability as can he managed. The reason why prices matter so much is that out of prices costs are paid, and if costs are higher than prices you get business failures. That is what happened between 1929 and 1932. The reason why there was so much depression was that the producer could not maintain himself, pay the costs on his borrowed money and pay his wages. All over the world you had the same situation; wholesale prices fell by 26 per cent., and the result was that many people went bankrupt. The farmer who had a mortgage on his property had to raise three bags of wheat in order to pay his mortgage debt, where previously he had only to raise one. The effect of that on the market was that by his struggle to produce what was necessary in order to pay his way the farmer glutted an already stagnant market, and the evil spread. That situation was alleviated in the main by devaluation of currencies. First of all we went off the gold standard, and afterwards America, France, Belgium and Switzerland devalued their currencies. In that way prices were raised and business was enabled to meet its obligations. That is one of the reasons why the world is much more prosperous to-day.

But it is wrong to think that at the present time our prices are high. I have been looking at the figures for 1929, a year which was very prosperous and when there were no complaints so far as I know about the cost of living or about the way in which we were getting on. Taking the figure as 100 for the year 1929, I find that, according to the Board of Trade index, general prices to-day are still only at 92, so that there will have to be a rise of 8 points before we get to the prices of 1929. The prices of raw materials are only 88, and the hon. Member opposite ought to take into account the figure for the cost of living, which is 92 as against 100 in 1929, that is to say, it is still 8 points below. Wages on the average are almost precisely at the same level as they were in 1929.

Therefore, it is obvious that we have not yet arrived at any critical situation. I think nothing would be more detrimental to the advance in prosperity which we have been enjoying than to begin any campaign to beat down prices, for in that way the whole flow of enterprise in the country would be interrupted. It is far more important that the raw material producer should, get prices which enable him to carry on than that he should be rendered bankrupt and that the world should go back to where it was in 1931. Accordingly, I would deprecate any undue fright about prices at the present time, although I agree that prices will have to be watched all over the world. But they are still well below the level of 1929. In America the figure is 92 as against 100, in France 88, in Belgium 80, and in the Netherlands 74. Therefore, it will be seen that there is room for an advance in prices all over the world, when they are compared with the level of 1929, a year in which as I have said there were no complaints. We ought to watch these prices, and I think the best mechanism by which we can keep a control over them is by agreement between the Central Banks of the world.

I hope that all of these things may be taken up: First, bilateral trade agreements, where they can be made; secondly, I will not say stabilisation of currencies, because that would perhaps sound as though we were getting a de jure stabilisation for which we may not yet be ready, but at any rate some more definite arrangement about the level of currencies in order that world trade may be conducted on a stable basis, and thirdly, common action by the Central Banks, which they can easily take, in order to see that prices do not run away. Those are the things I venture to suggest. I hope that these attempts at co-operation will gradually bring the nations together to settle their economic differences, and, once the economic differences are settled, I feel fairly confident that there will follow some assurance of peace in the world—liberty from the nightmare of war and freedom from the great burden of armaments which weighs so heavily upon our shoulders to-day.

5.35 p.m.

Sir Archibald Sinclair

I did want to express some sympathy with the Chancellor of the Exchequer in the disappointment and misfortunes which, largely through no fault of his, he has encountered during the last year or two of his term of office, but I think the right hon. Gentleman the Member for Hillhead (Sir R. Horne) with his, I will not say fulsome, but ample eulogy of the Chancellor of the Exchequer's lustrum, has said all that it is necessary to say on that theme. Although it is true that the Chancellor has earned the respect even of his opponents by his technical mastery of the administration of his office, and although it is true that he has encountered misfortunes which, as Chancellor, it was beyond his power to avert, I do not think it can be said even by his most devoted, if candid, adherents that his term of office has been successful; for the condition of the national finances at the present moment is hardly less precarious, and the burdens of direct and indirect taxation upon the backs of the taxpayers are even heavier than they were when the Chancellor assumed office. Let me take the criterion which the Chancellor himself suggested when he opened his Budget in 1933—the year 1931. In opening his Budget in 1933, the right hon. Gentleman said: At that time when the Estimates were presented in April, 1931, our ordinary expenditure, leaving out interest on the American Debt for purposes of comparison, was set down as £724,000,000. We were then borrowing for unemployment at the rate of £1,000,000 a week, and we were making provision to borrow £9,000,000 for the roads. So that our total ordinary expenditure then was at the rate of £785,000,000."—[OFFICIAL REPORT, 25th April, 1933; col. 41, Vol. 277.] What is it now? The more scrupulous we are to be fair to the Chancellor of the Exchequer, the more deadly is the comparison. Therefore, I invite the Committee not only to leave out of consideration, for the purposes of comparison, the loan expenditure on armaments, but also £90,000,000, representing emergency expenditure on armaments out of revenue. After those deductions have been made, there is still left a figure of £770,000,000 as the total ordinary expenditure for next year. In 1931, after making all the adjustments which the Chancellor of the Exchequer invited us to make with regard to the American debt, borrowing for unemployment and for roads, the expenditure was £785,000,000, of which £52,000,000 was for Sinking Fund, as compared with £770,000,000 now, without any provision for Sinking Fund.

It is no wonder that the hon. Member for Aylesbury (Mr. Michael Beaumont), in the Debate on the Budget last year, made a protest against the high level of expenditure; but that protest has had no effect. It is useless for the Chancellor of the Exchequer to say that all his difficulties are due to rearmament, for I have deliberately excluded special rearmament emergency expenditure from the calculation. Three years ago and again two years ago, the Chancellor of the Exchequer gave the Committee a solemn warning about the necessity for re-instituting the Sinking Fund, but he is now reduced to saying that the Sinking Fund in present conditions would be absurd; and he launches us and his unfortunate successor upon a series of unbalanced Budgets. The Chancellor's success, if indeed it can be called success, is in bringing us back to the point from which we started in 1931. It will be urged that conditions now are wholly different from what they were then.

Brigadier-General Sir Henry Croft

Hear, hear.

Sir A. Sinclair

The hon. and gallant Member for Bournemouth (Sir H. Croft) says, "Hear, hear." No doubt he would say that trade was depressed then and that now it is booming, but we shall disregard at our peril the warnings of the Economic Committee of Information and of the Statutory Committee on Unemployment Insurance that this is a passing phase. Only yesterday the Chancellor reminded us that last year he rebuked those who took short views and insisted, against the opposition of some of his friends, on increasing the Income Tax. We must not take short views now, and we must realise that this favourable phase of the trade cycle is bound to pass.

The Chancellor of the Exchequer, not unnaturally, claims for himself and for the Government the credit for such trade revival as we have experienced. Yet all countries have shared in this trade revival, some of them to an even greater extent than ourselves. That is the more astonishing when we remember that the ministers in the Governments of those countries are paid substantially lower salaries than those in our own Government, and when we remember that the arguments of the Government on the Ministers' Salaries Bill only a week or two ago were that the honesty and ability of Ministers were in direct ratio to the amount of the salaries they received. Nevertheless, the fact remains that if trade revival is indeed due to the wisdom of Governments, it so happens, by a happy coincidence, that all the countries of the world have in recent years enjoyed the undoubted advantage of equally wise Governments which, looking at the situation in the world to-day, is absurd. Therefore, there must be some other causes at work besides the wise policy of the Government.

I explained to the Committee last year what I thought were the causes, and I do not wish to cover the same ground again this year, but I want to examine what the Chancellor says are the causes. He has frequently indicated his views on the chief causes, but he never mentions one which I rank very high, and that is the abandonment of the Gold Standard to which we were linked at an artifically high level of exchange by the Conservative Government in 1926. The factor which the Chancellor always puts first is tariffs. On that point I cannot agree with him or with the right hon. Gentleman the Member for Hillhead. I think it is the Government's reliance on tariffs and subsidies—subsidies to the extent of £134,000,000 in the last financial year, as was revealed in answer to a question a month ago—which gives such an unhealthily artificial complexion to the present activity in industry and trade. The yield in revenue of all the Import Duties Act duties and the Ottawa Duties, to which the right hon. Gentleman the Member for Hillhead referred and of which he is so proud, is hardly more than the equivalent of an extra 6d. on the Income Tax, and so far below the estimates of the protectionists who introduced them has their yield fallen that, in spite of constant addi- Lions to them month by month and almost week by week since 1932, even now, in a year of what the Government calls prosperous trade, it amounts only to what the Government estimated it would be at the bottom of the slump, in the year 1932–33. The right hon. Gentleman the Member for Hillhead said that we have this revenue—which, as I have shown, is really very small—and that we have also managed to increase our exports. He did not mention to what extent we have increased them. He did not mention that the level of our exports last year was, with the exception of the crisis years and with the exception of that other crisis, the War, the lowest it has been since 1910. Yet there never was such abundance, such power of production, so much wealth to exchange between this country and the other countries of the world as at this time.

Sir H. Croft

Have not exports gone up £50,000,000 since the right hon. Gentleman left the Government?

Sir A. Sinclair

Everybody knows that when I left the Government it was at the lowest period of the slump. My answer is that at that time the exports of every country, not only our own but every Protectionist country as well, were at the lowest point they had reached for years. The exports of every country have increased since then and the countries whose exports have increased most, such as our own country and Sweden, are those with the lowest tariffs. Where tariffs have been lowest exports have increased most rapidly. As I was saying in spite of that, in spite of the abundance of wealth which exists in the world to be exchanged, our exports are still lower than they have been at any time, excepting crisis periods, since 1910. But the Government promised much more than a mere slow recovery of a beggarly £50,000,000 worth of export trade—beggarly in comparison with what we have lost since 1929. We have lost £350,000,000 worth of trade in that period and we have only recovered £50,000,000 worth of that. But the Government did not tell us when they introduced Protection that they were going to recover only one-seventh of our losses. No. They told us that if we gave them the weapon of tariffs they would be able to break a way into the markets of the world for the export of British goods. The event has wholly falsified and confounded the predictions which they then made.

Vice-Admiral Taylor rose—

Sir A. Sinclair

The Committee knows that I am always willing to give way to hon. Members, but on this occasion I must draw attention to the fact that two speeches, which have been most interesting but have not been short, immediately preceded mine, and I cannot expect as much indulgence from the Committee as has been extended to the two previous speakers. It would not be fair to others who wish to take part in the Debate. On the other hand, the right hon. Gentleman the Member for Hillhead did not give me notice of the fact that he was going to raise this question. I do not complain of that. I am only pointing out the difficulty in which it places me. It is a question which I am ready, as I hope I have already proved, to answer without notice. At the same time I am most reluctant to add to the length of my speech, and therefore I hope I shall be allowed to pass from this subject without further interruption as there is other ground which I wish to cover. I agreed profoundly with the right hon. Gentleman the Member for Hillhead in his wish for an agreement with the United States but he laid down for this country the principle that we must exclude goods coming from countries where the wages and working conditions are lower than they are in this country. If the United States acts on the same principle, I am afraid it will be very difficult for us to come to any trading agreement with them. So much for tariffs as a factor in promoting prosperity.

The factor which the Chancellor of the Exchequer ranks second is cheap money. There, I agree with him but how long will he be able to maintain it with prices rising and with an unbalanced Budget? That brings me to the third factor to which the right hon. Gentleman ascribes prosperity. That, as he said in his Budget statement of 1935, is the factor of balanced Budgets. But now the balanced Budget has gone; cheap money is threatened and the increase in expenditure on existing social services, without adding to them at all, is progressive and automatic. Unemployment, we are told by the Committee on Economic Informa- tion and the Statutory Committee on Unemployment Insurance is likely to average 15½ per cent. to 16½ per cent. over the next 10 years and an even higher figure over the next eight years, as compared with 11.5 per cent. at the present time. That means increased expenditure on unemployment and a declining revenue from slackening trade. Therefore it is clear that the Protectionist finance of the Chancellor of the Exchequer is threatening to land us again into that bog of insolvency into which Socialist finance landed us previously and from which the first National Government rescued the country.

For the hon. Member for Bridgeton (Mr. Maxton) insolvency, as he told us yesterday, holds no terrors. He sees other nations spending more recklessly and from slenderer resources than ourselves on armaments and other unproductive objects, and he tells us that they do not seem to him to be any the worse off. But the working-people living in those countries are worse off. If their governments are buying guns, they have to go without butter and a good many other things which British working men have. I go further and say that I base my hopes for peace and disarmament in no small measure on the special difficulties which countries, where the economic system has been grossly distorted and rigidly controlled in the interests of rearmament, will have in adapting themselves to rising prices.

Even in this country, with its immense resources, accumulated during a century of Free Trade, we cannot hope to avoid serious distortion of our financial and economic system if we have to complete the five years programme of rearmament; but before I come to a criticism of the financial aspects of the Government's rearmament programme, I would say this. If any foreigner follows these Debates on the Government's armament proposals and hears or reads criticism of them on grounds of finance or foreign policy, do Hot let him make the mistake of supposing that we impute the whole responsibility for the present situation to our own Government. In the situation as we find it, every party in this country is resolved to support rearmament, much as we loathe it, and to see it through, provided always that we are ready to stop the moment others are ready to join us in disarmament. I agree, and I am sure few will disagree with what the right hon. Gentleman the Member for Hillhead said on this subject. He told us that he had been strengthened in his resolve to support the Government in rearmament, by reading Marshal de Bono's book. I was delighted to hear the right hon. Gentleman refer in those terms to that book and show evidence of having profited so much by his study of it. But I remember that he took a different line in this House on the Abyssinian question. I do not remember that he stood with us in demanding the imposition of sanctions and the assertion of the rule of law against Italian aggression in Abyssinia. The right hon. Gentleman supported the Government in the abandonment of sanctions on a plea, which I reject, and I am afraid that he must be ranked among those to whom the military correspondent of the "Times" refers in his review of Marshal de Bono's book, when he says that it has made the apologists, in this country, for Italian policy in Abyssinia, look rather foolish. But having made clear our determination to support the policy of rearmament, it is not only our right but our duty to press the Government to adopt a constructive policy of economic disarmament and political appeasement and co-operation with other countries and also to urge the importance of finance even in the context of defence. Armaments are not the only weapons of war. The industrial economic and financial strength of Britain has long been a powerful factor in compassing the defeat of those who have sought to secure domination in Europe. To wield the cumbersome armaments which we are building we shall need large reserves of financial strength.

Before the War our National Debt was £640,000,000. To-day it is nearly £8,000,000,000. Then we were steadily paying it off. Now the Sinking Fund has been suspended for four years and we are proposing, deliberately, to unbalance our Budget and to add £400,000,000 in five years to the deadweight of our huge National Debt. Then, our Income Tax was 1s. 2d. in the £ and Surtax 6d., or a total of 1s. 8d. Now the standard rate is to be 5s. while Surtax on the highest range of incomes is 8s. 3d. The Excess Profits Duty, then imposed only during the War, is now to be brought into operation in peacetime. Then, a revenue of £300,000,000 was collected in rates and taxes. This year there is no doubt that the tremendous sum of over £1,000,000,000 will be taken from the ratepayers and taxpayers of this country. If taxation is kept at concert pitch in time of peace there will be no reserve or margin for war. If we cannot pay our way now and have to resort to loans it is difficult to see how we can do so when industry is dislocated by war and our financial resources have been depleted. Even from the point of view of defence, the restoration of the flexibility and elasticity of our fiscal system is of vital importance. That emphasises the paramount importance of economy—the avoidance of waste and superfluity—in the context of defence.

For that among other reasons, with which I do not intend to deal now although they are important, we on these benches resent the Government's delay in dealing with the report of the Royal Commission on the trade in and manufacture of arms. The Royal Commission found that to prevent profiteering it was not enough that the Defence Departments themselves should be satisfied that the profits allowed to private manufacturers under particular contracts were fair and reasonable, and they added that nothing less was required than control by the Government, in peace time, of all the arms manufacturing capacity in the country. That report has now been in the hands of the Government for four months, but the Government have not made up their minds what to do about it. We think it vital that profiteering should be stopped, that the cost of the rearmament programme should be brought down to the minimum. It is not sufficient for our purposes that the Government should, as the hon. Member who spoke from the front Opposition bench said, enter into partnership, by means of an Excess Profits Duty with those who are profiteering. We want profiteering in armaments stopped and the cost of the programme reduced to the minimum.

The other great step which we think the Government should take in order to reduce the cost of armaments is to attribute to the Minister for the Co-ordination of Defence functions which will enable him really to co-ordinate defence. At the moment it is clear that the old scramble between the Defence Departments for money and for authority continues. You have the position in which the air defence of London is divided up between the War Office and the Air Ministry; you have the bomb versus the battleship controversy settled by the Air Ministry ordering all the bombers they want and the Admiralty ordering all the battleships they want; and we are even told that although the cruisers which guard our trade routes now have aeroplanes to lengthen their range of vision and to assist them in the discharge of their duties, the number of cruisers which we require for that purpose is by that fact not at all reduced. Before the War we spent substantially under 4 per cent. of our national income on defence. Now we spend nearly double that proportion, or 6¼ per cent., and therefore I say that the need of economy, of eliminating waste and superfluity, is abundantly proved.

I would go further and ask the Government this question: High prices may well slow down the rate of rearmament in other countries. Is that being watched? It is reported that the Italian Naval Estimates this year amount only to the equivalent of £20,000,000, and it has not been suggested that the German Fleet is undergoing any rapid process of expansion. Are the Government watching these developments with a view to putting the brake on our naval expenditure, which is over £100,000,000 in this year alone, if other countries are in fact doing the same. If the case for any item of expenditure for our defence programme is proved, we must accept it, but it is our duty here to protect the taxpaying masses of the people from extravagant demands, and we must ensure that economy in public expenditure on defence is enforced to the limit of safety.

In the deplorable situation for which such a heavy share of responsibility rests upon His Majesty's Government and which forces upon us substantial measures of rearmament, I do not feel called upon to utter much criticism of the new proposals for taxation. It is disastrous that taxation should have been brought to so high a level in peace time, but it is better that we should face the consequences of the Government's failures and tax ourselves now than that we should pile up burdens which we should have to carry in circumstances of even greater difficulty in the future. We therefore supported the Chancellor last year in his decision to increase taxation rather than to rely upon loans or expansion in the revenue to balance his Budget. On the same principle we voted against the Defence Loans Bill this year, and on the same principle again we shall support the Chancellor in his proposal to tax industrial and commercial profits rather than to borrow more than he is already doing or to increase indirect taxation.

But the particular proposal which the Chancellor has made—which I feel inclined to describe, after listening to the speech of the hon. Member for East Edinburgh (Mr. Pethick-Lawrence) as an Accountants' and Lawyers' Endowment Tax, but which has been christened more attractively by the Chancellor of the Exchequer as the National Defence Contribution—will require searching analysis, and I should be grateful if the Financial Secretary to the Treasury would begin the process by answering a few questions additional to those which were put to him by the hon. Member for East Edinburgh and the right hon. Member for Hillhead. My first question is to carry a step further the question which those two hon. Members asked, namely, whether Income Tax will be assessed before or after the new tax is deducted. I imagine that the taxpayer will pay the new tax, the National Defence Contribution, that it will then be deducted from the profits of the concern, and that he will pay Income Tax and Surtax on the difference so ascertained. I imagine that that is so, but I hope the right hon. and gallant Gentleman will tell us. I would also ask whether the profits for the purposes of the new tax will be assessed in the same way as profits for the purposes of Income Tax and, therefore, whether the figure on which the taxpayer is assessed for Income Tax will be the amount of the profits so assessed on the same basis, less the amount of the National Defence Contribution. I imagine that, roughly, the answer of the Financial Secretary will be in the affirmative, but, if so, it will compel us to make a distinction between the net yield of the tax, which the Chancellor estimated at £20,000,000 for next year, and the net benefit derived by the Treasury, a figure which would be equivalent to £20,000,000, less the amount of Income Tax and Surtax which would otherwise have been paid on the amount which is to be paid in respect of the new tax.

Major Hills

I take it that it is additional to Income Tax.

Sir A. Sinclair

The right hon. and gallant Member for Ripon (Major Hills) thinks the taxpayer will have to pay both the new contribution and the Income Tax and Surtax on the full amount of the profits. He may prove to be right, but only the Financial Secretary can resolve that doubt. If in fact the amount of the tax will be deducted before the taxpayer is assessed for Income Tax and Surtax, then the amount which would have been paid in Income Tax and Surtax on what is now to be paid as National Defence Contribution will have to be deducted in order to represent the net benefit to the Treasury of the new tax. If that is a correct calculation, I hope the Financial Secretary will tell us what will in fact be the net benefit to the Treasury, taking into account any losses that there may be on Income Tax and Surtax.

Then I would ask how many people will be employed in administering this tax. Once it is imposed, of course, evasion must be checked wherever it can be found, but I imagine that the Chancellor of the Exchequer will try to limit the staff as much as possible, and I hope he will give us an assurance that the energies of the staff will be devoted largely to the big firms where the big money lies and whose employment of lawyers and accountants will make evasion the harder to detect, rather than to small businesses to which the attentions of the tax officials are particularly harassing. Next I would ask the Chancellor of the Exchequer why the years 1933, 1934 and 1935 are taken as the standard years for ascertaining the average annual profits of a firm. In 1933 recovery had hardly begun. Probably the majority of the firms which will have to pay this tax had not then begun to experience it. On the other hand, I must say that to include 1936 would, I think, go too far in favour of the firms, because in that year a large number of firms were already beginning to make special profits out of the armaments programme of the Government. I would therefore suggest to the Financial Secretary—and I should be obliged if he would give me an answer on this point—that it might be fairer to take the years 1934 and 1935 in arriving at the average annual profits of a firm.

There was a question which was asked by the right hon Member for Hillhead—or, rather, it was asked by the hon. Member for East Edinburgh and the right hon. Member for Hillhead elaborated it—the question, namely, as to what would be done to prevent evasion of this tax by the investment of large sums of money that would otherwise have to be treated as profits in capital equipment of an extravagant kind. We have all heard of instances of firms which equipped their offices elaborately with marble fire-places and so forth, because, as the right hon. Gentleman said, the reasoning was that 80 per cent. of it was paid for by the Government, that they would have to pay 80 per cent. in that way and that by adding 20 per cent. they got something for themselves instead of having to pay it to the Government. Unless this practice can be stopped, it will have a serious effect in some industries on wages, because in some industries wages are on a profit-sharing basis. Take, for example, the coal industry, in which 87 per cent. of the profits goes in wages. What is going to happen in a case of that kind? If a coal company chooses, in order to avoid this tax, to spend money which would otherwise be declared as profit on capital expenditure on sinking new shafts, it may be, or on new housing, then there will be less money, not only for the purposes of this tax, but also for distribution as increased wages to those who are employed in the industry. I therefore hope the right hon. and gallant Gentleman the Financial Secretary will be able to clear up that point.

I wish it had been possible to devise a method of taxation the incidence of which would have fallen on armament firms and not on productive industry. I wish the Chancellor of the Exchequer had not persuaded Parliament in 1933 to repeal the land taxes, which by now would have been providing an expanding revenue and which would have obviated the necessity for putting this tax on productive industry, but as the bankruptcy of the Government's policy makes it necessary to increase taxation, I support the Chancellor's decision not to delay in imposing taxation and not to add to indirect taxation.

If, without lasting injury to the country, without checking the revival of trade and precipitating a slump, we are to be enabled to carry the burdens which the Chancellor has put upon us, three things are necessary. One is insistence on rigid economy in financial administration and especially in carrying out the defence programme. The second, and even more important, thing was rightly emphasised by the hon. Member for East Aberdeen (Mr. Boothby) yesterday, namely, economic disarmament and the revival of overseas trade. Look at the great problems which face us now. There are the Special Areas, for instance. The Chancellor said in his broadcast speech last night that rearmament was a Godsend to the Special Areas. How can rearmament be a God-send to the Special Areas, or to any other part of the country, if it is going to lower the standard of life of our people for a generation or to break the back of our civilisation—both consequences which the Chancellor himself has prophesied if the world armament race continues?

I hope that I am right in believing that the Chancellor is sincere in hoping that we shall never have to complete our rearmament programme because, before we reach the end of the five-year period, counsels of peace and disarmament will have prevailed. What will be the position of the Special Areas if, in the meantime, we are to regard rearmament as a Godsend to them? Their only salvation will be economic and military disarmament and the revival of overseas trade. Peace and disarmament, as Mr. Hull, General Smuts, Mr. Bruce, and many other foreign and Dominion statesmen have pointed out, will be achieved only through economic disarmament and cooperation. Lastly, from the standpoint of finance and of according to our almost intolerably overburdened taxpayers some measure of relief, there is no greater new source of revenue that could be tapped than would be afforded by the revival of overseas trade. We shall, therefore, look to an early opportunity of coming to grips with this problem in the course of these Debates on the Chancellor's proposals.

If public economy and the revival of overseas trade are necessary to avert the onset of a slump, a third thing is also necessary, and that is, a rising level of wages. The enjoyment of the prosperity of which the Government boast has been confined to comparatively small classes: to men who were unemployed and have now found work—yes; to the proprietors of successful businesses—yes; but to the vast and much abused rentier class—no.

They have had their rate of interest cut to 3 per cent. and heavy tax burdens have been piled on them in addition. Pensioners and unemployed have not enjoyed this prosperity. What is less generally realised is that the majority of wage earners who have remained in steady or fairly steady employment have not profited either. Between 1933 and 1936 their wages rose, on the average, by 4½ per cent. Their cost of living increased by 5 per cent., so that their real wages, on the average of 1936, were just about the same as in 1933. As the "Economist" pointed out last week, by December last their real wages were 2½ per cent. lower than in 1933, and there have been further rises in the cost of living since the new year. It is by the increase of real wages that the demand for and the production of consumption goods must be maintained, and, therefore, I welcome the Chancellor's refusal to increase indirect taxation. I urge him to go further and to check the rise in prices by reducing existing taxation on food and on consumption goods, the cost of which must otherwise be certain to rise on account of the diversion of industrial effort, not only in this country but in all countries of the world, from the production of consumption goods to the production of armaments.

In his broadcast address to the nation last night the Chancellor said that Income Tax at 5s. in the £is quite as high as it ought to be when we are not at war. It is much too high, especially when Sur-tax is at 8s. 3d. in addition on the higher ranges of income, when heavy indirect taxation is levied on consumers, and when the Chancellor is compelled to tap another war time source of revenue in the Excess Profits Duty. Nor is a world war the only misfortune we may encounter. Disasters of another kind, perhaps happening far outside our territories, might shake the foundations of the precarious financial system which the Chancellor has constructed. Crushing taxation may well endanger democracy itself. It was the breakdown of the financial system in Germany as the result of the invasion of the Ruhr which destroyed the German middle classes, drove them into the arms of militarism, and stirred up that tempest of anger and humiliation which broke in the Hitler revolution. There is a limit, indefinable but none the less real, to the burdens which can be imposed upon our taxpayers in peace time. The Chancellor is approaching that limit, and he will overstep it only at the peril, not only of his Government but of Parliament, whose primary responsibility it is to prevent unproductive and wasteful expenditure, to curb the rise in taxation, and to insure to the people of this country the enjoyment of the fruits of their labours.

6.22 p.m.

Sir Alan Anderson

The Prime Minister lately remarked to us that truth is a gem with many facets. I have been wondering as I have listened to the interesting speeches this afternoon what a foreigner would think of it all. I meet a number of foreigners who know a good deal about business and finance, and I well remember five years ago the mixture of friendly apprehension and amusement, not unmixed with contempt, with which they regarded our distressing position. How different it is now. It has absolutely changed. They admire what has happened, and are surprised that what they expected to happen did not happen. They admire us and look upon our free progress as one of the great bulwarks of their safety. I think they are right, and that chief among the measures that have been taken to bring us forward have been wise measures of finance. Therefore, I offer to the Chancellor of the Exchequer my tribute on his Budget. It is wise for what it does and for what it avoids doing. The Chancellor abstains from nibbling at many of the attractive baits that were held out for him. He told us of them yesterday. It is a great mistake to disturb the taxpayers by a lot -of new measures.

He drew his chief fresh revenue from that trusted ally of all Chancellors, the Income Tax. I have been on deputations to the Chancellor one after another for years before the Budgets came on, on behalf of the Chambers of Commerce of this country, and their chief plea always is that the greatest relief that can be given to trade is a reduction of Income Tax. One of our arguments, which I believe is true, is that as that tax is the refuge to which every Chancellor must turn in bad times, so it must be relieved in good times. We recognise that these are not normal times. I suppose that, with regard to the Income Tax, the only question was 3d., or 6d., or 9d. The Chancellor knows far more than I do what amount is needed, and we gasped with relief when we found we did not have to pay more than 3d. in that direction.

But we have to face this other tax, the National Defence Contribution. Most of us realise that from a psychological point of view something of that order was necessary. We are calling upon the whole people of the country to help bear their share of the burden, whatever it may be, but many of them have no part in the profits which will flow to industry—and not only to armaments. We cannot spend hundreds of millions of pounds and confine the profits to the particular industry which is first employed. It spreads out like the circles when you throw a stone in a pond. Millions of people look at these trades, and they see here a bad case of too much profit being made, and there a case of profits being squandered, and they get upset and jealous. Some measure of this kind was, therefore, I believe necessary. Every measure for taxing excess profits that I have ever heard of, however, is full of difficulties and dangers. It is most unsatisfactory, but it is one of the terrible things forced upon us by the emergency. I do not want to go over the grounds which have been very well covered by my right hon. Friend the Member for Hillhead (Sir R. Horne).

If one lives one's life in hazardous trades, one knows perfectly well that there are many of them. All those trades which live in the open markets of the world are like the Special Areas in this country; they are different from the trades that have been protected by tariffs and protected in another way by the spending of money in public assistance. There are in the markets of the world those who have been suffering and just keeping their heads above water for the last six or eight years. They cannot cover their hazards at 6 per cent. in good years, just as a camel stores up water in its hump in dry times, so these trades must have more than 6 per cent. in good times if they are to live through bad times. The point has been made that the trades which least require assistance have been doing pretty well in the past, and will have a standard of profit of very likely more than 6 per cent., and that, therefore, they will gain under this Measure in comparison with those which have only been keeping on their feet. That is surely unfair. I do not know how it could be met. It seems to me that the fair way would be a standard percentage for each trade varying with the usual percentage that attracts industry and enterprise into a particular trade. If that is not possible, I feel certain that the considerable unfairness between trades is inherent in the present measure.

A point has been made by the right hon. Gentleman the Member for Caithness (Sir A. Sinclair) about the past losses and depreciation. In the ordinary way depreciation in the eye of the Income Tax cannot be classed as a loss, and it is essential that the firms which have not been able to set aside sufficient for depreciation in the past should be allowed to count that in. In general, on the issue of balancing the Budget, I admire the Budget and I think it is wise. The difficulties have been well faced. It is a matter of jugment always how much you must cast on at the moment and how much you can defer, and I accept the view that the judgment was wisely taken this time, as has been proved in the past.

The size of our expenditure is what appeals to me as the most prodigious fact about the Budget, about all the recent Budgets, only it is made more prominent by the sudden need of rearmament. I have been looking back over my business life of 40 years. In that time we have passed through the South African War, then a peace, then the Great War, and then a peace. One would suppose that the national expenditure would bound up with a war and then ebb again. Not so. It is always flood tide with the national expenditure. Not that every item goes up: the Consolidated Fund service, for example, rose after the Boer War, but by 1913 was back to what it was in 1895, and the Defence expenditure shoots up and then goes back to a lower level. What goes up regularly, always, is the civil expenditure. There has been a tremendous rise. In 1895 it was £33,000,000, after the Boer War £47,000,000, before the Great War £83,000,000, in 1923 £300,000,000 and last year £453,000,000.

What would an economist of the Victorian era say if he looked at us, quite apart from the defence expenditure, and saw those figures? He would say, not that we were on the brink of ruin, but that we were submerged fathoms deep. It would look like it to him, but he would be entirely wrong. We find that everyone in this country is living far better than in those earlier times, not the rich only, but the poor, and not the poor only, but those over-burdened rich who have paid their direct taxes. It is a most curious fact. I do not know whether there is any moral to be drawn from it, but I submit that there may be some comfort to be taken from it. Our national accounts are archaic in form; they do not adopt many of the methods of modern accountancy, and a pound whether spent on T.N.T. and blown into the upper air, or invested and used to pay off a loan, or used to teach the citizens who will govern this country in 20 years time—all those pounds are added together and treated as pounds of expenditure. They are totally different pounds. We are spending vast sums of money. Quite a lot of it is invested in human happiness and human progress—a different thing from blowing money away on armaments. And so, while I agree that this expenditure is an appalling amount, it really does not appall me, as long as we keep our heads and keep up the credit of the country, which is very good and very high now.

But something else is very noticeable—the fundamental unity of all of us in the need for this tremendous, objectionable sacrifice which we have undertaken. That is a portent. Nothing could have made us agree to spending this vast mass of human effort on such a useless, horrible thing as armaments with which to kill our best neighbours as a real, grave apprehension about the safety of ourselves and of the whole world. That is a portent. What do we get from it? I think we buy something negative. We stick up a notice, "No invaders wanted here." We warn them off the grass, and not before it was time—Marshal de Bono or anyone else. We also buy something positive, a space of time for ourselves and the whole world in which to put ourselves right. We bought time, with all the sacrifice of life and treasure of the Great War, and what did we do with it? We did our best: we hung on to the Gold Standard, we opened our ports to foreign trade, we did all the things we ought to have done, but we could not get the other great nations to work with us.

Now we have bought another piece of time—but it is not eternity. We have to get on, we have to get moving quickly. We now have conditions in which a trading movement in the world has become possible. We cannot persuade the nations to allow each other to trade so long as they are all afraid of losing their own employment at home. Directly we set up conditions, as we have in this country, and as America and some other countries have, of full and over full employment then, indeed, the nations may come together. So I feel that the moment is here for which we have been waiting so long, and I hope and pray that with this great pressure upon us, as evidenced by this vast burden which we have taken up, the great men we have will lead us forward, gathering the other nations round us, towards a world peace.

6.38 p.m.

Sir Stafford Cripps

I should like, first, to congratulate the Chancellor of the Exchequer, because I have had the opportunity of crossing swords with him about several Budgets, in all of which he was doing his best in the light of his very mistaken ideas, and I hope sincerely that he may live long enough to realise the folly of his ways and to experience the benefits of a more commonsense and a wiser economic system in this country, though I hope that that will not mean his living unduly long. Most of the speeches from hon. Members on the other side have been such as one would expect in the boom conditions of capitalism. One knows that they are all moderately contented with the state of affairs, that they all look forward to a continued and rising prosperity, and apparently none of them is prepared to cast his eyes beyond the peak of the prosperity boom. Nor do they seem to take into account the peculiar circumstances of this particular boom. First of all, it is wholly artificial, because it arises not merely out of our own expenditure upon rearmament but out of the general expenditure upon rearmament throughout the world, and because it entails a vast expenditure by the State, which is not the usual accompaniment of boom conditions within capitalism.

The right hon. Member for Hillhead (Sir R. Home) pointed out once or twice in his speech that the revival in industry in this country had started before we em- barked upon our rearmament programme. That is an entire fallacy. The expenditure on armaments in this country started to rise in 1933–34. In that year there was an increase of some £34,000,000 in armament expenditure, and in the following year there was another increase, but the prosperity boom—after the depression—which started at that time was undoubtedly assisted by the very heavy rearmament expenditure then taking place in other countries. The whole structure of this present boom within capitalism is based upon vast public expenditure by the various countries of the world upon this perfectly useless production of armaments. That is something with which I certainly do not agree in this country. I have said before, and I do not intend to repeat the argument now, that as long as this Government is in office I should not agree to any rearmament expenditure at all, because I so profoundly distrust both its foreign policy and the purposes for which it is likely to use those armaments.

The hon. Member for the City of London (Sir A. Anderson) stated that the expenditure under the present Budget did not appall him. I wonder whether he would have made the same remark had a Labour Government been in office and had the expenditure been not on useless armaments but on social services? I know quite well that if he had then been speaking he would have condemned out of hand the vast, wasteful expenditure being made on the unemployed or on social services, and I should be very much interested if, on some other occasion, he would explain why it is that he is not appalled by so vast an expenditure to-day, whereas he would be appalled if a similar expenditure were undertaken for the benefit of the people of this country. That is one of the matters which I have never been able to appreciate as regards the criticisms of financial magnates about Budgets produced under different Governments.

I have a question to put to the Financial Secretary to the Treasury dealing with the new Excess Profits Duty and its relationship to the situation in the mining industry. Under the ascertainment system for wages miners are entitled to 85 to 87 per cent.—it varies in different districts—of the increased profits and the owners are entitled to retain the remaining 13 or 15 per cent. If a company which is operating a mine increases its profits and falls within the new Excess Profits Duty—as I imagine some of them may in the Yorkshire and Nottinghamshire areas—would that duty fall upon that 87 per cent.? It appears from what the Chancellor said yesterday that that would be the inevitable result, and that fact has a very direct bearing upon the incidence of this tax in the case of the mining community, because it will, in effect, be a direct tax as regards this 85 or 87 per cent. of the wages of the miners themselves. Many hon. Members on this side of the House may regard the tax through a rather different pair of spectacles, if that is to he its effect upon that very large and already badly underpaid portion of the community.

While dealing with the Excess Profits Duty, perhaps I might add that the right hon. Gentleman the Member for Hillhead pointed out many reasons why it would be an inequitable tax. He pointed out so many reasons that he almost convinced me that it must be a good tax. A tax which the right hon. Gentleman, in all the many representations of industry which he brings into this House, calls bad is one which I should almost inevitably regard as good. Any tax which it is attempted to place selectively upon capitalist industry must always be inequitable. Once you get away from the system of taxing all individuals, or all industries, equally, and you try to select, either by the amount of their profits or by any other test, which of the industries you will tax, you are inevitably led into confiscation. That is why I regard this tax as a valuable precedent brought forward by the Chancellor of the Exchequer. When tariffs were first imposed, I pointed out to the Committee that that must also be the inevitable effect. Some man with a merchant business would lose his business, and some manufacturer of a particular commodity would suddenly be given a very good business that he had never had before.

The inequality, that taking away from one man and giving to another man, is the inevitable effect of this type of taxation within Capitalism, and when capitalists start to cry out against policies of confiscation they seem to forget that they are bound to initiate confiscatory measures within their own system, if they want to try to raise money by taxation. The system which the Chancellor of the Exchequer is introducing, although in its present form, and with the very limited sum which he proposes to take from industry, it does not make any substantial difference to industries which are already, as the figures show, earning very large interest on their capital, can, by succeeding Chancellors, be used as a valuable device in the transition period from this form of economy to some newer and better form of economy. It can, by an adjustment of the percentages and limits, be made a method of completely limiting and putting a ceiling to the amount of profit which industry can make. I hope in the years to come that the Chancellor's example will be followed, and that this tax will be a permanent feature of taxation—until we get rid of this kind of taxation altogether in a different form of economy—by which private industry will be able to be gradually replaced by national and State-owned industry. From that point of view I welcome the Chancellor's gesture, which was very much like the gesture he made in municipal finance. He was the first person to introduce a municipal bank in this country, though he has ever since rigidly prevented anyone else from doing it. This little start that he has made here can be the beginning of a form of taxation which will enable us to terminate the capitalist system much earlier than we should otherwise be able to do.

The main point of the Budget is the great instability it discloses in the financial system of the country. We are in a period already of rising, I think one might justly call it rapidly rising, prices. We are in a period when, under Capitalism, we already have a very high measure of taxation. I would like to ask the Financial Secretary to the Treasury a question. When the rearmament programme comes to an end, what is to happen? It seems to me that there are only two possible answers. One is that we shall slide into the next war, when the armaments will be utilised and we shall suffer the same sort of financial experiences that we suffered during the last War, probably in a very exaggerated way. Starting with a debt of £8,000,000,000, I suppose we may expect to end with a debt of £18,000,000,000, and all that that means, in the case of the Consolidated Fund, in the services of that debt. The only other alternative is that, when this expenditure ceases, either because, as the Chancellor of the Exchequer says, the back of the State has been broken by it, or else because somebody becomes more sensible in the world and stops this useless extravagance, there will be a slump.

What will replace this vast public expenditure upon public works? Armaments are just as much public works as the building of streets or houses; the only difference is that they are useless, whereas the others are useful. We shall be in the position that the country has been running its economy for five or six years upon the basis of a vast expenditure upon public works. I do not know how it is proposed to get rid of that position. We clearly cannot remain in it. We cannot raise another loan, expend another £1,500,000,000, raise another loan, and so on, for ever. The net result is bound to be that the cessation of that expenditure will lead us into a very big slump. A year or two ago, the late Sir Arthur Steel-Maitland, speaking upon a Budget in this House, made a statement which struck me very much at the time. He said that unless during the next period of boom the capitalists of this country were able to devise some system by which they could anticipate the evil effects of the slump that was to follow, and even out those effects, Capitalism would have proved itself to be the wrong system. I do not see in this Budget, as one ought to expect to see, the slightest appreciation or forecast of the problem that is likely to arise. Both the right hon. Gentleman the Member for Hillhead and the hon. Member for the City of London stressed the necessity that private industry should put aside reserves in the good time in order to be able to deal with their shareholders or with their businesses in the bad time.

Here we are, right on the top of a boom, in a good time, using all our resources to the utmost, and imposing new taxation, without apparently any appreciation of the necessity for doing something now, in order, if this terrible system is perpetuated, that we may have the means with which to meet the next slump. It is in that slump that the great mass of the people of this country are to be made to pay for the expenditure which is now taking place in the form of loan and of current expenditure upon armaments and similar services. The rise in prices which the hon. Member for East Edinburgh (Mr. Pethick-Lawrence) has already mentioned, will undoubtedly raise throughout the country a very insistent demand by the wage-earning classes for an increase in their wage rates, and I think most of us on this side of the House are very glad. That demand might have been made much earlier. Probably the Chancellor of the Exchequer, when he imposed this new Excess Profits Duty, had his eye on what is called the wave of strikes which is taking place at the present time, and he may have thought that if any conceivable justification could be made for trying to suppress those strikes he must at least make some gesture to deprive the profit-earners of the enormous profits which are shown, day by day in the Press, as being returned to those profit-owners. I should hope that the gesture of the Chancellor of the Exchequer could have no such effect. I hope that the strike position will become more acute in this country until it is realised that very substantial advances must be made to wage-earners, not only from the point of view of their own personal position but from that of continuing the purchasing power of the mass of the people here.

The next Chancellor of the Exchequer will have a very much more difficult task with the next two Budgets. If the right hon. Gentleman the Member for Hillhead and his hon. Friends get on to this new tax in the Committee stage of the Finance Bill, they will render it substantially ineffective, and the ingenuity of people of my profession and the accountants will no doubt assist in depriving the Chancellor of what he estimates it may yield. I am very glad that the Chancellor is going to stop up those bolt-holes in the Income Tax law. I wish it could be made illegal for people to invent bolt-holes in the Income Tax law. Unless the Chancellor of the Exchequer is very careful he will get so much advice during the Committee stage of the Finance Bill as to how this, that and the other should be dealt with, in order that inequalities might be wiped out, that he will find himself, and his successor will find himself, with a new tax which is of very little financial value to him. When we begin to get to the period when either war or slump will intervene upon the present conditions, we shall be approaching the point of final collapse of the present economic system.

6.58 p.m.

Mr. Mabane

Perhaps the hon. and learned Member for East Bristol (Sir S. Cripps) will allow me to answer some of the questions which he put to the hon. Member for the City of London (Sir A. Anderson). In reply to the question which he asked us as to why this House and the country have less confidence in the financial proposals advanced by him than in those advanced by the Chancellor of the Exchequer, the short answer is that it is quite evident that to the hon. and learned Member the world of industry is not so much a reality as a wonderland about which it pleases him to theorise. Those who are in close contact with industry must be appalled to hear the light-hearted way in which he speaks about strikes. They know that strikes mean hardship and suffering for thousands of people. On this side of the House we would rather achieve rises in wages by negotiation between both sides, than by promoting the kind of industrial and civil disorder that apparently the hon. and learned Member prefers.

Sir S. Cripps

Unfortunately for the workers in this country, unless they strike they do not in fact get any.

Mr. Mabane

I gather that the hon. and learned Gentleman's purpose goes beyond that. He desires not merely increases in wages; he desires revolution. He does not say that?

Sir S. Cripps

I never have.

Mr. Mabane

At least the House is glad to have that assurance, after the hon. and learned Gentleman's many utterances in the country.

Sir S. Cripps

Will the hon. Member kindly cite the utterances in the country? The hon. Member said "many utterances." I challenge him to bring forward a single one.

Mr. Mabane

It is difficult without notice to bring forward particular utterances.

Sir S. Cripps

Will he then kindly withdraw his remark.

Mr. Mabane

Nothing would please me more than to withdraw any suggestion that the hon. and learned Gentleman has advocated revolution in this country if he has not done so, because I assure him that there is a widespread opinion in this country that he has.

Sir S. Cripps

May I tell the hon. Member that that is because people like him go about the country saying it without any authority or any evidence on which they can base it.

Mr. Mabane

The impression has been contributed to by some of the speeches made by the hon. and learned Gentleman.

Mr. Ede

Why do you not quote them?

Mr. Mabane

The hon. and learned Member patronised the Chancellor of the Exchequer and that provokes me to make a comparison. The Chancellor of the Exchequer indicated that this might be the last Budget which he would introduce. This Budget is a remarkable conclusion to a remarkable series, which will be memorable in the financial history of this country. It is interesting to compare the condition inherited by the Chancellor of the Exchequer from the hon. and learned Member and his friends with the conditions to-day. During the last six years the House has witnessed a recovery far beyond the expectation of any of us in those sombre days in 1931. More important still, a new chapter has been opened in the bearing of national finance on the economic life of the country. National finance is not mere arithmetic; it is a great policy. The truth of that saying has never been better illustrated than during the last six years and it has been supremely illustrated by this Budget.

Yesterday, the Chancellor of the Exchequer reviewed briefly the whole period during which he has been in office. Perhaps, therefore, those of us who have endeavoured to observe the course of finance may draw attention to certain features which have excited our interest. What was the position in 1931? The Chancellor of the Exchequer was faced with a deficit on his accounts, declining industrial profits, stagnating international trade and appalling unemployment. Every source of revenue was drying up and yet at the same time his commitments for expenditure were inevitably increasing as the result of many statutory provisions. It seemed that that situation must cause a rigid curtailment of ex- penditure on many social purposes that we hold dear. What hope did there seem in 1931 of the maintenance of our great social code, let alone an expansion of it? Yet what are the facts? There has been a startling change. Since then the progress of the revenue has been uninterrupted and so fortunate has been the management of the national finances that the Chancellor of the Exchequer has been able to provide quite remarkable sums of money for the development of our social services.

If we are going to be realists instead of theorists we must recognise that this period is worthy to rank as a parallel in social legislation with that great period, 1908–14. I should like the House to consider three main heads of expenditure—expenditure on the home department, education, and on health, labour and insurance. In 1932 the Chancellor of the Exchequer provided £208,000,000 under these services. Today he provides £254,000,000, an increase of £46,000,000, or nearly 25 per cent. If we add the contributions made to local revenues this increase is £55,000,000. This has occurred during a period of recovery from unprecedented depression, a period when the Opposition, in repeated speeches, have endeavoured to convey the impression in this House and outside that the social services have been starved. What would have been the situation had the management of national affairs remained since 1931 in the hands of the Labour party? That was the question which the hon. and learned Member for East Bristol asked.

Sir S. Cripps

I did not ask that.

Mr. Mabane

The thought is horrible to contemplate.

Mr. Kelly

He never asked that question.

Mr. Mabane

We are entitled to proclaim this series of Budgets as the supreme and final reason why the Labour party should not return to power. Finance is the foundation of government. Without sound finance there can be no sound government. I would say that it is because the Labour party have never grasped that fundamental doctrine that there is less confidence in their financial proposals than in the proposals put before the House by the Chancellor of the Exchequer. So far as I can see, the Labour party to-day show no more signs of grasping that fundamental truth. They do not seem to comprehend that there must be a relationship between social progress and finance. Social progress has been possible in the last five years because it has been clearly related to finance the whole of the time.

These wise words were uttered in this House not long ago: I am convinced that in existing circumstances an essential factor in ameliorating unemployment is a restoration of a spirit of confidence and enterprise among those responsible for conducting industry and commerce. I believe that always to be an important truth. It was uttered by Mr. Philip Snowden when he introduced, with the shadow of doom already on him, the Budget of 1931. But how many Members on the other side of the Committee care twopence for confidence? How many ever express any concern for those whose business it is to provide employment and industrial profits, that main artery of national revenue? Very rarely save from the Front Bench, do we hear speeches which indicate that those on the other side of the Committee have any belief in industrial confidence. That is why the country has greater confidence in the financial proposals made by the Chancellor of the Exchequer than in any made by the Opposition. The Labour party in 1931 paid no attention to Mr. Snowden's wise words and they lost not merely their Chancellor; they lost the confidence of the business community and of the country.

The Labour party, I believe, are the worst enemy in this country of the working classes. They arrogate to themselves a monopoly of sympathy; without any sort of justification they adopt a self-righteous attitude as having a vested interest in poverty. The experience of the last five years shows that the material welfare and progress of the working classes is more sure, more steady and more rapid when the national finances are managed as they have been managed during the last five years than when they were managed by the Labour party, when this and that canon of public finance was abandoned and there were chaos and collapse. We have many evidences in the behaviour of hon. Members opposite at the present time of the reasons why the country has still no confidence in them. It was a sorry history from 1929 to 1931. They started out gleefully to soak the rich and ended by soaking the poor. The poor suffered.

Mr. Maxton

They did not soak them enough; that was the mistake.

Mr. Mabane

In these years all the credit is to our side and all the discredit to the Opposition. And now we are entering on a new phase of our financial history no less important. In the past it has been my habit to complain of excessive demands made by the Chancellor of the Exchequer on this House. I have no regret, because I believe it to be the first duty of Parliament to resist demands for excessive supplies. He mentioned yesterday that in the last four years no less than £45,000,000 had been provided for the Sinking Fund. If the figure for the statutory Sinking Fund had been added that figure would have been even higher. Yet no express Budgetary provision was made for that appropriation. Parliament had no chance to decide whether it would rather that money went in relief of taxation. I would have preferred that, for I am no friend of the Sinking Fund. Therefore to that extent those of us who have complained in the past that excessive demands have been made on the country have been justified.

It might seem difficult in the current year to pursue a similar line of complaint. I do not suggest that the Chancellor has no need of the additional 3d. on Income Tax, but there are in the financial statement two items which provoke me to say that we are entitled to ask for rather more details as to why he wants this additional 3d. These items are, on the expenditure side, the supplementary provision of £10,000,000 and, on the revenue side, the item of miscellaneous revenue. I should like to ask the Financial Secretary to the Treasury what that £10,000,000 is for. In the past many hon. Gentlemen have protested against the inclusion of provision for Supplementary Estimates in the Budget statement. It is a new practice. It is a dangerous practice. In recent years there may have been justification for the inclusion of sums for Supplementary Estimates. There has been legislation before us. We have been able to see the need. For example, there was the provision for the Cattle Fund. Here, as far as I know, there is no reason. Yesterday the Chancellor of the Exchequer dismissed this matter in a sentence. He said I am proposing, however, to add another £10,000,000 … as a margin for Civil Supplementary Estimates."—[OFFICIAL REPORT, 20th April, 1937; col. 1607, Vol. 322.] What is it for? Doubtless there is some purpose still unrevealed, but the Committee is entitled to be told what this £10,000,000 is for. If it is for no particular reason, is it not an invitation to the Departments to be extravagant? Is it not making a principle of a practice that has been continuously fought by the House of Commons for centuries?

Then, with regard to the item Miscellaneous Revenue, we find, when we make allowance for the absence of any contribution from the Road Fund, that there is a net decrease of £8,000,000 in the revenue from Miscellaneous Receipts. May we be told in greater detail why that is so? It would appear to me that, if this item of Miscellaneous Revenue is a fairly constant sundry item, there is no need for the House to require much detail, but if it is fluctuating as widely as appears to be the case this year, I think we ought to be told. In the ordinary way we have to wait 15 months before we can discover how Miscellaneous Revenue is made up. It is a very curious item. The financial year 1935–36 is the last for which details are available. They were published in June of last year, that is to say, 15 months after the event, and they include very varied items, from 7,000,000 from the Road Fund down to small items like 19s. 9d. contributed by the First Commissioner of Works from the sale of postcards in the National Maritime Museum. If there are to be fluctuations of this character, I think the House might have rather more details presented to it than were given to us yesterday, and to be told why we are £8,000,000 short of last year's Revenue.

These, however, are mere details, and I would like to come to what appears to me to be the very heart of the present Budget, namely, the proposal for a National Defence Contribution. That proposal sets everything else in the present Budget in the shade. I think it is not an exaggeration to say that that proposal will make this Budget as memorable as the Budget of 1909, and possibly it will be regarded as scarcely less revolutionary. It appears that there is some complaint about this proposal for a National Defence Contribution, and, therefore, I want to say that for my part I am whole-heartedly in favour of it. Perhaps unwittingly, I nailed my colours to the mast over a year ago on this proposal. On 25th March, 1936, the hon. Member for East Rhondda (Mr. Mainwaring) proposed a Resolution to the House dealing with Defence expenditure, and, in co-operation with my hon. Friend who is now the Under-Secretary of State for Scotland, I moved an Amendment. In the course of my speech on that Amendment I said this: The expenditure of large sums of money now, or larger sums in time of war, will be pumping the life-blood through the arteries of industry more rapidly, and will increase profits. I think it proper that we should make some provision that those firms which so benefit should make some contribution, and I firmly believe that they would be willing to make a contribution. A little later I said: We ought to do our best to pay as we go. Industry would not be unwilling to consider some special tax—call it a nationnal defence tax—on excess profits that arose."—[OFFICIAL REPORT, 25th March, 1936; cols. 2332£3, Vol. 310.] At any rate, I, for one, am glad that the tax is here, and I believe that on reflection those who have hitherto been inclined to make complaints about this tax will find that their complaints really cannot be justified, and will end by supporting the Chancellor. I believe that, by proposing this method of taxation, which has been suggested in one form or another from all the benches opposite, the Chancellor has, at the outset of the rearmament programme, prevented a repetition of the experiences of the War. I am very glad that that should be so, for I belong to the War generation, and I well remember the bad effect on the morale of the troops of the knowledge of what was going on at home in those days. Ever since then it has seemed to me that national defence should be a national endeavour, and should never be allowed to become a scramble for profits. I remember, after the War, a poem—a bitter poem—written by Alfred Noyes, a poem, if you will, against war profiteers. Its title was "The Victory Ball," and I remember very well the refrain: Ghosts of the dead were watching them there. If there are ghosts of the dead watching us here to-day, I am sure they will be nodding approval of the proposal of the Chancellor of the Exchequer to prevent any excess profits being made out of the provision for the defence of the country. I am sure we must all agree that, if the Chancellor has been pressed to provide for the defence of the country, it would be absurd for those who engaged in that pressure to refuse to foot the bill when the bill is presented. Let it never be said that any of those who asked for rearmament really wanted profits.

After all, let us be sensible in this matter. Look at the Service Votes. Reference has been made to them already to-day. The Service Votes this year total £280,000,000, as against £186,000,000 last year and £102,000,000 in 1932. It was said a moment ago that that is unproduuctive expenditure. It is an abstraction, albeit a necessary abstraction, from real wealth. Of the £280,000,000 this year, £80,000,000 is to be raised by loan. This increased expenditure must come out of profits; there is no other source from which it can come; and it can only be met, I believe, by greater efforts, by greater efficiency, and by greater resolution. It is absurd if people are going to imagine that this expenditure can be undertaken and at the same time profits can continue to grow, unless it be by additional efficiency and additional efforts.

So far I have referred merely to the principle of the new tax. Many references have been made to-day to details. I am sure many of the detailed criticisms that have been made are good criticisms, but I should not like to feel that any of the detailed criticisms that have been made indicate a desire on the part of those who have made them to oppose the tax in principle. Indeed, many of those detailed criticisms are, if I may say so, so obvious that I cannot but believe that the Treasury have already thought of many of them and have devised means for meeting them. We all want to know why professional men should be exempt; we all want to know how the capital employed is to be computed for the purpose of determining the rate of interest; we all want to know how salaries and expenses are to be dealt with; we all want to know what is to prevent overcapitalisation or over-valuation of assets in order to reduce the interest rate; and we want to know precisely when and where Income Tax will be assessed—whether before or after the computation of the National Defence Contribution. We want to know, too, what valuation is to be put upon the goodwill of a concern in estimating its total assets. These and many other details will, I am sure, be discussed at a later stage, and I feel certain that the Treasury will be able to deal with them in such a way that it will be possible for the tax to be collected and that it will provide the revenue that the Chancellor expects from it.

What will be the effect of the tax? I believe it will be wholly good. In this country we desire now, above all, to avoid the recurrence of boom and slump, and a growing volume of opinion has for some time been in favour of some sort of conscious control. Recently there have been dangerous signs of a boom, and I believe that this new tax will have a steadying and a stabilising effect. I believe that in one way it is an evidence of first efforts at conscious control of the fluctuations between boom and slump. I do not believe that the effect will be inflationary, as I gather is suggested in the "Times" this morning. Equally, I do not believe it will be deflationary, as is suggested in the "Financial News." I believe its effect will be to counter certain disquieting tendencies. Reference has been made to rising prices, and those of us who come from the North have already been disturbed by the prospect of a return to that fruitless circle of rising prices, higher wage demands, and industrial disputes, with all the attendant dislocations. I believe that this tax will have a substantial influence in allaying that danger.

Finally, I would ask what will be the effect of the tax on the national spirit? I believe it will be remarkable. There can be no doubt, in my view, that the people of this country, above all, wish their Defence to be secure. But during the period when we have been contemplating rearmament, and now, when at last we are engaged upon it, there is one discordant note. Fears have been expressed that the national emergency might be exploited for purposes of private profit. I believe that that fear has been a principal deterrent to recruiting. That fear will now be utterly removed from the minds of sensible people. The sting will have gone out of the Socialist case, for the Chancellor has declared to the country that the national emergency is to be met with sacrifice by all. Therefore, I would like to end as I began. This Budget, it appears to me, is not mere arithmetic; it is a great policy; and were the Government to go to the country on this Budget and ask for its approval, that approval would be given by an overwhelming majority.

7.28 p.m.

Mr. James Griffiths

I feel sure that the Chancellor of the Exchequer must be feeling very proud and pleased at the compliments that have been paid to him this evening by the hon. Member for Huddersfield (Mr. Mabane), but I have been referring to the hon. Member's speech on the Budget last year. Since then he has calmed down considerably, and now he hails the Chancellor as the saviour of the nation, so it might be well to remind him of what he said 12 months ago. On 22nd April, 1936, he used these words: The Chancellor of the Exchequer comes here, admits an error in his estimates, and glories in it. If that sort of thing is to be permitted to be approved by the House of Commons, we might as well abandon Budgets altogether. The Chancellor of the Exchequer ought to have come to the House and begged forgiveness"— I hope the Chancellor is listening— for the fact that he had estimated that he ought to receive only a certain amount of revenue but here he had received so much more; he ought to have asked for the forgiveness of the House and pleaded that it was an error and not a justification of an intention which he had always had."— [OFFICIAL REPORT, 22nd April, 1936; col. 216, Vol. 311.]

Mr. Mabane

I referred specifically in my speech to those words, and I went further, and said that I did not regret them. I said that I regarded it as the first duty of Members of Parliament to resist demands for excessive supplies. I have always endeavoured to fulfil that duty, and shall always continue to try to do so.

Mr. Griffiths

I would only say that the hon. Member, who last year said the Chancellor had made a great error and ought to ask the forgiveness of the House, now regards him as the architect of the country's prosperity. The hon. Member described the Labour party as the worst enemy of the working classes. I do not quite know what he means by that. We on these benches in the main belong to the working classes. We began our life in the pit, the factory and the workshop and we certainly represent the feelings, the views and the life of the working classes more than any hon. Member opposite can possibly do. I would invite him to make that statement in some of the depressed areas in South Wales. This House was not quite a proper setting for the speech in which he described the glories of the country. The proper setting for that speech would be Merthyr Tydvil, with its closed steel works and its abandoned pits. I want to express my almost dismay at the fact that the Budget holds out no hope for the depressed portion of our population, no hope for the unemployed, no hope for the Special Areas, not a penny extra for any of those who are dependent on the very meagre allowances made to them by the Government and the nation. The Chancellor yesterday took pride—he has cause to take pride—in what he regards as the strength of the country. When we speak with pride of the strength and wealth of the country, we on this side are entitled to point out upon what that strength is built. Who makes that wealth? It is not made in this House. We come here merely to distribute it. All we do is to handle a portion of it and decide how it shall be distributed. When we boast of the strength of the credit and the finances of the country and how it can bear this colossal burden of armaments, who makes that strength, who makes that credit, but the men and women who produce the wealth of the nation? The Chancellor, therefore, in taking pride in the strength of the country ought to remember, as I hope he does, that that strength is based upon the shoulders of the workers.

The right hon. Gentleman yesterday gave a brief survey of the six years during which he has been responsible for the finances of the country. They have been six years of unprecedented increase in the productivity of industry, six years of rationalisation, six years of mechanisation, six years in which the workers have been driven to work harder year by year and are turning out increased produce for the nation. The Minister of Labour the other day made a statement the real significance of which, I am afraid, was lost on the House. He said that in the mining industry we had reached the productive level of 1929. In March of that year the average daily output of coal was 5,000,000 tons. We have now for the first time since 1929 reached that level. The right hon. Gentleman, like the hon. Member for Huddersfield, claimed credit for the National Government, and he made the astounding statement that in 1937 the miners, working 7½ hours, are producing 5,000,000 tons of coal per day with 160,000 fewer men employed than in 1929. In 1932, when the Chancellor opened his first Budget, the output of saleable coal per head in the mining industry was 268 tons. Last year it was 304 tons—an increase of 36 tons. There are other industries where the productivity of the workers is responsible for this great strengthening of our credit, and they are not getting their right and fair share.

The Chancellor has been fortunate in another respect and, unless the Government change their policy and attitude, his successor is not going to enjoy his good fortune to the same degree. The period of the right hon. Gentleman's occupancy of his office has been one of industrial calm. There have been very few strikes. In the seven years between 1929 and the end of 1936 the number of days lost in trade disputes was only about a tenth of 1 per cent. of the number of days worked On an average the time lost has been two hours per man employed each year. Now we are entering another period. The Government are appealing to the trade unions not to take advantage of this period of expansion. How many appeals did they make to employers not to take advantage of the period of depression? Did we ever hear hon. Members opposite telling the employers, "We want to have fair play. The market favours you. Economic conditions favour you. The workers are poor. Wages are low. Do not attack them. Do not lock them out. Do not starve them into submission." The appeals that are being made to the trade unions would have come with a better grace if appeals had been made to the employers in the time of depression.

There has never been a strike unless there has been a genuine grievance. I can say from many years' experience that the suggestion that strikes are caused by hot-headed men who can induce the workers to risk their livelihood and to risk victimisation is absurd. Strikes are the result of some grievance which has not been remedied. They are the result of a feeling among the men that they are not getting a fair and square deal. There is a rising tide of revolt among the workers and a demand for increased wages. I hope it will not stop at that. I hope it will be followed by a demand for a reduction of hours. Unless we have that, what hope is there of tens of thousands of men getting back to industry? They see prices and profits increasing. They see commercial men taking advantage of rearmament. Who will deny that there are industrialists taking advantage of this rearmament boom? Are the workers to be the only ones not to take advantage of it? Let me quote a statement made the other day at a meeting in Cardiff by a man who is highly respected in his profession, Mr. Percy Thomas, President of the Royal Institute of Architects: No right thinking man would suggest that they should interfere with the supply of materials for munitions, but the Defence programme was no reason for the ridiculous increase of prices, week by week, of materials. Everywhere commercial men are taking advantage of this expenditure by the Government to increase prices. I warn the Chancellor and the right hon. Gentleman who, it is said, is to follow him. The workers of the country are going to demand a share in this increased wealth in increased wages and in reduced cost of living. They are entitled to ask for it, and if the nation is big and strong, why should they not have it? That is why we are having this outburst of feeling, this intense development of consciousness among the workers that they ought to have their share in the wealth that is being created. I hove that Members on this side will do all they can to foster it. The Chancellor yesterday expressed a hope that the picture that he had drawn and the prospects that he saw for the nation would not be destroyed by some international catastrophe. I would warn the Chancellor of the Exchequer and the House that it is time the Government took note of the rising tide of industrial discontent. Unless the men who work in the mines, the factories, the workshop are given some satisfaction that they are getting a fair and square deal and an opportunity of sharing in the increased prosperity, the estimate of the Chancellor of the Exchequer may be blown skyward by a national catastrophe.

I join in the complaints that have been made that at the present time when prices are rising and the cost of living is increasing, a Budget is presented without a single word or promise of any kind that those who are so much hit by increased prices will get redress. Some weeks ago we fixed the scales for unemployed people. I was interested yesterday to hear the Chancellor of the Exchequer say that there had been a good deal of what he described as "bond-washing," which in familiar English means "tax-dodging." Wealthy people have, apparently, cheated the State as tax-dodgers. In listening to his statement I was struck by the different treatment of rich people who dodge and cheat the State and a poor workman who sometimes is driven to do something which is regarded as cheating the State. I have in mind the case of a poor boy who left home in order to prevent his living at home reducing the standard of life of the family. Because his father was in work this young man who used to receive 17s. unemployment benefit was cut off, and he left home in order that he might claim 10s. while living with someone else. The Minister of Labour said that they could not countenance that, that it was robbing the State and manoeuvring to get something out of the Exchequer. Yet yesterday we heard that there are wealthy people who do the same thing. The Dos, a week which the poor man tried to get is very trifling compared with what those people take.

I would urge upon the Committee that the whole tendency of the Budget and of industry and commerce at this time is to raise the price level, to make food and rent dearer, and to make everything dearer that the workers need. The scales for the unemployed which we fixed recently are to-day worth less than they were at the time we fixed them. Is any provision being made to deal with the case of a man and his wife who get 26s. a week? That 26s. is to-day not worth more than 25s., and in a few months' time it will not be worth more than 23s. or 24s. These are the people who will be asked to carry the burden. Then there are the old age pensioners. There is a grievance here which could be remedied at a trifling cost. The remedy would bring to poor homes in this country something immensely greater than any contribution which the Exchequer would be called upon to make. We have pleaded that one of the worst anomalies in our system of social insurance should be remedied. When a man at 65 is pushed off unemployment benefit and has to go on to the old age pension, his wife, if she is under 65, is denied anything. As a result we have to-day large numbers of people who have to do a very bitter thing. For the first time in their lives they have to go to the public assistance committee and beg for help because they have grown old in the service of the nation. I trust that at this time when we are so strong, and we are going to be stronger, something will be done for these people.

The Chancellor of the Exchequer has estimated that next year the new tax on increased profits will yield £20,000,000. Therefore, the amount of the increased profit cannot be far short of £100,000,000. The Chancellor of the Exchequer takes only a percentage. He will leave in the hands of the profit-makers £80,000,000, which they will have made out of the needs of the nation. I hope that the workers and the trade unionists will demand their rightful share in the increased wealth of the country and that the men who produce coal, steel, munitions, etc., in the factories and workshops will realise that this is a rich country and that they are entitled to ask for a share of the riches which they create.

7.50 p.m.

Sir H. Croft

We have listened to a speech which was full of sincerity, and we listened with interest. I hope the hon. Member will pardon me if I make but a brief reference to what he said, and it will be made in no spirit of antagonism, but to try to gain something like a fair basis of criticism in regard to the industrial position. He pointed out in eloquent words the sufferings of the workers of the country during the depression. All of us who have any hearts recognise those sufferings and realise that there are still black spots where we would like to see some of the prosperity which has come to other parts of the country. The hon. Member said that appeals should have been made, perhaps, more to industrial leaders during that period. It is not unfair to say that it was hardly necessary to address such appeals, because in many cases no profits have been made in industry, and in others only very small profits. The industrialists have also had to share in the depression.

The hon. Member said—and he was perhaps voicing the opinions of more than those who sit on those benches—that there must be no taking advantage of the rearmament boom. I share that view, and surely the answer was given by the Chancellor of the Exchequer yesterday. The hon. Member concluded his remarks by expressing the hope that all sections of the community will share in the prosperity of the country. We are entitled to point out that in the Budget statement of the Chancellor of the Exchequer yesterday, whatever be its virtues or its vices, in no single case did he put one penny of additional taxation upon the workers of this country. The hon. Member mentioned that it was the workers who are responsible for the strength of the nation. Of course, the workers make a very great contribution, but I am one of those who believe that it takes all kinds to make a world, and the probability is that as we gain in enlightenment and as days go on we shall recognise that, great as is the share of the worker in the organisation and progress of industry, without those who alp prepared to risk such capital as they possess, the strength of the nation could not have been attained. The hon. Member made a further remark in regard to rising prices which is worthy of attention. I would ask him not to forget that the right hon. Member for Keighley (Mr. Lees-Smith)—I think he was out of this House at the time, although he was the economic instructor of hon. Members opposite—declared that the only hope of better conditions was a general raising of prices throughout the world. The Chancellor of the Exchequer is not responsible for the prices of raw materials that come into the country to the extent of many hundreds of millions of pounds a year. He may look gloomy about it but, unfortunately, it is impossible for him to dictate to the wheat growers in Russia, the maize growers in South Africa or the metal producers in other parts of the world what the prices shall be for their commodities.

I should like to deal with a few matters which have arisen on the Budget. There has been the criticism of the general financial condition of the country by Members of both Oppositions, and there has been some attempt, belated and rather unhappy, certainly imaginative, to try to point out that the finances of the country have not been restored as they should have been under the guidance of my right hon. Friend the Chancellor of the Exchequer. When as realists we look at the complete change in the position of employment, when we see the extraordinary change in the flow of revenue into the coffers of the Exchequer and we see the tremendous advance in social services in the last few years, we must admit that there has been a truly remarkable change in the situation. The explanation is that in the present position of the finances of the country we are once more able to make our country safe, and we can carry the great burden in our stride, whereas in 1931 it would undoubtedly have broken us.

The Chancellor of the Exchequer spoke of the Defence Contribution tax and, as was bound to be the case, there has been a certain amount of criticism, in some quarters, while we have not fully appreciated the details. In this respect, however, I would recall, and I think my colleagues of the Conservative party will remember, that at the great party conference at Bristol, when the Chancellor of the Exchequer attended, my friend Lord Lloyd, with whom I always have pleasure in co-operating, tabled a resolution urging that His Majesty's Government should no longer neglect the defences of the country, but should put us once more in a position of safety. I can remember very clearly the picture when the Chancellor of the Exchequer rose and warned the conference. I cannot remember his exact words, but I think they were these: "Do you realise what this means? This means increased taxation. Are you prepared to foot the bill? Are you prepared to put words into the resolution to that effect?" The Chancellor of the Exchequer will remember that the whole conference rose to their feet and agreed, and the words were inserted. I should not be honest if, having taken part in those proceedings, I denied that the Chancellor of the Exchequer gave us due warning of what was likely to happen. Therefore, it is our duty as patriots to help him to meet the position.

I think I am right in saying that not only the Chancellor of the Exchequer but other Ministers have given the warnings to the House that there was to be no profiteering as apart from fair profit-making in the armaments industry. The Government had to take action if we are to ensure that there shall be no profiteering either on the part of employers or of labour. We could not allow a pistol to be directed at the heart of the country. Therefore it is wise that some such principle as this has been brought into our fiscal operations.

The real difficulty with regard to the Chancellor's new proposals appears to be to adopt them with absolute fairness to industry. There do appear to be cases in which companies, going through the depression, have made no profits at all, while stronger companies dealing in commodities for the people, such as food, drink and tobacco, have been able to maintain a certain steady level of profits. We shall have to watch carefully to see that industries which, through no fault of their own but owing to a fall in the export trade, have made no profits in recent years, shall not be unduly penalised if it is found that they are once more making a reasonable profit. If such cases can be given consideration, the man-in-the-street, who believes security is more important than opulence, will be ready to support the Chancellor in his proposals.

Mr. Maxton

Is not 6 per cent. a reasonable profit?

Sir H. Croft

The point which the hon. Member for Bridgeton (Mr. Maxton) makes does not cover the whole of the ground. If a company, which has been properly worked and which, through no fault of its own, has made no profits in the last three years, makes 6 per cent. on entering a period of prosperity, I submit that that is not sufficient reward for the capital of that company over the whole period of years. I do not think you would find capital available anywhere for less than 5 per cent., and if after such a period it is to be penalised because the profit goes up from nil to 8 per cent., that would Snot be fair. If you spread the profit over six years it is only 1½ per cent., and I doubt whether that is adequate for the least profiteering individual in the world.

The right hon. Member for Caithness and Sutherland (Sir A. Sinclair) made one or two extraordinary remarks. One was that protectionists had never expected such a paltry contribution as –36,000,000 a year from Customs duties. His friends have always maintained that it was impossible under any system of Protection to give employment to the people and at the same time to raise Customs revenue. We are glad that, in spite of those gloomy forebodings, we have achieved both these things. Since the tariff was introduced, in 1932, we have reduced unemployment by 966,000 persons, but, more important still, we have increased the number of people employed in industry by no fewer than 1,700,000. There are more persons employed in the industry of this country to-day than ever in the story of our race. No protectionist of any authority in this country has ever maintained that if you cut down your imports of competitive manufactures to any extent you could raise more than £30,000,000 to £40,000,000 per annum in Customs revenue. In the General Election of 1931 I did what is usually considered an indiscreet thing. I made a prophecy. It was that if a tariff were imposed we should find employment for an additional 1,500,000 people and raise between £30,000,000 and £35,000,000 a year in Customs duties. It was not a bad guess. I was a prophet even in my own country. The right hon. Gentleman the Member for Caithness and Sutherland, when he was suggesting that this was a niggardly result of the tariff, omitted to refer to the 1,500,000 additional people employed. The State, the employers and the employed would have had to contribute something like £100,000,000 a year for keeping life in those people but for the changed economic situation. Something like £40,000,000 per annum was also gained by the loan conversion measures of the Chancellor of the Exchequer, and £36,000,000 was raised by Customs duties. All that has meant a change in the picture of £176,000,000. Anyone who says that that is not a great achievement is thinking solely of the next election.

I must refer to exports, because here I come into conflict with the right hon. Gentleman the Member for Caithness and Sutherland. I did not intend to interrupt him discourteously. He said "What a miserable position our export trade is in to-day after these years of tariff legislation." I merely answered by putting this question: whether it was not a fact that since he left his position in the Government, our exports had actually increased £50,000,000 per annum? That, I think, was a serious contribution to the Debate. His answer was, "The exports of all countries have increased. What a paltry sum this is." My recollection is that, with the exception of Japan, no country during the depression had exports equal to our own, but the right hon. Gentleman, in pouring scorn on the £50,000,000, said, "What is that compared with the £350,000,000 export trade which we have lost since 1929?" We lost the whole of that £350,000,000 of export trade during the concluding years of Free Trade. When the right hon. Gentleman who was not in the Government at the time but was sustaining from collapse the Government which was holding office during those years, says "What is £50,000,000 increase during the first six years of Protection compared with the £350,000,000 lost during the concluding years of Free Trade?" that is a satisfactory statement to have placed on record in the OFFICIAL REPORT. The fact is that when the right hon. Gentleman left office we had sunk to the third position among the exporting countries of the world. To-day Great Britain is back in the first position. Once more we are leading the world in exports. That, after all, is a pretty good contribution by our change of policy. It should be specially noted by those who suggest that the moment you introduce a tariff exports decline.

I regret that an increase in taxation is necessary at all. I do not complain, because the Chancellor of the Exchequer has produced a wonderful record. The whole spirit of this people has been elevated in the last few years, and we are going from strength to strength and to a prosperity in which it is my earnest hope that all sections of the community will share. If a vigorous policy of cooperation emanates from the forthcoming Imperial Conference, it will still be possible greatly to stimulate our export trade. The various countries of the British Empire to-day are buying something like £700,000,000 worth of goods and produce from foreigners, proving conclusively that the British Empire is not selfish to the extent of excluding foreign goods and produce. Surely, therefore, there is a greater margin of expansion for British exporters. Since the Government instituted the new policy for this country, actually more than half of our exports of manufactures are going to the British Empire overseas. More than half of the workers in this country engaged in its vital export industry are drawing their weekly wages owing to that Empire custom. Surely, with such an example before us it will be wise to pursue far more vigorously the policy of reciprocity in order to increase the trade which is already on the up-grade. We must [...]e to it that employment is ensured to our children by a wise policy of co-operation between the different parts of the Empire.

8.13 p.m.

Mr. Quibell

I do not share the pleasure that many hon. Members have expressed in respect of the Budget. I fail to see that there is anything in the Budget for them. The other interests look very gloomy about it, but whatever additional taxation is placed on their backs is very largely of a character that can be handed on, and will, in most cases, be handed on to the consumer. With regard to the desirability of preventing profiteering, I have not noticed any anxiety on the part of colleagues of the hon. and gallant Gentleman the Member for Bournemouth (Sir H. Croft) to prevent mounting profits. I have not noticed that they have been concerned in urging the Treasury Bench to prevent profiteering in industries devoted to the purposes of protecting the Empire about which they prate so much. They always remind me of an unemployed man standing at the dock gates. His wife, a child in each arm, asks "Have you a job?" "No," he replies, "I have Australia, and India, South Africa and Canada but I have not a job." The Empire to him was employment, and to attempt to call this Budget a prosperity Budget in the face of the distress and unemployment is playing with words.

This new tax is largely in the form of the Excess Profits Duty which was in operation during the War. It has been said many times that it is so framed as to prevent a repetition of what happened in those days. Some of us know what happened then, and, I am afraid, will happen on this occasion. Some of us saw the things that were done and indeed took part in some of them, and we know that so far from the Excess Profits Duty fulfilling the intentions of Parliament, all it did was to encourage waste of the profits made in industry. I am afraid that some of the works in the days which followed reaped largely what they had sown. I may be out of date so far as my own party is concerned, but let me say at once that I think this is a very bad form of taxation. I would far rather justify the imposition of a further 6d. on the Income Tax, because I believe that the total income of a person is the safest guide to his ability to pay. As a Socialist I look upon direct taxation as the best form of taxation for the purposes of producing revenue.

I have what, I think, is an interesting question to put to the Financial Secretary, who, I understand, is to reply. I want to know what attempt is being made by the Treasury or the Inland Revenue to prevent the tremendous profiteering which is taking place at the moment. Let me give cases within my own personal experience. A man buys an estate and sells it out in portions. If it is a 50-acre estate in five 10-acre portions, he makes an enormous profit. I know that in one case as much as £30,000 profit was made. He is not a trading estate because he does not make sewers or roads or develop the property in any way. He sells it out in portions, and leaves those who have purchased these portions of land to lay down the sewers and construct the roads. The man who actually develops the land, that is, the man who actually makes the roads and lays the sewerage, is going to be penalised under these proposals, while the man who has walked off with the biggest share of the profit is not touched; he just sits in his office in London. In many cases such a transaction is considered to be merely casual, it is not regarded as income derived by the man as a consequence of following his ordinary employment. This is one of the scandals which should be removed. All profits from whatever source which are income should be taxable by the Exchequer, and a man who makes such a profit should make his contribution to the revenue. It is not only in and around London that this has been done, but I know of many other cases in the country where such transactions have been carried through, and I hope that some of these scandals are to be dealt with.

There is another thing which I cannot understand. Under these proposals the professional man, the auditor, the accountant and the lawyer, are to be all right, but I do not know what the poor taxpayer is going to do. What with one kind of form and another which has now to be filled up, the small business man is to be turned into a clerk in order to fill up all the various forms with which he has to deal. The White Paper itself is very confusing. There may be two or three super-men on the other side of the House who can understand it, but I have never met one who has yet properly understood the White Paper. When you come to apply it to the ordinary man I do not know what he is to do. It is like the formula in the Local Government Act. Nobody has yet explained what it means, and I do not think that anybody ever will be able to explain it. As far as the average man is concerned, by far the best way of raising money is by the direct form of Income Tax rather than the clumsy, irritating and inefficient proposals of the Budget, which will only mean that he will have to employ a lawyer or an auditor in order to advise him as to how he can take advantage of the provisions of the Measure. The small business man will be hit the hardest. He has already suffered the most, and he is to suffer again. It is the old Tory philosophy: Whosoever hath, to him shall be given,… but whosoever hath not, from him shall be taken away even that which he hath. It is making the rich richer and the poor poorer. At any rate, the Conservative party are consistent to that extent. As far as I can see there is no comfort whatever for the working classes in the Budget. The only remedy is the old philosophy we have preached as Socialists, that direct taxation of income is the only honest way of raising revenue for the public services of the country.

8.24 p.m.

Major Hills

I have listened to many Budgets in my long experience as a Member of the House, but I have never listened to one in which all parties found something to support. The hon. Member for Brigg (Mr. Quibell) likes the National Defence Contribution, although he would rather it was raised by direct taxation. Still he does not mind the fact that a National Defence Contribution in some form or other is made.

Mr. Quibell

I do object to it. I say that the contribution should be raised by Income Tax.

Major Hills

At any rate, the hon. Member does feel that some special contribution in view of the circumstances should be made by wealth in some form or another. The hon. Member for East Edinburgh (Mr. Pethick-Lawrence), who opened the Debate with an interesting and very competent speech, although criticising certain features of the present situation, was not on the whole very antagonistic to the Chancellor's way of dealing with it. He would have liked the rise in prices to have been dealt with, but I think he will agree with me that some rise in wholesale prices was essential if we were to pull ourselves out of the slump in which we were in 1931. If there is an increase in prices, an increase in wages will follow. Moreover, the hon. Member knows very well that unemployment is very much lower than it was a year or two ago.

The hon. Member for Brigg strongly condemned profiteers. All of us want to stop profiteering; nobody wants money to he made out of the necessities of the country. The difficulty is that all the money is not made in the armaments industry. However strict the control of the Government may be—and I sincerely believe that their control is very complete and strict—the spread of profits is much wider than the armaments industry, and all sorts of ancillary trades are bound to make more money. That is the situation with which we have to deal. I wish to say distinctly that I accept the principle of a National Defence Contribution and the principle that it should be paid by those who benefit from rearmament. I also recognise that we cannot do absolute justice between one business and another and one man and another, and that we have to do a sort of rough justice. I agree that there may be hard cases under this new taxation, but I do not, for that reason, reject it. I want to see a National Defence Contribution not only because the money has to be provided, but also because it will show the world that we are serious in saying that those who make money out of rearmament shall contribute a part of their profits.

I wish to put one or two questions to the Financial Secretary; they are very simple ones and I am certain that the answers have already occurred to my hon. Friend and to the Chancellor of the Exchequer.

Mr. Quibell

If they are not simple questions, the right hon. and gallant Member will not get answers.

Major Hills

I do not ask these questions in any cavilling spirit, but in order to clear up difficulties. In the first place, although the tax on the profits made by a company will be paid by the company, the burden will be borne by the individual shareholders, and in this case the whole burden will go on to the ordinary shareholders. I do not think that the preference shareholder, and still less the debenture holder, will bear it. The tax is to be paid on profits, but what profits are to be taxed? Are the profits to be assessed in the ordinary way, that is to say, the profits that are made by a company after the debenture interest is paid, but before the preference dividend is paid, and are all those profits, including what is put to reserve, to be taxed, or are only the profits distributed in dividend to the ordinary shareholders to be taxed? There is a very great difference. For many years past a great many of us have felt that the taxation of profits put to reserve is a bad thing for the country, since it helps industry that profits should go to reserve, especially as in most cases they are spent on capital goods. Therefore, my first question is, What profits are to be taxed? Secondly, are Income Tax and Sur-tax to be deducted first? For instance, the shareholder receives his dividend; assuming that it is an increased dividend over the period which starts the profit scale, I take it that he would first have to pay the Income Tax and Surtax on the dividend, and afterwards pay the new charge. I would like to have some answer on that point.

I now come to some more difficult questions. The hon. Member for East Edinburgh asked very aptly, What is capital? What is truth? In both cases one could answer the question in very many ways. Let me take, for instance, a case where, during the period 1933–35, the capital of the ordinary shareholders was written down—a very common case during those years. Let hon. Members note that the ordinary shareholder, although he did not like it, did not object very much to the capital being written down, since it did not make very much difference to him whether his share was called 20s. or 2s., because even at the smaller sum he possessed the same fraction of interest in the equity of the company. The capital of very many well-known companies, the names of which are known to hon. Members, has been severely written down.

Suppose that during the years 1933–35 a company having a capital of £1,000,000 in £1 shares wrote down its capital to 100,000 in 2s. shares and suppose that in the accounting period ended 5th April next, 10 per cent. were paid on the reduced capital, that 10 per cent. would be at the rate of only r per cent. on the old capital; on what capital would the percentage be reckoned—the old capital or the reduced capital? I do not think it can be said that the shareholders are getting 10 per cent. when they are getting only 1 per cent. on the amount originally invested. I know that in his speech yesterday the Chancellor allowed for cases of losses incurred during the last four years, but I take it that those are losses made on profit and loss account, and not made by writing off capital.

My next question is at the opposite end of the scale. It refers to some of the successful companies, such as electricity, motor tyre and artificial silk companies, which coming into production recently have done extraordinarily well, and during the slump years largely provided the employment which the standard trades did not provide. Some of those companies pay high dividends now and may pay higher dividends later. In many cases their shares are at a premium, and the man who wants to buy a £1 share has to pay £3 for it. Assume the case of a sound company of that sort whose shares are costing £2or £3 each, and which win pay in the next accounting period 15 per cent., or a large increase over what it paid on the average in the three years 1933 to 1935. Are you to assess the shareholder who has paid £3 for his share as getting 15 per cent. on his money, where he only gets 5 per cent. on his money? Those are questions which will arise, and they will arise in the case of very good sound concerns such as those which I have just instanced.

Lastly, I should like to know who are to come within the scope of this new tax? The Chancellor said that the contribution was to be payable, in respect of the growth of profit, by all persons engaged in industry, trade or business, but not persons engaged in employments or professions. What is the distinction between a business and an employment? Is stockbroking, for instance, a business, or an employment or a profession? Are bankers considered to be engaged in a business or an employment or a profession? I see a need for more careful definition. I think there may be a great deal of overlapping if this is not put right in the Finance Bill.

Having said that, I come to my real difficulty in connection with this tax. I want to see our taxation system help the man who is helping to increase the national dividend, whether he works with his hands or works with his head, or places his money at the disposal of productive industry. On the other hand, though I do not wish to harm the investing man, the rentier, I do not think he is as worthy of help as the productive man. Consider the two cases. One man invests his money in War Loan, and draws his dividends from it. Another man puts his money into some sound industrial enterprise. But he will pay Income Tax and Sur-tax and he will have to pay this extra tax as well. I agree with the last speaker. I say in all sincerity, and well knowing the burden that it would be, that I would prefer to see this extra tax added to Income Tax, Sur-tax and Death Duties. I profoundly believe that the plan which is here proposed will hurt the productive part of the community while leaving the interest-receiving part untouched.

I have no ill-will towards the man who invests his money in War Loan, but somebody has to pay this tax, and surely the man who takes no risks, who does not assist industry, who does not add to the nation's wealth, who does not help in the building-up of great businesses, is the man who ought to pay. I may be told that a man who has invested his money in War Loan does not get any of the extra advantages enjoyed by the man who has put his money into aircraft factories or steel works or armament firms. That is true, but still the man who has invested his money in companies of that kind pays the extra Income Tax on his increased profits, and he will pay at a very high rate. I feel strongly—and I hope I shall induce the Chancellor of the Exchequer and the Financial Secretary to give the matter further consideration—that it will be a fundamental mistake to collect the money in the way proposed.

I know that by giving up the scheme of taxing profits qua profits you do lose something of the psychological and dramatic effect of dealing with the matter in that way. I want to tax extra profits as much as hon. Members opposite, but I believe that the way I propose would be a better way for the country. I believe that the money would be paid in a rather different manner, but in a manner which would do productive industry far more good than the scheme of the Chancellor of the Exchequer. I agree that there may be two opinions on the subject. I know that the hon. and learned Gentleman the Member for East Bristol (Sir S. Cripps) welcomes this as opening the door to the realisation of some vision which he has before his eyes. I do not see the same vision, and I do not look in the same direction as the hon. and learned Gentleman. But I want to see an increase in the actual wealth that is created in the country and that can be shared by all in the country. I want to see that wealth shared. All through my political life I have tried as far as lay in my power, to secure that profits should be better distributed than they are now. But I want to see those profits made, and I want to help the country to make those profits.

I do not believe you can achieve that end by the means here proposed. On the contrary, I believe you will damp down the making of profits, and that employers will tend to waste money on unnecessary capital expenditure which does not add to productive power. The Excess Profits Duty was not very satisfactory in its operation. A great deal of the money slipped out of the Chancellor's hands and did not do much good where it went. By this method of taxation which is proposed you would, as I say, damp down productive industry while you could get the money in a way that would help the country better, by putting this addition on to Income Tax, Surtax and Death Duties. If that cannot be done, may I plead with the right hon. Gentleman to consider this suggestion? I should like to take one year—and if 1936 is thought to be too favourable to the taxpayer let it be 1935—and then Io take some proportion of the excess profits of all companies over that year. I should like that proportion to be a single figure such as a quarter, or a third, or whatever it may be. I do not like all the complications of the present scheme, and what I suggest would be simpler and would be understanded of the people.

May I say just a few words to the Chancellor of the Exchequer on the conclusion of his six years in that office? During those six years he has built up a great financial system in our country, and he leaves the country stronger and more prosperous than it was in 1931. When he spoke he twitted us with always saying that he ought to expect more income and therefore he ought to reduce taxes. I did not say that last year, but I did between 193r and 1935, and I did it on a definite principle. I believed, rightly or wrongly, that in bad times you should reduce taxes and spend money raised on loan on public works. Now, when we have passed the low point and are approaching the peak, I am all for increasing taxation. I believe that you ought to increase taxation now, and I believe that, in spite of all this expenditure on armaments, you ought to run a Sinking Fund too. I mention that to show that, though I appeared unreasonable to the Chancellor of the Exchequer, I did proceed on principles which I believed to be sound, even though he thought them mistaken. But in welcoming him now on his last Budget, I feel, as I think we all feel, that he has won the esteem of the House and of all parties, and though, of course, no party politician is ever accepted by all the different opinions represented in this Chamber, still the right hon. Gentleman's courage, his indifference to popularity, his determination to do what he thought right at all costs have, I am sure, won the esteem of every Member of this House.

8.48 p.m.

Mr. J. Jones

I cannot claim to be a financial expert like most of the hon. Members who have preceded me, some of whom know more about finance than others are able to understand. During the 18 years that I have been a Member of this House, the more I have heard from the financial experts the less have I understood the question. The right hon. and gallant Gentleman the Member for Ripon (Major Hills) has expressed a sort of agreement with the principle of direct taxation. I have belonged for the last 47 years to an organisation that has always advocated direct taxation on incomes, not on what you are supposed to have, but on what you have, which is a different proposition altogether. Those of us who drink beer, as I do, are taxed to-day 100 per cent. more than the other fellow who does not drink beer. He is not 100 per cent. better or more virtuous than I am, he does not bring up his family better than I do, but because he does not drink beer he gets away with it and is a respectable citizen, but I am not. You find the same differentiation made between one class of people and another throughout the whole range of taxation.

There ought to be a tax upon every man's income and a preference given to the man who works for what he gets, and if there is to be any differentiation against the taxpayer, it ought to be against the fellow who does nothing for what he gets and who takes everything that he gets out of the fellow who does. The people opposite talk about the taxation that they are going to pay, but who will pay? The people who work will pay at the finish. The others can transfer it, every time and all the time, on to the backs of the people who have the least power to resist them; and the Chancellor of the Exchequer comes along and collects the money, and he will smile at both of them, as he always can do, and does. If he cannot smile, he sends his Financial Secretary along to do his smiling for him. I suppose that when we draw our extra salary, e shall smile at him too.

I want to suggest, quite frankly, that it is high time that this House appointed a Committee to go into the whole question of national taxation. Before another Budget is introduced, the whole question of how taxes are levied, who pays them, and who does not pay them should be gone into. I know people in my own constituency who are going to do very well out of the armaments programme. They will have to pay a certain percentage of those profits over to the State, but they do not mind at all—they do not really want to pay anything—because in the last Great War they made huge profits. New factories were built out of armament profits, and in my own con- stituency people who used to walk to their offices drive there now in Rolls Royces. The London Passenger Transport Board provides me with my motor car, but I have seen people grow up in my lifetime—and I am not old yet—in the East End of London who could not afford to keep motor cars 30 years ago, but who now ride along in great style, all made out of the profits which they have been able to make out of the needs of the nation, particularly in war time.

Now we are going to make a compromise with the devil. Nobody believes in war, not even the Members opposite. There is only one warmonger in this House that I have ever heard speak, and that is the hon. and gallant Member for Bournemouth (Sir H. Croft). I am sorry he is not here, but he always talks from the standpoint of the man who has served his time in the trenches and left them as soon as he could. In so far as we on this side are concerned—and I am probably only one of a minority inside the party; it has never been decided officially—the only principle of taxation should be taxation according to income, and the only differentiation should be on the basis of earnings as against unearnings. The idea of the Government in this Budget is this: "We want to make an arrangement whereby, if you are going to get contracts from the Government for rearmament, you will give us some of it back. We will share the spoils with you, and everything in the garden will be lovely." That is the great proposal in this Budget. "Let us share the swag," as Bill Sykes would say.

That is not a financial policy, however, that will meet the situation. How are you going to trace the people who will be making the profit out of your rearmament scheme, out of your Defence policy? How are you going to trace it to its source? There are contractors, there are sub-contractors, there is a sub-contractor to a sub-contractor, and so the whole thing goes down from A to Z. Some of us work in the building trade, and we know that in the case of some of the big jobs in London there are 50 contractors on one job. How are you going to trace them all to their source and assess their tax? You cannot do it, but they will all be in it when there is any ramp, all of them. They are the Forty Thieves, or first cousins to them, and when it comes to making money out of national necessities, they will be on the job straight off the reel, every one of them. You cannot tell where they begin and where they end. Therefore, so far as some of us are concerned, the Budget is very nice. I am glad that the Chancellor is not increasing taxation for anybody else, except for the 3d. on Income Tax. If he is going to give me a rise I shall not grumble. [Interruption.] I gather from my hon. Friends that there is not much chance of that. If it is off, I shall denounce him. I am, however, quite satisfied if I get nothing, while he is not satisfied if he gets anything.

The Chancellor has been wise in keeping away from the Debate so that he will not hear what some of us have to say about him. We want, however, to express our gratitude to him in his absence, and I hope that he will recognise what we feel when he winds up the Debate later after the Committee stage, the Report stage and all the other stages of the Budget. We know it is all a stage, and that we are splendid actors. Downing Street comes along and the crowd waits to cheer them for what they think they are going to get, and when the Chancellor tells them, they criticise the Government and say what rotten people they are. The Government have not done anything yet but tell the common people that they are to stop where they are. Taxation is levelled up for the benefit of those who have everything, and it is levelled down to the disadvantage of those who have nothing. People who have something to pay will soon discover a method of putting it on to the people at the bottom. We are already paying in advance by the increased prices of food. In my district they are increasing the price of sugar, butter, and all the ordinary commodities of life and when we ask the Government the reason why, they cannot tell us. They are under the control of other people at the top who have the real control—the people you never see. The Government have to find a certain amount of money, but it will be found in the same way in which it has always been found. The workers will have to pay. They say: The King rules over all. The soldier fights for all. The parson prays for all. The worker pays for all.

8.59 p.m.

Lieut.-Colonel Sir William Allen

I want to intervene in the Debate as one who comes from another part of the world where we pay similar taxes to those paid over here. I cannot follow the hon. Member for Silvertown (Mr. J. Jones) in the humour which is always greatly enjoyed by the House. I was struck by his reference to the prospect of increased pay for hon. Members, for I agree with him on that subject. It is not only Members on the other side of the House who are looking forward to that, for there are some Members on this side who want it too. I hope that the Prime Minister will not take too much notice of a Committee called the 1922 Committee. In the course of the Debate, a great many questions and requests for explanation have been put to the Chancellor. I have no doubt that all these points of view came before the Chancellor in his preparatory review of the Budget, and I am confident that he will give satisfactory answers.

We are living in very different times from those in the middle of the last century. I have been reading in a life of Lord Palmerston about Cobden's proposals in 1859 for a commercial entente between England and France, and I found that the Prince Consort went into particulars of the proposed commercial treaty, and said: Strange to say, the Treaty will give the Emperor our coals and iron, which he will want if he should come into collision with us, and by the abolition of the wine duties we shall sustain a loss of £2,000,000 in our financial receipts; and, as we have to raise the Income Tax to 9d. in the £ in order to meet the increased Army and Navy Estimates, and must borrow £10,000,000 for the permanent defences, the Income Tax will have ultimately to he raised to 11d. Sober-minded people anticipate that the public will not stand this. How far have we progressed since that rate of Income Tax was imposed on this country? What would sober-minded people have said at that time had they been asked to pay a 5s. rate? I fancy that there would have been no sober-minded people left and that all the asylums would have been full.

I wish to congratulate the Chancellor on the accomplishment of one of the most difficult tasks that have ever confronted a Chancellor. There were different times and different opportunities presented to the Chancellor of the Exchequer during the Great War. Somehow or other, there was then a stimulus, and the speeches we have heard to-day deprecatory of the renewal of the Excess Profits Duty were different from the speeches in those days when everybody received with acclaim even the proposal that there should be an Excess Profits Duty of 80 per cent. We were then faced with disaster, and the country rose as one man to do what it could, financially and otherwise. To-day the Chancellor has a very different and a more difficult task. We are at peace; yet he finds the necessity to impose these increased taxes. I believe that he has done it in a way which, on the whole, will meet with the general approval of the country. He has avoided putting increased duties on articles for general consumption, or even on luxuries. The hon. Member for Silvertown referred to some people who drink beer as being very respectable and to some who do not as being the contrary. I do not drink beer, but I want to say this of people who do. Some of my best friends are drinkers of beer. They are the most helpful people in this country. I draw no distinction, so far as respectability is concerned, between those who drink beer and those who do not.

Then the Chancellor expects to receive his revenue from those who profit by the Defence programme. At the same time he has been at pains to avoid, in my opinion rather skilfully, the imposition of taxes on those who are least able to bear them. Another most commendable result of this way of collecting revenue is that the possibility of inflation of values and the tendency towards a boom in exploitation will be checked. I do not think people are really shocked at the imposition of this Defence programme duty. A few weeks ago I was asked at home what I thought about forthcoming taxation. My answer was, "Everybody is expecting 3d. on the Income Tax, and the other tax is to be Excess Profits Duty." As a modest Irishman I would like to add that great minds think alike. Ii is only human nature to expect that the first thought of all who will have to pay this new duty will be how to avoid it. It has been mentioned that accountants and lawyers will be very busy. I wonder what their advice will be, and whether it will be that those liable ought to pay as much as they can. However, I think there will be a great fight between the authorities who have to collect this duty and the people who have to pay. We are going through a cycle of trade improvement, and I fear there may be great difficulty in assessing the duty equitably between those who are enjoying legitimate prosperity because of world prosperity and those who exploit the Defence programme for the purpose of increasing their profits; but I have no doubt that the Chancellor has already considered all these various points and will be able to give us a satisfactory answer.

The question is bound to arise, "Why have we this defence programme and why is it necessary?" This country made a great gesture, a gesture of high culture and up-to-date civilisation, in favour of disarmament. It was a gesture which almost astounded the world, and yet it was not accepted by any nation. That is why we now have this defence programme and why there has to be this excessive taxation. But how could we expect that gesture to be accepted by many nations which we must have in our minds? Russia has under its Government discarded the Creator from its schools and from its homes, and how could we expect Russia to accept a gesture towards bringing peace over all the earth? Germany has been reduced to distraction. Germany is a virile nation which had to accept defeat and must have felt it very keenly, and then there came the degradation of the Treaty of Versailles. How could we expect Germany to lie down under that sense of defeat and degradation?

Then we have France, the oldest enemy of Germany, always wondering when she will be attacked. Could we expect France not to increase her defences and not to spend more money on a defence programme? Italy is governed by a man who does not hesitate to use his so-called educated, up-to-date and civilised battalions to crush a country which is unarmed and unable to defend itself. We have Spain in the throes of a savagery which has been unequalled within the memory of any living being. All over the world we have countries contending with difficulties, and those being the conditions the gesture we made would necessarily fail; and until the time comes when the old Gospel of 2,000 years ago again fills the breasts and the minds of men we must look forward to spending money on armaments in order to protect ourselves. I notice that the right hon. Member for Bow and Bromley (Mr. Lansbury) is doing his best in the interest of the peace of the world. We wish him God-speed, but he seems to be like John the Baptist, a voice crying in the wilderness, because all nations appear ready to fly at one another's throats.

We do not know by what reason or argument the Chancellor of the Exchequer decided to put on the old Excess Profits Duty, but I should like to warn him against any development of that duty. It was the 80 per cent. Excess Profits Duty which caused all the trouble in business after the War. One of the bases of calculation was the three years' average profit before the War, when frequently a very low percentage of profit was made by businesses and some were working at a loss. Then came the expansion of business owing to the War, and high profits were made, but most of the liquid assets possessed by those businesses at that time had to be handed over, and what must ever be remembered in connection with any taxation is that businesses ought to be allowed to conserve their liquid assets and not be left simply with bricks and mortar. I warn the Chancellor, lest the duty be raised to such an extent as to deprive those industries of their liquid assets.

The Chancellor has been praised for his work during the last five years, but speeches have been made from this side of the House which seem to express the opinion that he has blundered at last. I do not think so. I have the same confidence in him that I have always had. Hon. Members have praised him for his great ability and for the methods that he has adopted. He never was a scaremonger, and we may trust on this occasion that what he is now doing will not seriously affect the great business concerns of this country. I am satisfied that when all is done they will praise him.

9.16 p.m.

Mr. Ellis Smith

The right hon. and gallant Gentleman the Member for Ripon (Major Hills) is an acknowledged authority upon orthodox finance, and he was listened to just now with the respect which his services in this House and outside deserve. Had I known that he was going to speak I should certainly have looked up some of the speeches which he has made during the past year or two and particularly during the last 12 months, in which he has pointed out to the Government the danger of the financial policy which they are pursuing. He complained about the writing down of capital which had taken place, and he asked the Chancellor how that would be dealt with under the new tax. May I remind him that financiers and industrialists, with whom he is associated, do not put all their eggs in one basket? They are not like the working people of this country, who have nothing to sell but their human energy. The financiers and the industrialists, for whom he speaks, if they are not drawing from one section of industry are drawing from another. During the past six years, and particularly during the period from 1930 to 1932, the sacrifices made by the vast mass of the people were relatively greater than those made by the people with whom he is associated.

I am sorry that the right hon. Gentleman the Member for Hillhead (Sir R. Horne) is not in his place. I am not complaining; I have sat here during nearly the whole of this Debate and we do not expect all Members to do the same. He represents one section of industry. He speaks for the big industrialists, while we speak for the common people who are employed in industry. He paid a great tribute to the Chancellor of the Exchequer for the Budgets which the Chancellor has introduced during the last five years, and he proceeded to attribute the improvement in the industry of the country to the sound financial policy pursued. That is not a statement of fact. If it were, industry would never have been in the position in which it has been. The financiers do not desire that industry should be put into the position in which it was in 1931 and 1932; they desire to have the maximum return on the capital invested in industry. Therefore, it is not true to say that industry is in the position in which it is because of the Chancellor's sound financial policy. I have here a ten-shilling note—this is my answer to the right hon. Gentleman the Member for Hillhead and the right hon. and gallant Gentleman the Member for Ripon, with his orthodox economic outlook. If their economic analyses were correct, this note would represent the motive power which has brought the country to its present position.

I would remind them that if I place that 10s. note upon this bench it can remain there for ever and ever—[HON. MEMBERS: "No "]—that is, if the hon. Member for Sowerby (Mr. McCorquodale) will not take it away, and it will not make one penny of wealth or improve the financial position of the country. How is the financial position of the country improved? It is mainly based upon industry. All of us present here are not contributing one penny towards increasing the wealth of the country, but the people who are doing so are those who are employed in the mines, in engineering and in industry as a whole. The main reason why this country's position has improved is the increasing productivity which has taken place from 1929 to 1937. Output per person in this country is relatively greater than in any other capitalist country in the world. Another reason is the policy pursued by industry in applying the latest scientific methods to obtain the maximum amount of output. The improvement in the competitive position of Britain in the markets of the world is due to the utilisation of the human energy of the millions of men and women employed in industry, and not to the financiers.

Instances were brought forward by the right hon. Gentleman the Member for Hill-head of industries which have been in a bad position during the past six years, and he mentioned the engineering industry. He did not say a word about the large amount that has been paid out in that industry in debenture and preference stock. It is true that the ordinary shareholders have at times received a relatively small return compared with Woolworths', Marks and Spencer's, and firms of that description, but those who had their capital in debenture and preference stock have received as good a return as any other section of industry in this country. I would recall that the "Economist" of 19th April said that 628 companies had declared profits showing an increase of 12 per cent. compared with the preceding year, not compared with the years when we were deep in the slump. It is not we who are saying this, but the orthodox "Economist," accepted by the orthodox economists on the other side of the House. It goes on to say— The general level of profit-earning is well above that ruling before the slump. The financial editor of the "Manchester Guardian," making an analysis of the effects of rearmament, wrote a few weeks ago: Rearmament is going to proceed in this country without tears. I look upon this Budget as a modern window-dressing Budget. It reminds me of the policy pursued by Marks and Spencer's. They have large windows which attract scores of people as they pass; they have huge advertisements in the Press. This brings about a huge turnover. It is true that the profit per commodity sold is relatively small, but the profit in the aggregate is a large one, to such an extent that Marks and Spencer's are probably making relatively higher profits than most other firms of that character. They have applied modern scientific methods of exploiting the public and the workpeople employed by them. I look on this Budget—and shall produce evidence to prove it—as showing that the same policy is being pursued by this Government.

Those of us who address meetings from week-end to week-end, who move among large numbers of ordinary people in this country, have been struck by one thing above another during the past six months in particular. There has been a growing indignation in the country against the large profits which are now being made by many industries. There is a growing indignation against the great increase which is taking place in the cost of living. This is reflecting itself in strikes. I have sufficient knowledge of the workmen of this country to make me say without hesitation that you will never get a large body of workpeople to strike and so risk their livelihoods unless they have legitimate grievances. The reason for the strikes which are taking place throughout the country, in spite of the official advice which the strikers are receiving from certain quarters, is that the strikers can see the big profits of the industries in which they are employed, the effects of speculation and the increased cost of living.

In addition, there is a growing indignation among men and women round about 60 to 70 years of age. Many of them have given the best of their lives to industry and have looked forward to retiring on a pension of 10s. and drawing a few shillings in superannuation benefit from a friendly society or trade union; and after all these years of service they find themselves, with the cost of living mounting as it is, with only 10s. to spend on food, and yet they see in the newspapers the big profits which are being made and the speculation which is taking place. Therefore this National Government has a group of members in the Cabinet who are the most astute politicians and statesmen who have ever been responsible for governing this country. They have their fingers on the pulse of the country and to deal with this growing realisation that it is the masses of the people who are to pay for rearmament they have come forward with this method to sidetrack this realisation, this proposal known as the National Defence Contribution. If the principle of this National Defence Contribution is correct why was it not applied long ago? Why was it not applied in 1931? Why was it not applied in order to maintain the social services?

That reminds me of the speech of the right hon. Member for Hillhead. It was a very interesting speech. I listened to it carefully and I shall look forward to the OFFICIAL REPORT to-morrow and to tearing out those pages. Let any Member of the House in the future blame the Labour party for what took place in 1931 and all we shall have to do is to refer him to the speech made by the right hon. Member for Hillhead. For he made a close, reasoned analysis from an orthodox point of view of what was responsible for bringing about that situation. He was speaking as an economist, not as a politician; he was not trying to score party points, but was speaking within the limits of his own economic understanding. In the analysis which he made he came to the same conclusion that many of us came to in 1931 and 1932, but for political reasons and purposes hon. Gentlemen opposite exploited the world economic position from 1931 up to the present time in order to sidetrack the common people of this country from returning the movement which would really represent their interests in this House.

Rationalisation in this country was carried through from 1927 to 1932. Some of us passed through some dark days during that period because we had the courage to oppose certain people in our own movement who were prepared to assist in this kind of thing. The stand we took was a stand on principle. Our stand was that if productivity is increased as a result of the co-operation of the workpeople with the employers, then the workpeople ought to receive some of the benefits. First, this rationalisation policy was carried through through National Shipbuilding Securities, and first on the Clyde. Shipyard after shipyard was closed down. Then the same thing took place on the North-East Coast. The productivity of the shipyard worker went up to a tremendous extent and those who were unemployed as a result had to manage on a meagre unemployment benefit. If they had taken sufficient interest in their own welfare and had been in regular employment and able to save a certain amount in a bank, they found themselves on the means test because of this increased productivity Yet the employers, as a result of this, are finding themselves now in a better position than any other employers in the world Output increased relatively more in Great Britain than in any other capitalist country, and now heavy industry in particular is benefiting as a result.

Superimposed on this increase in productivity is the armament policy. Now we find heavy industry exploiting the result of this increase in productivity. Super-imposed on this increase is the rearmament policy of the Government, and we now find that heavy industry is in this relatively good position. The Chancellor is proposing to take these steps. There will be evasions of all kinds. If a return could be made of the number of telegrams sent out in this country this morning, I would venture to say that it has increased to a tremendous extent because of the announcement that was made in this House yesterday. Captains of industry and financiers in particular will have been speaking on the telephone to their legal advisers and to their accountants, and I have already heard this proposal described as an Accountants' Endowment Act.

Some of us can remember what took place during the last War under the Excess Profits Duty. Machines were installed, extensions were made to factories, roads were built, the formation of auxiliary companies took place, and many other methods were adopted in order to evade the tax. The Chancellor stated yesterday that he hopes in a normal year to receive from the National Defence Contribution approximately £20,000,000. That is an infinitesimal amount compared with what this country, even within the limits of orthodox economics, has a right to expect as a return from heavy industry. I would remind the right hon. and gallant Member for Ripon and the right hon. Gentleman the Member for Hillhead that in the period 1932–36 profits rose in this country by 52 per cent., and yet wages remained relatively the same. Who is paying for rearmament? Who will pay for rearmament? Unless a change can be made in the direction of taxation, it is the common people who will be paying for rearmament in this country.

The proposals of the Chancellor will, within limits, be conducive to a certain extent to making those people pay who, he desires, shall pay, but the people who will really pay will be the ordinary people of this country. They have already paid to a very great extent. Wholesale prices rose in 1936 by the following percentages: Wheat, 46.4; flour, 3.7; bacon, 10.5; cocoa, 71; potatoes, 20. On what are the wages of the common people of this country mainly spent? They are not spent on Rolls Royce cars; they are not spent on the building of luxury flats; they are not spent on visiting the Riviera or on going on cruises or sailing round the world. The common people of this country are already paying for rearmament in their increased cost of living, as is proved by the figures I have just quoted. In 1936, the industry of this country added to its net profits £25,000,000. For each £1 of net profit made in 1933, industry is now receiving 30s. in profits. In addition to that, there is a substantial lag between the time when the profit is made and the time when it is announced at an annual meeting. Therefore, there is every indication that the common people of this country are already paying for rearmament, and this proposal only carries out the policy of Marks and Spencer, of applying scientific window-dressing methods in order to side-track the common people of this country from the idea that that it is they who are mainly paying for rearmament, on to an idea that, as the result of this tax, it is industry that is going to pay.

On page 8 of the Statement of Revenue and Expenditure it is shown that the Chancellor is allowing, in respect of housing, for an increase of only £372,000 during the current financial year. The Chamberlain family have been known for their social reform ideas. It is true that politically they have always differed fundamentally from us, but within narrow limits the old Chamberlains as we knew them were known for a certain amount of enthusiasm for social reform, and, therefore, I would like to remind the right hon. Gentleman, when he is allowing for an increase of only £372,000 for housing, that what this country needs more than anything else is a great national housing scheme to enable the poor people in this country to live in houses the rents of which they can afford to pay, so that they may not be forced to live in the overcrowded way in which they are living, despite the slum clearance schemes which have already been carried through.

The right hon. Gentleman, again, is allowing for an increase of only £983,000 for old age pensions. I have some questions down for next week asking the Financial Secretary whether he is prepared to increase widows' and old age pensions in accordance with the relatively large increase that has taken place in the cost of living during the past 12 months. In addition to that, we find that there are 500,000 widows in this country without a pension at all, owing to the anomalies in the present Widows' Pensions Act, and there are 100,000 depending on public assistance. Therefore, even from an orthodox point of view, if the National Government are going to propose a great expenditure on rearmament, we have a right to say at the same time, even within the limits of their own orthodoxy, that they ought to have allowed bigger sums in order to do justice to those who are living on meagre allowances of the kind that I have just described.

9.43 P.m.

Mr. Wedgwood Benn

I suppose that, strictly speaking, I am not entitled to claim the indulgence which the House always shows to those who address it for the first time, but I can assure you, Captain Bourne, that I feel very fully the need for that indulgence. It is a long time since I was first elected, but the ordeal of addressing the House always seems to me to grow more formidable year by year. It is 30 years since I heard Mr. Asquith open his first Budget, and, since then, allowing for absences, partly due to the War and partly due to the lamentable preference in some constituencies for other candidates, I calculate that I have heard 22 Budgets opened in this House; and I can say, and I speak, surely, from experience, that never have I heard one opened with a greater mastery of the material or clarity of expression than has been shown by the right hon. Gentleman. Therefore, the few words that I have to address to the Committee will be rather in the nature of a general survey, from my own experience, of the great changes that have taken place in public opinion on fiscal matters in the last 10, and particularly in the last six, years. After all, as one gets older one has less interest in propaganda and more in diagnosis. We are all eager to know whether the prophecies that we made have actually turned out to be true. It is from that angle that I propose to say what I have to say concerning these proposals.

The first change that I notice particularly is the abdication by this House of its old functions. The privileges of the Committee of Ways and Means are very solemn affairs, and this House is very jealous of them. In the old days we used to fortify ourselves from little text books in the Library and keep every Government strictly up to the mark in its observance of the privileges of the Committee of Ways and Means. There are Statutes dating from Edward I, and many Resolutions, including that very specific Resolution of 1860, that the matter, manner, measure and time of every charge on the subject shall be the sole prerogative of this House. The first change that I notice is that all that has gone. I understand that there is a new committee of ways and means, a private affair of three individuals, and Members of Parliament not only do not take part in its debates, but are not permitted to be present. No one is let in unless he has an axe to grind. At any rate, that makes John Hampden look rather foolish. The second great change that I notice is the enormous increase in indirect taxation, that is to say, taxation of the consumer. In the last six years the taxation of the consumer has increased by £85,000,000. After all, we know the principle very well. If you have no income you pay no Income Tax, but, whether you have an income or not, you pay the consumers' tax, and it is precisely in inverse ratio to the capacity to pay, so that, for example, a widow with six children pays seven times as much in the sugar tax, the tea tax and the beef tax as the right hon. Gentleman the Member for Hillhead (Sir R. Home), who has no children and, as far as I know, is not on public assistance. I notice that the Chancellor of the Exchequer rather gleefully chortled over the prospect of an increase in the beef and veal tax which was to come next year.

My second point is this. This enormous change, especially the food taxes, has been repudiated with fervour by every Member of the Conservative party, saving always the very distinguished father of the Chancellor, with whom I sat at one time in the House and here we are. The astounding thing about it is that these taxes have all been introduced without ever securing public consent. Three times before the War, in the Election of 1906 and the two Elections in 1910, they were defeated and in 1923, when they were squarely put to the electors, they were defeated again. They were actually introduced by stealth during the panic of 1931. It was done in this way. The acquiescence in this moment of panic of such well-known Free Traders as Lord Snowden was secured. He was permitted to tell the public that there was no question of these taxes being imposed and, having collected millions of votes for the National Government on that plea, the taxes were introduced. Lord Snowden was very proud. He was Casabianca. But after the Election he found that, instead of being the boy who stood on the burning deck, he was only the girl who took the wrong turning. At that time the Government did not think it well to invite the co-operation of the present Home Secretary. He was not one of those who were called in, and it was quite understandable, because he had frequently expressed very strong opinions on this question of tariffs and had expressed himself very strongly against the idea of coalition at all. He had said comparatively recently in those days: Are we content that the immediate future of British politics should be simply a cleavage between those who profess extreme Socialist views on the one hand, and this consolidated body, a kind of amalgam or shandy-gaff of Liberals and Tories on the other? In his Election address he remarked in very large type: I am an out-and-out Free Trader. The task that lies before Parliament of rebuilding the social fabric on a better plan and of establishing the conditions of peaceful progress calls for the expression of clear-cut convictions and the application of consistent principles. It cannot be discharged by shifts and devices adopted to get over the difficulties of the moment, or to accommodate conflicting interests. The Lord President of the Council said, "I shall be run by no party." The Tariff is there and it is generally felt in what are called well-informed circles, which includes Members on this side of the House, that the thing has gone too far and that it is time to put on the break. We are told that we must get back again to our export trade. The President of the Board of Trade, the reasons for whose absence to-night we all regret, has been reminding the manufacturers that, above all, in their scramble for profits, which may be somewhat chastened by the Chancellor's new device, they must not forget that the position really depends on our export trade. We are all in favour of the reduction of the international barriers to trade, but when we say that we mean that we are all in favour of other people reducing their international barriers to trade. In the course of the last seven years, several such opportunities have occurred and the Government party have either rejected or destroyed them, particularly on the eve of the crisis in 1930 when Mr. Graham proposed to Europe a tariff truce. I do not know whether much could have come of that, but it was a very courageous effort for a Minister representing a minority Government of one country. He proposed a tariff truce which might have held up the disaster which landed Europe in a welter of economic distresses. What did the Government do to it? Before Mr. Graham had a chance to go to Geneva to put his proposal forward, the present Prime Minister denounced it and said that, if returned to power, he would destroy it. There was another occasion. Two Powers, Belgium and Holland, and the little State of Luxemburg made a convention agreeing to lower inter se their tariff barriers by so much per cent. The Convention of Ouchy was destroyed in 1932 mainly by the opposition of His Majesty's Government, although the Powers concerned were perfectly prepared to promise, if they were permitted to make the Convention, not to raise their tariffs against us.

Then there was President Roosevelt's first Presidential campaign. He made a most remarkable speech. He said of us: "They are practising the villainy we taught them," and then he proceeded to make overtures for the lowering of tariff barriers. Mr. Cordell Hull has continued to make similar efforts, and so has Mr. Bingham, who was sent as Ambassador to this country. Then there was the Currency Agreement of 1936, which was heralded in the "Times" as an agreement for the promotion of international trade and the removal of tariff barriers. What has happened about that? The Chancellor of the Exchequer was questioned the other day and he gave an answer which in effect was: "What can we do more? We sent the Lord President of the Council to America and we sent the President of the Board of Trade to America." But after all these Broadway nights, nothing whatever has been done.

What are the real reasons why we cannot get a reduction of tariffs? The first reason is that the Government have created vested interests of whom they are afraid. That is the fundamental reason. The President of the Board of Trade made some trade agreements with the Scandinavian countries. I do not know whether or not they are important, but I do know that the moment he had made these trade agreements he began to be lectured by all the organisations of the vested interests. One business man—I do not know whether he is a Member of the House now—Sir William Alexander, said: The political Jacks-of-all-Trades without consultation or expert guidance have concluded agreements. The time for drastic action has arrived. When the Federation of British Industries heard that the Government were going to insist or might insist on the reduction of international tariffs, they said: In those cases, which the Federation consider should be very few and exceptional, where His Majesty's Government considers it inevitable to make tariff concessions, it is absolutely essential that the Government should consult "— Consult whom? Not Parliament— the organised representatives of such industries. The League of Industry, another of these trade organisations, wrote almost in the terms of the preamble of an Act of Parliament. They said: Rates of Import Duty in this country should be made only on and with the advice"— Of the House of Commons? No! of a small independent body of experts. When the President of the Board of Trade replied—" The Government assume full responsibility. What did Sir William Morris say? He said: If such is the position, it is one which industry cannot possibly accept with equanimity. But it is not that these organisations have not shown gratitude, because Sir William Morris himself paid a great eulogy to the Prime Minister and said that he was at the bottom of all they had received. That is the first and I believe the main reason why the Government cannot get rid of this network of tariffs. The second reasons were given by the President of the Board of Trade at a Free Trade banquet which he was attending before he became Protectionist President of the Board of Trade. He was snatched away between the fish and the joint at that Free Trade banquet, in order to devise a Protectionist tariff. He explained to the Free Traders at that banquet, a few weeks before he joined the Government, the two reasons why the Tories will not agree to get rid of tariffs He said: The Tory party will not give up tariffs, first, because they believe they will relieve the direct taxpayer. The right hon. Gentleman is a very shrewd and wise man. He added: I think they are wrong. First, they will not give up tariffs because they think they will relieve the direct taxpayer and, secondly, because a great many people have not the courage to attack wages openly. The third reason why the Tory party sticks to tariffs and food taxes is the foreigners. Here I must go back into history, and I am about to make a statement which some hon. and right hon. Members will not believe. Nevertheless, it is true. The Tory party is fundamentally opposed to the social services. I sat in this House at the time when the Insurance Bills for Unemployment and Health were proposed.

The Parliamentary Secretary to the Treasury (Captain Margesson)

What about widows' pensions?

Mr. Benn

The Chief Whip can have his little Debate afterwards. I know that he is kindness itself and he knows what a difficult job I have. I sat in this House at that time and I saw the late Sir Laming Worthington-Evans week after week, along with other Tories, opposing and obstructing our Insurance Bill against unemployment and for health purposes. The only two Conservative Members in that Parliament who are still Members of this House and Members of the present Government are the Prime Minister and the First Lord of the Admiralty, both of whom voted against the Third Reading of the National Health and Unemployment Insurance Bills. The same was the case with the Old Age Pensions Bill. Mr. Asquith devised and the right hon. Member for Carnarvon Boroughs (Mr. Lloyd George) introduced the Old Age Pensions Bill. The Tory party had not the courage to divide against it, but the Leader of the Tory party in the House of Lords had something to say about the Bill. Let me give the House a few of the reasons that Lord Lansdowne advanced against old age pensions. He said: This Bill will cost the nation as much as a great war "— I do not think he had a very good idea of the cost of a great war— would cost, but with this difference, that war has, at any rate, the effect of raising the moral fibre of the country. This Measure will lower the moral fibre of the country. It was a Measure to give 5s. a week to old people at 70 years of age. Although the Chancellor of the Exchequer was not in the House at that time he took his own vigorous part in Birmingham in opposing the old age pensions proposals. He described the Old Age Pensions Act as an Act rabidly rotten in principle. It is just as well to delve a little into history and to see exactly what is the record and not what is the profession of the party opposite. They are reconciled now to the social services for one reason, because by means of the operation of the tax on commodities they have found a way to make the poor pay for their own social services. By the taxes on meat, sugar, clothes and everything they use and eat the masses of the working people make their contribution towards a system which was intended to be a re-distribution of the wealth of the country.

Now I come to my second and last subject, and that is Imperial Preference, by far the worst part of the new fiscal policy. The Tory party fancy themselves as Empire builders. If the Empire had been left to them it would have been in ruins to-day. Their policy of 20 years resolute government in Ireland might have lost us Ireland—we do not know—but the Chamberlain policy would certainly have lost us South Africa. They sent the Black and Tans against Mr. Cosgrave and soldiers and guns against General Smuts and Hertzog. Their conception was to unite the Empire by force; that was the Tory conception of Imperialism. When that became out of fashion they tried to unite the Empire by vested interests—Ottawa. Some of the things which were said about this in the old days have turned out to be painfully true. The first thing that happened at Ottawa was a family row the facts of which the "Times," though wanting to do so, could not conceal from the public. Mr. Mackenzie King was perfectly outspoken about it. He said: Relations came as near to the breaking point as they could. I do not think we shall see another such conference. We are not going to see another such conference. Following on Ottawa Lord Swinton issued a circular compelling all the colonies and dependencies to come into what Mr. Mackenzie King called an economic preserve. They were compelled to give at their own cost preferential treatment to British interests. What happened next? Immediately this policy was adopted other countries followed suit. The first country to call a conference was, I think, France, and her colonies; and the next to follow the example was Italy. The President of the Export Association in Italy immediately after Ottawa said: We must take our own measures. They did take their own measures. They made their own Ottawa in Ethiopia. The right hon. Member for Hillhead may feel cross—

Sir R. Horne

I am not at all cross. I am delighted to welcome Rip Van Winkle back to the House of Commons.

Mr. Benn

The right hon. Gentleman has confessed to-day that his eyes have been opened as to what has happened in the Ethiopian affair. He had read Marshal de Bono's book and he knows that the Italians justify the extension of their African Empire on the same grounds that the right hon. Gentleman justifies Ottawa —that they must have a sphere for preferential trade.

Mr. H. Strauss

If tariffs are the evils which the right hon. Gentleman says, why did not he and his party say that they would repeal them in the event of their being elected at the General Election?

Mr. Benn

The hon. Member knows that in three years you can make such a mess of things that it will take a whole generation to clear matters up. Following Italy came Japan. During my period of enforced unemployment part of it was spent in visiting Japan and Manchuria, and in Tokyo and other towns the Japanese were filled with bland astonishment that their proceedings in Manchuria should be regarded in this country as they were. They said "Why should we complain? They were extending and surrounding an area of preferential trade in Northern China," and that we ourselves had an Ottawa policy of our own. After Japan came Germany. The right hon. Member for Hillhead may be very cross with Herr Von Ribbentrop when he said that as we had Ottawa they should have their colonies. It is not a question of whether they are reasonable. The question is what the result in the world has been of our Ottawa policy. The result has been that other people want Ottawas and vast areas for economic preference.

If you want a closed Empire you will have to fight for it. I say that the tariff policy of the Government is directly related to their armaments programme. In 1931 and in 1932 Europe was almost in a morass with all these economic conferences. The Government, of course, are not the only persons to blame, but they injected into this economic body in Europe this new poison of tariffs in this country and tariffs in our possessions and Dominions, which was sufficient to set the whole thing going. Quotas, restrictions and currency control all came in a heap as a result of the Government's action. Tariffs, quotas and restrictions have produced economic distress, and economic distress has produced dictators; dictators demand arms, armaments demand tariffs, and the whole thing goes whizzing on. Armaments and tariffs are twin policies. The fact of the matter is that there is a deep division of opinion between hon. Members on this side and hon. Members opposite. Fundamentally the party opposite believe in two things. They believe in profits as a motive and in force as a sanction. We oppose and shall oppose with success the motive of service and of brotherhood as a guarantee.

10.15 p.m.

The Financial Secretary to the Treasury (Lieut.-Colonel Colville)

It would be presumption on my part to compliment the right hon. Gentleman the Member for Gorton (Mr. Benn) on making a maiden speech, for he is an old Parliamentarian, but, on behalf of all parties in the House, I express our pleasure at seeing him here again and our interest in what he has said. The salient feature of his speech was a careful avoidance of saying anything about the subject before us. He roamed over a field of reminiscence. The right hon. Gentleman the Member for Hillhead (Sir R. Home) aptly described him as a genial Rip Van Winkle who had come back among us, but on the subject before us he said very little. I agreed with one thing he said—that the Committee would recognise what a difficult job he had. It is difficult for anyone to belittle the financial achievement of the right hon. Gentleman the Chancellor of the Exchequer. Referring to the question of food taxes, the right hon. Gentleman the Member for Gorton expressed his abhorrence of them. Surely, it is a matter of degree only, because he himself has been a member of Governments of more than one complexion which imposed not inconsiderable taxes on food.

On the question of overseas trade, he referred in particular to the efforts made by the late Mr. William Graham, whom we all greatly esteemed, to secure a tariff truce. Nobody was more capable of urging a point than Mr. William Graham, and no doubt he used his very best endeavours to that end, but he was not equipped with any bargaining power in dealing with foreign nations. Coming to the question of trade agreements, I think I shall be able to prove to the right hon. Gentleman the Member for Gorton and the Committee that they have played no small part in the recovery of our overseas trade. He said it was possible to make in three years a muddle that it might be difficult to clear up in a whole generation. The National Government is showing some ability in dealing with the difficulties which they found on taking office, and in their effort to clear them up in a much shorter space than a generation.

The hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence), in contrast to the right hon. Gentleman who has just spoken, applied himself diligently to the examination of the Budget. He opened by expressing no sorrow for the increase of 3d. in the standard rate of Income Tax. He regretted, I think, that it had not come before. This is the point of view held by a great number of hon. Members opposite, namely, that a higher rate of Income Tax is a good thing in itself. [HON. MEMBERS: "No!"] It is a point of view not out of accord with the opinions of a number of Members opposite. They hold that a higher rate of Income Tax is one of the best methods of redistributing wealth, and as such a good thing in itself. We on this side of the House cannot share that point of view. The Chancellor of the Exchequer explained last night that the increase was due to the stern necessity which confronts us. But when the hon. Gentleman the Member for East Edinburgh went on to deliver a homily on the subject of borrowing, I was reminded of the quotation from "David Copperfield" when Mr. Micawber addressed David on the same subject. We read: Mr. Micawber conjured me to observe that if a man bad twenty pounds a year for his income and spent nineteen pounds, nineteen shillings and sixpence, he would be happy, but that if he spent twenty pounds one, he would be miserable. After which he borrowed a shilling of me for porter and cheered up. The hon. Member's stricture would have had more force if it had not been clearly in our recollection that the Government, of which he was such a distinguished member, like Mr. Micawber, had also borrowed considerably for purposes of consumption, and that, to continue the analogy, as in the case of Mr. Micawber, it was a hazardous and difficult enterpris on account of the lack of confidence which their reputation caused.

Mr. Mathers

It was not for porter.

Lieut.-Colonel Colville

It was certainly for purposes of consumption. The hon. Member proceeded to ask a number of questions about one of the principal features of my right hon. Friend's Budget, namely, the National Defence Contribution, and his questions were echoed by other hon. Members, for instance, the right hon. Gentleman the Member for Hillhead, who also asked some other questions, the right hon. Baronet the Member for Caithness and Sutherland (Sir A. Sinclair), and the right hon. and gallant Member for Ripon (Major Hills). Hon. Members will appreciate that many of these are points of detail affecting the computation of the tax which can only be dealt with at length on the Bill, but I think the Committee would appreciate it if I gave certain broad indications of the lines upon which the Bill will be framed. The hon. Member for East Edinburgh and the right hon. Member for Hillhead both raised the question of the basis upon which capital is to be computed. The Chancellor of the Exchequer said in his Budget statement that the capital will be computed on the basis of the costs of the assets employed in the business. That is the general basis, but, as my right hon. Friend went on to say, there may be special modifications of the general principle to be made in special cases. I would add that from the cost there will be deducted the liabilities, such as, for example, debentures and loans. With regard to the question as to whether reserves will be included in the capital, the answer is that if the reserves are invested in assets employed in the business, they will be included as such.

With regard to profits, these will be computed, generally speaking, on the same lines as for the purposes of Income Tax, with certain modifications, the most important of which is the deduction of interest on debentures and loans corresponding to the deduction of these items in the computation of capital. Preference dividends will not be deducted, nor, correspondingly, preference shares in computing the capital. Losses will also be computed on similar lines. The first step will be to compute the National Defence Contribution for which purpose—and here I come to the Income Tax question—no deduction of Income Tax will be allowed, but the Contribution will be treated as an expense in determining profits for Income Tax purposes. As I have explained, these are broad indications of the way in which the National Defence Contribution will be treated. They are no more than that, and it will be possible to go into closer details on these points at a later stage.

Sir R. Horne

The only reason why I asked the question was because it is important for business firms to realise as quickly as possible the conditions under which they are to work. May I ask, in regard to capital, whether reserves are not to be included except those which are employed in the business? Further, if reserves are invested, for example, in gilt-edged securities, will the interest on the gilt-edged securities be included as part of the profits of the business or not?

Lieut.-Colonel Colville

I have made the position clear as far as I can at the moment, namely, that reserves invested in assets employed in the business only, would be included. If they were invested outside, they would not be included.

Sir R. Horne

Then may I ask whether interest on investments outside the business is to be included in the profits of the company?

Lieut.-Colonel Colville

I take it that it would not be included. Perhaps the right hon. Gentleman will take that as my view, expressed at this stage, while agreeing that there are many matters which must be examined more closely later. I have given my view, which is that reserves invested and employed in the business only would be regarded as included—

Mr. Pethick-Lawrence

Capital?

Lieut.-Colonel Colville

Yes, capital, and that income from outside investments would be treated as being outside.

Mr. David Grenfell

Are we to understand that interest on preference shares and interest on debenture shares are to be excluded from the amount of the profits?

Lieut.-Colonel Colville

I thought I had made it plain. I want to give the Committee all the information that I can give at this stage and I made a careful statement which I will repeat. With regard to profits, these will be computed, generally speaking, on the same lines as for the purposes of Income Tax with certain modifications, the most important of which is the deduction of interest on debentures and loans, corresponding to the deduction of those items in the computation of capital. Preference dividends will not be deducted, nor, correspondingly, preference shares in computing capital.

Mr. Remer

May I ask one question? I do not want the right hon. and gallant Gentleman to give me an answer now, but perhaps he can answer the point tomorrow. What will be the position under this proposal of subsidiary companies with very small capital, which are held by large companies?

Lieut.-Colonel Colville

Perhaps my hon. Friend will give me time to go into that matter. There is another point on the question of the National Defence Contribution which was raised by the hon. and learned Member for East Bristol (Sir S. Cripps) relating to the wages of miners. He asked what would be the effect on miners' wage agreements. The hon. Gentleman who opened the Debate for the Opposition did not raise that point, probably because he understood that, in fact, miners' wages would not be affected, but I would like to reassure hon. Members opposite on that point. The suggestion was made in the Debate that the payments to the National Defence Contribution would have the effect of restricting wages in the mining industry which are measured by reference to ascertained profits. There is no foundation for that suggestion. The formula for fixing the ascertained profits takes no account of any tax payable on the profits. The Income Tax is not taken into account, and the position would be the same in the case of the National Defence Contribution, which, like the Income Tax, is payable out of profits. I hope that that explanation will make it clear to the Committee that the suggestion made by the hon. and learned Member for East Bristol was in fact based on false premises. There was one other hon. Member representing a mining area, the hon. Member for Llanelly (Mr. J. Griffiths), I think it was, who was much concerned about the same thing, and I hope that he too will be reassured.

Mr. J. Griffiths

I never raised the point at all. I understood how the ascertainment was made.

Lieut.-Colonel Colville

The hon. Member spoke when I was out of the House for a short time, but I understood that he had raised the point. However, he evidently saw from the method of ascertainment that that difficulty would not arise. The hon. Member for East Edinburgh asked one or two other questions about the National Defence Contribution which must await an answer at a later stage. He then went on to speak of the high cost of living, and he compared the figures of the latest available date, 1st April, with those of last year and with those of 1935; and he went on to say that in his view the National Government were applying, I think he called it, a concealed indirect tax to the people of this country owing to the rise in the cost of living. The figures that he took were those that suited his argument, and he did not go back to the figures of, say, 1930 or 1929. If I may give the Committee, so that there may be no doubt in their minds, the figures for those years, they will show that the hon. Member's argument loses very much of its force. The figure for April, 1937, the latest available figure, was 151. The hon. Member quoted the figures for the two previous years and showed that there had been a rise. If he had gone back to 1933, he would have seen that the figure at that time was 137, the lowest point that it has touched; but if he had gone further back still, to 1930, he would have seen that the figure was 157, and at that period the Government of which the hon. Member was a member was in office. If he charges us with applying a concealed indirect tax to the people of this country because the cost of living has risen to 151, we will ask him what kind of tax, indirect or otherwise, was being applied at that time.

He spoke of the effect of the cost of living on pensions, but I must remind him that most of those pensions were fixed at a time when the cost of living was considerably higher than it is now. I do not minimise the feelings which may be aroused in certain quarters when the cost of living rises and the income is a fixed income, but when the hon. Member charges us, with great severity, with being harsh to those who receive pensions, I must remind him of the figures obtaining at that time, when he himself was at the Treasury.

Finally, he sought to impugn the credit of the National Government and said that at the time when the Defence Loans Bill was brought out their credit fell and that this was reflected in the prices of gilt-edged securities. I would like to draw his attention to some figures. He mentioned 3 per cent. and 3½ per cent. The actual yield of the 3½ per cent. Conversion Loan taken at 10th February was £3 5s. 11d.; on 17th February it moved to £3 9s. 11d.; on 20th April it came back to £3 7s. 10d. Thus there seems to be a good deal of difference between the actual figures and the figures of 3 per cent. and 3½ per cent. which the hon. Member quoted.

Mr. Pethick-Lawrence

If the right hon. and gallant Gentleman will take broadly the figures of gilt-edged securities, he will find that they were standing practically on a 3 per cent. basis. It is no good taking one security. If you take Consols, various conversion loans, funding loans, and the principal municipal stocks, they are all to-day not very much better than 3½ per cent.

Lieut.-Colonel Colville

I will take another typical one, the 3½ per cent. War Loan, which moved from £3 5s. 3d. to £3 7s. 2d. I think that it was rather an over-statement to say that there had been so much movement in gilt-edged securities as a result of the Defence Loan Bill. I would remind the hon. Member that at the time when the Government of which he was a Member was in office, in August, 1931, the 3½ per cent. Conversion Loan yielded £4 9s. 10d. That is a big difference. The conversion operation must be borne in mind, but here, again, it is as well to point out that a great saving has been made by the National Government by creating the conditions which made conversion possible.

The right hon. Gentleman the Member for Hillhead raised a number of points mainly relating to the National Defence Contribution. I will try to answer some of them, but there are others which must await a later stage. In general, he gave his approval to the Budget, but expressed some anxiety about the National Defence Contribution. I rather differ from him on one point. He felt that there was a risk of extravagant extensions on the part of employers to avoid the payment of this new duty. He gave cases where under the Excess Profits Duty such a thing had taken place. I agree with him that it took place, but there is a great deal of difference between the rate which was chargeable under the Excess Profits Duty, which rose as high as 80 per cent., and the present rate of duty in this tax, which my right hon. Friend was at pains to point out was a temporary tax to meet a temporary burden. Would a man for the sake of avoiding a temporary tax of 20 or 30 per cent. spend huge sums of money on large extensions knowing that in the future they might be of little use? There is all the difference between the rates chargeable in this case and the rates chargeable in the case of Excess Profits Duty.

Sir R. Horne

In the case of a company, it might, with Income Tax, amount to 45 per cent. and in the case of a firm it might be higher.

Lieut.-Colonel Colville

The right hon. Gentleman will remember how high the Excess Profits Duty went at its highest point, and he will agree that there is a big difference. The right hon. Gentleman proceeded to analyse our overseas trade and expressed approval of the trade agreement policy and the policy of the Government in general in regard to prices. The right hon. Baronet the Member for Caithness (Sir A. Sinclair) was loud in his condemnation of the Government and of the financial policy of the Government. I think he went so far as to characterise the administration of my right hon. Friend as a failure.

Sir A. Sinclair

As not successful.

Lieut.-Colonel Colville

The distinction is a nice point. He knows that it would be difficult to get accepted anywhere in the world his statement that my right hon. Friend's financial administration of this country is a failure.

Sir A. Sinclair

Not successful.

Lieut.-Colonel Colville

The right hon. Gentleman went on to say that this same financial policy might put us back into the morass to which Socialist finance had brought us and from which we had been extricated. I seem to remember that when the Labour Government were in office the Liberal party were supporters of that Government, and that my right hon. Friend himself voted with them in many Divisions, and therefore if he foresees us getting into a morass he must take his share of the responsibility.

Sir A. Sinclair

And many Members of the present Government.

Lieut.-Colonel Colville

I was concerned for the moment only with the right hon. Gentleman. He indicated that there was once a good Government, the first National Government, of which he was a member. Then he told us that from the moment that he and his friends left the National Government things began to improve. I hope he will not take that in an offensive spirit. I do not mean it in that way. I meant it as a statement of fact. The two facts were not entirely unconnected. I hope the right hon. Gentleman will not take that offensively either. The right hon. Gentleman, who holds certain views with great sincerity, left us on a cardinal but important point of our policy, namely, Imperial preference. He went away holding contrary views, and our policy was adopted, and from that moment things began to improve. Later I should like to give some figures of the improvement in our trade to prove the point which I have made.

The right hon. Gentleman then went on to the question of taxation, which he said had reached "concert pitch." He argued that we had reached almost the limit of the burden of taxation, but why then did he and his friends oppose the National Defence Loan, which was a wise method adopted by my right hon. Friend to avoid screwing the piano beyond concert pitch? The right hon. Gentleman cannot have it both ways. If, as he said, we have reached the stage when taxation is so oppressive that the limit has almost been reached, he cannot at the same time refuse to support my right hon. Friend and the National Government in the methods they have adopted for financing this rearmament scheme, which he himself is convinced is necessary. The right hon. Gentleman referred to the National Defence Contribution proposal as "a lawyers' and accountants' endowment Act." So far as they are subject to Income Tax and Surtax a portion of their incomes will find its way back into the coffers of the Treasury.

Mr. Bracken

Can the hon. and gallant Member tell us whether, if accountants profit out of this they will have to pay this contribution?

Lieut.-Colonel Colville

I cannot say more on that point at the present time. The right hon. Gentleman asked why the particular years chosen for the average of profits had been selected. In our view it is a fair period to choose. I listened with interest to the right hon. Gentleman's views on that point, but, with all the circumstances in mind, we hold the view that the period we have chosen is the most suitable. It is impossible to distinguish between armament firms and others. The right hon. Gentleman set out the difficulties of that distinction.

Now I come to the speech which was made by the hon. Member for the City of London (Sir A. Anderson). It was a very thoughtful speech and interested all those who were present. He brought out the point in relation to the distinction between armament firms and others, and he pointed out what was very true, that the benefits to armament firms have an effect upon firms not in the armament trade; the benefits are not confined to armaments firms but spread out in other directions too. That, of course, is a plain fact. The hon. Member for the City of London went on to comment on the Civil Estimates. He said that he was concerned not so much with the rise of expenditure in the Civil Estimates as with the rise of expenditure in armaments. He hoped that we should reach a point where all nations would realise that these burdens are intolerable, and that wasteful expenditure upon armaments would be reduced That is a view with which we all agree, however we may differ upon points of detail in foreign policy.

Then I come to the speech made by the hon. and learned Member for East Bristol. I have already dealt with the point he made about miners' wages. His speech was characterised mainly by profound distrust of the Government's policy. I had intended to say, and I shall say, that that distrust is reciprocated, so far as we are concerned, in relation to the policy which he advocates. His speech was perhaps not so interesting as the interruptions which he made in the speech of my hon. Friend the Member for Huddersfield (Mr. Mabane) who said something about the support of revolution. The hon. and learned Member rose at once and indignantly denied that he had any views of that kind. I know that the Committee will be interested to learn that the hon. and learned Gentleman is such a supporter of the present order of society. The hon. Member for Huddersfield approved generally of the National Defence Contribution. I shall not follow in detail what he said. In his view it would even out the boom and the slump periods to some extent. He said that the allowance of £10,000,000 for Supplementary Estimates was not large enough; but the experience of the last five years goes to show that it was sufficient.

If I do not answer every point which was raised by hon. Members I hope they will forgive me. The hon. Member for Brigg (Mr. Quibell) talked of land speculators escaping taxation. If their gains can be brought into Income Tax and Surtax returns there will be no more ready listener to any suggestions than myself, or any representative of the Treasury. He went on to say that the Chancellor's proposals would make the rich richer and the poor poorer. There I must part company with him. There is no shred of truth in that suggestion. He ended by saying that the small business man was specially hit. But in the contribution to National Defence my right hon. Friend has specifically provided that the small business man with no more than £2,000 profits should be excluded altogether. The right hon. and gallant Member for Ripon asked me questions relating to the National Defence Contribution, and the answers I gave earlier cover most of the points he raised. He ended by saying that he accepted it generally in principle, but had some doubts as to its application.

I have not been able to cover all the questions that have been raised, but before I sit down there are some general observations which I should like to make. In recent years the use of loud speakers and amplifiers has made it possible for huge gatherings to be addressed by speakers, and we are all familiar with the spectacle of these great mass demonstrations which are held in certain European countries and the pictures of some speaker addressing a huge uniformed gathering, row upon row and banner upon banner. Sometimes in the quiet and restrained atmosphere of this House it is difficult to realise that the utterances of our statesmen have an even greater carrying power.

Yesterday was such an occasion, because the whole civilised world takes an interest in the British Budget, and within an hour of the time my right hon. Friend had spoken it was known in all countries that Great Britain had given a further example of sane financial administration, and had shown that she was willing to face her burdens. He rightly said that Defence dominated the situation at the present time. That is right. Our social structure, social services, and improving trade would all collapse if the country were not adequately defended. But when the right hon. Member who spoke last says that the Tory party profoundly disapprove of the social services, I would remind him that the National Government have in no way let the social services down. At a time when we have to meet this immense and unprecedented demand for the equipment of our Forces, it is a great thing to be able to say that not only have we not let the social services down, but have given evidence of our will to fulfil our election programme by the special legislation we have introduced.

Mr. E. Smith

What about the means test?

Lieut.-Colonel Colville

There might have been a temptation when this immense demand for rearmament came upon us to curtail that programme. I agree that we have to watch our expenditure, but it will be recognised both in this country and abroad that the National Government have had a good record for the improvement of the condition of the people of this country as well as for provision for their safety. The Chancellor's estimate for next year on the basis of existing taxation showed a surprisingly small prospective deficit because of the improvement in revenue, and that, to a large extent, has been brought about by improving trade.

That brings me to a point which was referred to by one or two hon. Members, and particularly by the right hon. Member for Caithness, who sought to belittle the extent of the recovery in our overseas trade. In the year that has just passed, 1936, the value of our total imports of merchandise was £848,900,000. That was £92,900,000 greater than the total for 1935. That is a very considerable increase in our imports. Great Britain is now by far the largest purchaser of overseas goods. We have bought immense quantities of overseas goods, and our imports last year played a big part in contributing to the improvement of world trade.

Our exports last year were the highest since 1930. Hon. Members may say that that does not apply as compared with the years before 1930, but what we have to have in mind is the present rate of improvement in our conditions. We are experiencing a very notable improvement in those conditions. The right hon. Gentleman referred to the trade agreements as of rather doubtful value, but I would quote these figures. Comparing the year 1932, which was the year before the agreements were framed, with last year, our exports, including re-exports, increased by £85,000,000. The increase in the total exports to the Ottawa Dominions and the countries with which trade agreements were in force during the whole or the greater part of last year amounted to no less than £72,000,000. That is a very significant figure. Of the increase of £85,000,000, £72,000,000 was with countries, Empire and foreign, with which we had made agreements. That is a definite contribution towards the revival of our overseas trade, and cannot in any way be belittled.

Not only have the overseas trade figures improved, but, as has been shown, the figures of consumption and production in this country have greatly improved also. The increased consumption of tea, tobacco, sugar, beer and oil, all indicates increased activity of one kind or another. It was, I think, the hon. Member for Silvertown (Mr. J. Jones) who pointed out that in his view indirect taxation was too high, but there is one object of indirect taxation which does not seem to have suffered very greatly from the present rate of duty, for no less than 649,000 more bulk barrels of beer were consumed last year than in the previous year. All these signs of activity indicate a return of prosperity to this country, and that return of prosperity did not come about by mere chance; it has come about as a result of the deliberate policy of the National Government. The actions of Governments do not pass into oblivion, and, when the history of the last few years is written, it will show what a great part in the recovery that we have made has been due to the wise financial administration of my right hon. Friend. If it is the case, as I believe it is, that a strong and resolute Great Britain can exercise a great influence for peace—perhaps the greatest individual influence in Europe at the present time—let us remember that strength and resolution can be shown in finance as well as in arms and munitions.

Sir R. Horne

Does my right hon. and gallant Friend propose to give any answer on the question of the depreciation of ships?

Lieut.-Colonel Colville

Not to-night.

Captain W. Shaw

Can the Financial Secretary say whether those Cabinet Ministers whose salaries are raised above £2,000 will be liable to the National Defence Contribution?

Motion made, and Question, "That the Chairman do report Progress, and ask leave to sit again," put, and agreed to.—[Captain Margesson.]

Committee report Progress; to sit again To-morrow.