WAYS AND MEANS.

HC Deb 27 April 1938 vol 335 cc137-265

Considered in Committee [Progress, 26th April].

[Captain BOURNE in the Chair.]

AMENDMENT OF LAW.

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."— [Sir J. Simon.]

3.13 p.m.

Mr. Pethick-Lawrence:

Yesterday afternoon the House of Commons listened with the usual attention to the speech of the Chancellor of the Exchequer. To-day, before I start on my criticism of that speech and its contents, may I say that I was very glad that the Chancellor made no attempt to disguise the unpleasant facts? Figures we had in abundance, but they were figures which clarified instead of camouflaging the reality. We have had Chancellors who held a different view of their duty, notably the right hon. Gentleman the Member for Epping (Mr. Churchill). He took a puckish delight in obfuscating the issue, but though he immensely enjoyed himself in the process neither the House nor the country profited thereby, and I am satisfied that neither the Government nor he himself enhanced their reputations by those extravagances.

To-day the facts stand out quite clearly from the speech which the Chancellor made in the Committee yesterday, and I think still more clearly from his broadcast speech, to which I listened yesterday evening. What are those facts? The revenue for 1938, on the basis of last year's taxation, would be £914,000,000. The expenditure, under the existing Estimates, is no less than £1,034,000,000. Therefore, the deficit to be met in the existing Budget is £120,000,000, to which has to be added, of course, the cost of any accelerated rearmament that the Government can crowd into the current year. Such acceleration is not likely to cost less than £10,000,000, and it may be £20,000,000, £30,000,000 or even £50,000,000. The Chancellor has decided to find by new taxation some £0,000,000, and to leave the balance, which is almost certain to exceed £100,000,000, to be met by borrowing. That is the effect of his Budget proposals, and I notice that in the Press this morning he is praised by the orthodox for his courage, and chidden by the light-hearted for his undue severity. What a criticism of the pass to which this country has come under the guidance of His Majesty's Government !

In face of these facts and figures my mind naturally reverts to the year 1931, when the Government of which I was a member was hounded out of office because it was said that the Budget was unbalanced. At that time there was a large Sinking Fund in operation, and the claim was that so great was the unbalancing of the Budget that it equalled, and perhaps slightly exceeded, the whole measure of the Sinking Fund. At the very outside there was a deficit running to slightly above £1,000,000 a week, while the present Budget reckons upon borrowing to the extent of more than £2,000,000 a week. A further charge made at the time of the Labour Government was that we were becoming a bankrupt nation because of the negative balance of our visible trade position. In a Debate on the question Lord Horne, who was then a Member of this House, drew attention to the fact that, whereas in 1913 we paid for our imports by visible exports to the extent of 82 per cent., in the year 1931 the percentage had fallen to 71. He made that the occasion for a special attack on the Labour Government of that day. What are the figures at the present time? For the year 1937 the proportion of imports which is covered by visible exports has not gone back to the 1913 figure, when it was 82 per cent., or to the figure in 1931, when it was 71 per cent., but has fallen as low as 58 per cent.

The Government of to-day will say, "Ah, but look at the emergency of the present time." Was there not an emergency in 1931, equally brought about by the international situation? Was there not then an economic blizzard, and was it not as necessary then as it is now to take exceptional measures? Capital expenditure incurred at that time would have been reconstructive and would have added to the strength and stability of the nation, but capital expenditure—if it can be so called at all to-day—is for the purpose of building up armaments which, however much they may add to security, add nothing to the capital strength and wealth of the country.

I hope that the lessons, which are obvious, will not go unlearnt; they certainly will not go unlearnt by myself and my hon. Friends on these benches. There are two lessons. First of all, the lesson is that there are vast untapped productive resources that are not utilised under the normal working of the credit system of capitalist economics and capitalist finance, and that unorthodox methods alone call them into being and into activity under that system. In those days, orthodox methods failed to bring into full use all the possibilities of the nation which could have been employed to build up happy and healthy people, not only in this country but throughout the world. What is happening to-day is that those unorthodox methods of finance and economics are being employed, not to build up health and happiness but to build up throughout Europe destructive apparatus which may well bring our civilisation, as we know it, to an end. The second lesson to be learnt is that the party opposite are willing to use arguments and methods against their opponents on specious grounds which they are perfectly willing to override when it suits their purpose and for their own objects.

I will not further digress from the situation of to-day, and I return, therefore, to the current facts. I remember very well when the Prime Minister brought in his Budget two years ago. When I followed him on the following day I said that his speech foreshadowed a succession of years of steadily rising taxation. The Prime Minister indignantly protested. No doubt in his protest he was envisaging his intention to carry part of the burden of expenditure by a loan in the forthcoming years, but though he boggled at my description of his speech that description was, in fact, correct, and the prophecy I saw embodied in it has come to be realised. In the following year, he himself put an additional 3d. on the Income Tax and he gave us two versions of the National Defence Contribution. The first was so unfortunate that he had to withdraw it, and to substitute the one which is at present law. The present Chancellor of the Exchequer has had to put the Income Tax up by a further 6d. in the £ further taxes on oil and tea and, in addition, to frame his Budget on the assumption that a sum in excess of £100,000,000 will be borrowed to make up the deficit.

I do not think that this is an occasion to discuss in detail all those increases in taxation. As the proposals which the Chancellor of the Exchequer adumbrated to us pass through their stages in Committee and in the House we shall have more than one opportunity of discussing them, but I would say in regard to the Tea Duty that whatever may be the case of the ordinary working class families in this country there is no doubt that any burden, however small, upon the very poorest of the poor necessitates a reduction in their standard of life. I am thinking of the unemployed and of people of minute fixed incomes who have been so seriously hit by the rise in the cost of living during the last few years. I have attempted to show in previous Debates that the wave of what the Government call prosperity has fallen with unfortunate consequences on the shoulders of those unhappy people, who, so far from getting any share of the prosperity which has fallen to other members of the community, have actually paid a severer price in consequence, and have had to cut down their standard of life step by step.

That is the position in the current year, but the Committee will realise that we are concerned still more with the position in the years to come. What will be the position next year and the year after? I can say without fear of contradiction that if the Budget is viewed from a peace standpoint it is not merely a depressing Budget but an outrageous and deplorable Budget. It places burdens on every section of the community by means of heavy taxation, and it fails to remove any of the omissions in the social services. It accepts the reduction in the cost of unemployment allowances, and it ties posterity up with an increasing burden of debt. When the Prime Minister first indicated that we were to borrow in order to meet the current expenditure of the country he said that it would be all right because he had arranged, most happily, for a Sinking Fund to begin at a definite date. The House could rest assured, if borrowing was undertaken, that when the proper time came it would all be paid off, interest and capital. Sometime during the five years we should have passed the peak, and at the end expenditure would have come down and we should have no special cause for anxiety. In the light of the speech of the present Chancellor of the Exchequer, what has happened with all that comfortable prophecy?

The Chancellor of the Exchequer repeated, almost in the words which I used, the statement that though much of this sum was for capital expenditure—for reconditioning—that when reconditioning had been done there would be a large amount of current upkeep required to continue to finance the armaments of this country. So far from the peak being this year, it might be next year, it might be the year after, or, one is tempted to add, it might be never, and the expenditure may go on increasing year after year.

The fact is that this is not a peace Budget. I do not want to be alarmist and call it a war Budget, but at least I think it is right to say that it is a Budget based on a prepossession with war. I think that that is why, although the Committee listened with attention to the Chancellor yesterday, the Galleries which as a rule are filled by Members on Budget day, were practically empty, and I noticed that there was very little excitement. That is quite natural, because the real issue is not how precisely the Chancellor of the Exchequer meets the expenditure of to-day, but what the future is going to be. Are we to have a war, or are we going to avoid it? And, if we are going to have a war, what does it matter whether there is an extra 6d. on the Income Tax, or whether an extra £100,000,000 is placed on the debt to-day? That was the feeling, I think, which was present in the minds of right hon. and hon. Members of this House, and is to some extent shown even in the columns of the Press this morning. The real issue is the issue of peace and war, and the precise details of the Budget, compared with that tremendous issue, sink into comparative insignificance.

I noticed that the greatest cheer that the Chancellor received in the course of his speech was when he announced that there had been a measure of food storage. That was a position at which all sections of the House rejoiced. The criticism I have to make on that question is that it seems to me that, if something less than £10,000,000 which I think is what the Chancellor mentioned, has been spent on that object, it is very doubtful whether it has gone nearly far enough to meet the real situation which may arise.

Therefore, terrible as it is to have to face it, and though one must make every effort to avoid the assumption that war is inevitable, we are compelled by the position of the Government to face up to this Budget and see what it will be like if the calamity that we all fear should fall upon us. We must examine this Budget as though it were, in fact, a war Budget. If we carry our minds back to the last War, which everybody hoped would really be the last war, we see that one of the most serious features of that war was the faulty finance with which it was conducted. In the first year before the taxes had been increased, borrowing had started; prices continued to go up, and taxation never went more than a fraction of the way towards keeping level with the expenditure. But this time we have started borrowing before the war begins; the inflation is already under way; and, if we are confronted with the calamity, we shall be to that extent worse off than we were before. War profits are being made already. The Government cannot pretend that large profits are not already being made out of armaments. They refused to take the course recommended, not only from these benches, but by large numbers of people who know the facts, to take the armament business out of private profit, and, for all the steps that they are taking, there are nevertheless enormous profits falling to the manufacturers of armaments.

What steps is the Chancellor taking to fortify his position and to meet the shock of expenditure and taxation if it arises? We had, before the Budget was announced, a considerable advertisement of tax avoidance. "Tax avoidance" is, of course, a very nice term to shield the susceptibilities of those who are taking part in a grave scandal. At the present time, while the law proceeds to the uttermost against small people, and, according to some, is even strained against them, big people delay payment, and in many cases dodge it entirely. When we come to the—

Sir William Davison

The Chancellor in his speech said just the opposite. He said he was embarrassed by having too much Income Tax paid this year.

Mr. Pethick-Lawrence

What I am saying is that small people are pressed to the uttermost, and that many large people delay, and, still worse, dodge their correct burdens under the law of this country. Although the Chancellor said he was going to deal with that matter, the proposals he put before us are totally inadequate for the purpose. He has proposed certain changes in the law which do not go beyond replugging some of the holes which his predecessor, the present Prime Minister, professed to have plugged successfully two years ago. I have not had time, since the Chancellor made his speech, to refresh my memory by going carefully over the details of the discussions that we had in this House during the passage of those proposals into law, but, if my recollection serves me, more than one of the changes which the Chancellor of to-day finds it necessary to make are rendered necessary because the Chancellor of that day, the present Prime Minister, did not yield to the suggestions that were being made from certain parts of the House to make his proposals more secure against abuse than they actually are. We shall, no doubt, have plenty of time to discuss these matters in greater detail, both on the Report stage of the Ways and Means Resolutions and on the Clauses of the Finance Bill when it comes before the House in Committee and on other occasions.

An attempt has been made to argue that the law of diminishing returns applies with regard to Surtax, but anyone who makes that statement is, I think, being entirely led away by a phrase, unless it is meant that, in the face of the definite law of the land, a larger number of people are attempting to evade their responsibilities in order to dodge the tax. I am one of those who believe that what the Chancellor of the Exchequer said yesterday is perfectly true, namely, that large numbers, indeed the great bulk, of the people of this country who are liable to Surtax quite honourably pay the share, which they are called upon to pay. For that very reason, as well as because the revenue has to be protected and the laws of the country have to be respected, it is obligatory on the Chancellor of the Exchequer and on this House to close all possible lines of abuse, be- cause otherwise those people who honourably pay are obviously called upon to hear an improper share of the burden. The tax is an obligation; it is not a voluntary gift; and in the present condition of our law unless far more drastic precautions are taken, there is a danger that it will be a voluntary gift on the part of those Surtax payers who honourably bear their burden. It is not a question of how many people evade the law at the present time; it is a question of how many could evade it if they set out to do so. Hon. Gentlemen on the other side may think I have been exaggerating in saying that this can be avoided by anybody who deliberately goes out to do so. This is what a responsible writer in the "Times" said only a few weeks ago: There are so many avoidance schemes that one may say the payment of surtax is purely voluntary. It is possible to avoid the payment of any surtax on any income, whether earned or unearned, by resorting to one or two simple devices which could be included on a printed form and filled up in a few minutes. That some surtax payers are still left is due partly to ignorance of the technicalities and partly to disapproval of chicanery on the part of a large but diminishing number of persons. That is not my statement; it is the statement of an authority in the "Times." Whether it is wholly true or not, there is enough truth in it to justify my statement that far more drastic action must be taken.

Mr. Boothby

Who is the author of that?

Mr. Pethick-Lawrence

I do not know; but it was given the greatest prominence in the "Times," and the "Times" itself had a leading article broadly endorsing what its correspondent said. The country will not tolerate the kind of thing to which much prominence was given lately, in connection with a certain case which we all remember. If there is to be a war, and if grave sacrifices are to be demanded, we on these benches and the people for whom we speak, and I believe a great many Members on the other side, have no intention of sitting idly by while rich men make themselves radically richer by means never intended by the Legislature.. It would be most undesirable for the Chancellor at that time to have a weapon which breaks in his hand when he comes to use it. One of two things must be done. Some means must be found of taxing the incomes of people who, by converting their income into capital and increasing the appreciation of the capital they hold, are able to employ their income and yet call it capital for purposes of taxation. I do not know whether the Chancellor, beyond the proposals which are here to-day, has any further proposals that he intends to make to this House. If so, and they are adequate, we shall certainly support him in what he may be doing; but if not, I say most emphatically that what we have already here are quite insufficient to stop he large holes which are still open to those who wish to evade payment.

But if it be impossible to make such a change in the law, and if wealth can always be treated in that way as capital when it is income, there is another method which the Chancellor has always in reserve, and which he can apply if he thinks it desirable and necessary. Quite independent of this, if there is a war, and enormous sacrifices are demanded from people in life, it may be necessary to use this weapon to obtain the corresponding sacrifices in finance. That is the weapon of a tax on capital. I am not speaking of a levy on capital, but of an annual tax. It is always possible for the Chancellor, if he fails to catch the income from great wealth, to tax that wealth itself. It is no new proposal; it is not an untried proposal. It exists certainly in one, and I believe in several, of the countries of Europe at the present time. I suggest to the Chancellor that, having that weapon in reserve, he should insist that the due share of taxation is paid by such people; and if that should fail under the existing law, this new weapon, which can be substituted if necessary for Super-tax and perhaps for Death Duties as well, may be used.

I have ended my survey of the specific proposals which the Chancellor has made. I cannot close without a word on the larger question to which I have already referred, and which must be in the background of all our minds. That is the question of the international outlook. I say to the Government—and this is a question which is being asked not merely in this House but throughout the country as a whole—where are you going; where are you leading your country and your countrymen at the present time; where are you leading Europe and the world? You are asking from the people of this country unprecedented sacrifices. You are calling for unity. The question is, for what are you asking for this unity and these sacrifices? You say you are out for appeasement and reconciliation. For any real reconciliation in Europe, not only we on these benches and the people for whom we speak, but every man and woman in this country, devoutly pray. Any Government seeking real reconciliation will have the whole-hearted support of the people of this country.

But you say you have started on the road; we ask what evidence is there of this? Take the countries one at a time. Ireland: yes, thank goodness you have been in time to rectify the blunder your Government made a few years ago. Germany: you are yielding to autarchy and force what you refused to give to justice and democracy; and you are doing this partly because an ignorant section of your followers erroneously believe that under a regime such as that in Germany, their class has a better position than under our own democratic constitution. In Spain, you threw away democracy and freedom when you allowed non-intervention to become a farce. With Italy, you are throwing to the wolves two free countries, only bargaining that when the second victim has been killed and dismembered it shall not afterwards be eaten by its aggressors. I am tempted to ask what form your appeasement will take when there are no more weak nations to be flung to the wolves?

If you want unity you must stand for the things for which the great heart of our people beats: for liberty, for justice, for democracy, for the rule of law among nations. But you prefer to be leaders of a faction. To us it seems that you are asking sacrifices not for the things for which unity could be obtained, but for the triumph of aggression, for the suppression of democracy, for the planting of the swastika in Central Europe and in the Pyrenees, and of German and Italian guns on the shores of the Mediterranean. If it is for these objects that you look for unity, you will look in vain.

3.50 p.m.

Sir Archibald Sinclair

The Chancellor of the Exchequer has been listening for some time to a strong and searching criticism of his Budget, and I should like to open my remarks by saying something kindly and pleasant to the right hon. Gentleman before I start on the same tack. Undoubtedly, the Budget of the right hon. Gentleman has given a shock to public opinion. One reason for that, I cannot help thinking, is that he has resisted courageously the pressure from quarters to which this Government in the past has often been susceptible—pressure which has been brought to bear upon him in the newspapers, in speeches from the supporters of the Government, and, I have no doubt, in private conversations—and he has managed to keep the secrets of the Budget well. I do not only refer to illegitimate disclosures of information, but I do mean that, of the recent series of Budgets, I do not believe that there has been one in which so little information of the general tendency and character of the proposals of the Chancellor of the Exchequer has leaked out as on the present occasion. Therefore, I would congratulate him, in the first place, upon his well-kept secrets.

It is not the least merit of the Chancellor's austere and honest Budget that it exposes the precariousness and, indeed, the rottenness of the foundations of the economic and financial policy which his predecessor and the Government as a whole have been following for the past six years, and in particular since rearmament began. This is not the time that any wise Chancellor of the Exchequer would choose to impose fresh taxation if any other course was open to him. As the Chancellor of the Exchequer pointed out yesterday, the economic trend is now unfavourable to the remunerative employment of capital and labour, and, therefore, to the Revenue. At this period in the trade cycle there is no small risk that recession may develop into a slump. The outlook in America is obscure and at the moment not particularly hopeful, and a slump there could hardly leave us unaffected. Our unemployment returns, too, contain a serious warning. In December, 1937, there was an increase of 37,00o as compared with December, 1936; in January, an increase of 138,000 as compared with January, 1937; and in March, we had over 1,700,000 unemployed, an increase of 148,000 as compared with March of last year, and of no fewer than 400,000 as compared with September of last year. This is a juncture at which it would obviously be desirable to avoid reducing purchasing power and discouraging enterprise by increasing taxation. The necessity for increasing taxation is imposed upon the Chancellor of the Exchequer not only by the circumstances to which he so cogently drew attention yesterday, but also by the failure of his predecessor adequately to strengthen our financial position when times were good and when recovery was in full swing, as we on these benches urged him to do in successive Budget Debates and in the Debates on the Defence Loans Act last year.

The Prime Minister with his hesitating threepences on the Income Tax in good times, and the final muddle and crash of National Defence Contribution which started us on that unfavourable trend in our business which the Chancellor of the Exchequer asked us to note yesterday, was like a refusing horse which has not the heart to take the big jump and queers the take-off for those that come after it. The present Prime Minister talked about restoring the Sinking Fund two years in succession, but he remained deaf to the appeals from these benches that he should pass from words to action. How much stronger would have been the position of his successor in the present emergency if, instead of being compelled to contemplate the stark alternatives of fresh taxation or of borrowing in excess of the amount of the annual savings of the people, he was able merely to suspend a substantial Sinking Fund.

Nor would the task of the present Chancellor of the Exchequer have been so heavy if adequate steps had been taken in time by his predecessor to check and control the alarming growth in expenditure. When the Labour Government was in office the Prime Minister wrote a letter to the "Times" in which he declared that he would not enter a Government which was not pledged to reduce national expenditure. Yet, even omitting all Defence expenditure, the necessity for which, it might be argued, was outside his control as Chancellor of the Exchequer, expenditure grew under his administration of the national finances from £663,000,000 in 1931, of which £50,000,000 was for Sinking Fund, leaving £613,000,000 as the net expenditure under the Labour Government, to £647,000,000 last year, of which only £10,500,000 was for Sinking Fund, leaving £636,500,000 as the net expenditure. And this, too, in spite of a permanent saving in Budget charges of upwards of £40,000,000 by the conversion of the War Loan by the first National Government in 1932. It was in those years of world recovery from the world slump, years of buoyancy, that our financial resources should have been husbanded and an effective Sinking Fund established.

Then came the necessity for rearmament, which in the present international situation we on these benches admit, but to which, in our opinion, the foreign and economic policies of the Government have contributed. Now the rising torrent of expenditure is swollen by the spate of armament Estimates. There is no doubt that they will be passed by Parliament, for all parties in this country are convinced of the necessity for rearmament, and foreign governments will make a great mistake if they reckon upon any faltering here, whatever sacrifices may be involved, so long as a threat exists of aggression from countries which are still using war as an instrument of national policy. At the same time we must face the facts, appreciate the size of the burden and do what we can to check its unnecessary growth.

Already the Estimates foreshadow an expenditure of £343,000,000 from Votes and Defence loans in the present year, on the Army, Navy and Air Force alone, in addition to £8,000,000 on air-raid precautions, or a total of £351,000,000. But not even this colossal total is the whole total. It will be swollen in four different ways. There is first of all the new construction for the Navy, which is not included in the present Estimates. There is, secondly, fulfilment of the warning given in the statement relating to Defence which was issued last month, that the present Estimates would be exceeded. There is, thirdly, the further statement made by the Prime Minister in the Debate in this House on 14th March, that the international situation would make a further acceleration necessary. Fourthly, there is the provision which was announced yesterday by the Chancellor of the Exchequer and which I applauded—provision which was indeed included in his allowance for Supplementary Estimates but which is additional to the other expenditure on Defence—for food storage to an amount which the Chancellor of the Exchequer has not yet disclosed but which I hope he will be able to disclose in the course of these Debates.

It is therefore clear that the figure of £351,000,000 for Defence in the current year will be exceeded, and substantially exceeded. Even then we shall not have reached the peak of the expenditure. We shall not see the peak until next year, as we are told in the White Paper on Defence which was presented to the House last month, or indeed, as the Chancellor warned us yesterday, not perhaps until the year after next. In the concluding passage of his speech yesterday the Chancellor spoke eloquently about the dogged determination and dauntless courage with which the taxpayer would shoulder this armament burden. But I anticipate that the taxpayer will display these qualities in direct ratio to the diligence, firmness and resource which the Government show in pursuing a constructive policy of peace, in making all their armament expenditure conform to a coherent conception of our strategic responsibilities and requirements, and in eliminating profiteering and waste.

To-day, in spite of the temptation offered to me by some passages in the Chancellor's speech of yesterday, I will, for fear of taking up too much of the time of the Committee, await another opportunity of criticising the Government's foreign policy, the breakdown of which has so greatly aggravated the problems of Defence and armament finance. I shall also await other opportunities of drawing attention to the need of more effective measures for attaining to a coherent conception of our Defence requirements than are afforded by the Government's makeshift appointment of a Minister with inadequate powers to coordinate Defence. Let me, however, in a few sentences make clear the vital importance—I am glad that the Minister for Co-ordination of Defence has come into the House—of this aspect of the problem from the standpoint of finance and economy, and therefore of efficiency.

When the rearmament programme was launched it was common ground between Members of all parties that the Defence service which stood most in need of expansion, both absolutely and relatively to the expansion proceeding in other countries, was the air service. The Government's policy was defined, not to my mind very satisfactorily, as I said at the time, as "parity with the strongest air force within striking distance of our shores." That formula has been thrown over. There is evidence that far from reducing the disparity between the strength of our Air Force and that of Germany, and also the disparity between the aircraft production capacity of the two countries, the Government have allowed it to increase, and it has recently been asserted by prominent supporters of the Government that we are now relatively worse off in the air than when rearmament began. At sea, on the other hand, as the right hon. Gentleman the Member for Epping (Mr. Churchill) pointed out two years ago, our naval predominance was already greater over other European countries than it was in 1914. Of course, we must remember the naval requirements of the Far Eastern situation; but recent developments there must tend to discourage the idea that additional new construction of colossal battleships will be necessary in order to keep pace with Japan. Yet not only have the gaps in our naval strength been filled, but we have doubled our expenditure on the Navy in three years —£124,000,000 this year compared with £64,000,000 in 1935-36—and the tonnage building has been quadrupled since January, 1935, an increase from 138,000 tons to no less than 547,000 tons, in addition to large repairs and modernisation of existing ships. Nor does this estimate including anything on account of the new construction programme for 1938.

My submission on these facts is that the Ministry for the Co-ordination of Defence has not saved us from the old vice of the departmental scramble, in which the most strongly entrenched Department, the Admiralty, always scoops the pool, and that if we are to avoid uncoordinated and therefore wasteful expenditure we must obtain more effective machinery for the integration of the three Services and a closer co-relation of their demands upon the taxpayer.

No less important is the need for eliminating waste and profiteering in carrying out rearmament. Day by day evidence accumulates that this task is so colossal as to be beyond the capacity of the machinery of Treasury control. The armament companies' profits are mounting month by month. Taking the years 1934-35 and comparing them with the years 1936-37, thus avoiding the years of worst depression and selecting a few companies almost at random, I find that the profits of Dorman Long have risen from £400,000 to £700,000, of Vickers from £600,000 to £1,100,000, of the United Steel Corporation from £259,000 to £722,000; while of aircraft firms the profits of Armstrong Siddeley have risen from £176,000 to £533,000, Fairey Aviation from £40,000 to £248,000, and Handley Page from £S45,000 to £100,000.

Nor indeed is there any ground for surprise in the rapid growth of these profits of aircraft manufacturers when we find it revealed in the report of the Comptroller and Auditor General upon the Air Services Appropriation Account for the year ending March, 1937, that aircraft factories are receiving £300 profit from each aeroplane produced. If our output is now 300 aeroplanes a month no less than £3,000 a day in net profit on the production of new machines alone will be flowing into the pockets of shareholders in aircraft factories. I saw the other day a speech by the hon. Member for East Aberdeen (Mr. Boothby), in which he declared that aircraft production in Germany and Austria is now boo aeroplanes a month.

Mr. Boothby

It will shortly be.

Sir A. Sinclair

If we are to equal them the profits of shareholders in aircraft factories on new machines alone will amount to £6,000 a day. Many of us, too, are disquieted by the information which has reached us confidentially about waste in various directions, but as I am not at liberty to disclose the source of certain information which has come to me, so that it can be scrutinised and verified, I do not feel justified in repeating it. Moreover, the Committee is fortunate in having first-hand testimony in a maiden speech which was delivered the other day by the hon. Member for Ipswich (Mr. Stokes), based on firsthand experience. It is a mine of information on this subject. If any hon. Members did not hear that speech, they ought to read it. It threw a revealing light on the workings of the Government's control over armament expenditure, or indeed, as he described it from the manufacturers' standpoint, "the arms racket." He declared that the civil servants who discharge the functions of control allotted to them by the Government were doing their job manfully, but that they had not a chance, that you could defeat them very easily and that he would back himself not to be caught by anyone. He made one practical suggestion which I think is worthy of consideration by the Government. He said that firms taking part in rearmament should be obliged to employ an approved firm of auditors, who would render to the Government a certificate of profits at the end of each contract. There is a strong case for that, if indeed there are sufficient auditors in the country to undertake the task. I urge in addition, as I have repeatedly urged before, that the Government should adopt the proposals of their own Royal Commission on the Manufacture of Arms.

Nevertheless, as I pointed out in the earlier part of my speech, this problem of Defence expenditure is only one part of the whole problem of mounting expenditure at a time when we are faced with the probability at no distant date of a decline in the yield of existing sources of revenue. The "Economist" points out in its Budget Supplement that the expenditure required—for all expenditure other than the Debt and Defence services —is substantially larger now than it was in the last roughly comparable period of prosperity. In 1924, leaving out Debt expenditure and expenditure on armaments, such expenditure amounted to 6.8 per cent. of the national income, and it amounted to a similar proportion in 1929. By 1938 the proportion had risen to over g per cent. of the national income. If the unfortunate economic trend to which the Chancellor directed our attention yesterday continues—and there is nothing in his Budget proposals to check it—unemployment expenditure will increase and national income will fall.

Looking a little further ahead we are faced with the prospect of a declining population. Already, the numbers of children leaving school are declining, with the result that there is a scarcity of juvenile labour. In a very few years that scarcity will be reflected in a falling off in the number of young artisans and labourers, while at the other end of the scale old people will be increasing, and the cost of old age pensions and other social services will be automatically rising. Soon, if things are allowed to drift in the fashion that has been characteristic of the present Government's policy in many spheres, there will be a panic demand for a committee of hard-faced business men to cut down expenditure ruthlessly, and the social services will again be in danger. If we are to protect the social services and save the taxpayers from burdens of taxation which are even more crushing than those which they are now carrying, we ought to act now and initiate a careful and objective inquiry into present expenditure and, looking several years ahead, into the means of keeping it within our present and prospective revenue without detriment either to the needs of national defence or to the social services.

I am not prepared to dogmatise as to the exact nature of the inquiry, but certainly it should not be a Geddes Committee or a May Committee. It seems to me that a more useful and encouraging precedent is to be found in the work of the Committee on National Expenditure during the War, of which Lord Samuel was chairman. That committee saved the country millions of pounds, and high tribute was paid to its work in this House by Mr. Bonar Law and Sir Austen Chamberlain on 29th January, 1918. Let the Government act now, for there could be no stronger antidote to the inevitably depressing effect of the present Budget on business and enterprise than the assurance to the taxpayer that this House is effectively grappling with the problem of increasing expenditure.

Yet if the immediate effect of the Budget proposals must inevitably be depressing, I remain of the opinion that the decision of the Chancellor of the Exchequer to meet by increasing taxation £30,000,000 of the prospective deficit—which we must remember, on this year's working, will amount to more than £120,000,000 in all—was as prudent as it was austere. Nevertheless, my agreement with his decision stops short at the methods by which he proposes to give effect to it. I regret the addition to the Tea Duty. For the reasons which I adduced yesterday, this impost will fall with special severity on the poorest of the poor at a time when, in spite of the fall in the last four months, the general trend of the cost of food is upwards. In 1924 the cost of food was 22 per cent, above the level of July, 1914; in 1925 it was 25 per cent.; in 1936, 30 per cent.; in 1937, 39 per cent. and last month it was 40 per cent. Moreover, while the taxation on foodstuffs in 1930-31 amounted to less than £14,000,000, the burdens piled by the present Government on to the consumers of food had brought the amount of the taxation of food by last year over the mark of £38,000,000. This is no time to add to the burden of the consumers of food an addition to a tax upon what is not a luxury but a necessary article of diet for the poor.

It would have been better to have increased the Beer and Tobacco Duties, which are definitely in the category of luxuries. The idea that beer is overtaxed has been sedulously propagated. Much has been made of the decline in consumption that took place when the last increase in duty occurred and the increase in consumption when the additional tax was removed; but the addition was made at a time of deep depression at the bottom of the slump and the tax was removed when things were improving and trade had largely recovered. Therefore, the cause of the drop in consumption when the additional tax was put on is clear, and the increase in the consumption of beer was far more likely to have been due to the change in the circumstances of consumers, rather than to the fact that the tax was removed.

Sir Francis Fremantle

Can the right hon. Gentleman say whether he regards tea as more of a food than beer?

Sir A. Sinclair

Most decidedly, and far more an essential article of diet for poor people all over the country. Comparatively few women drink beer but nearly all drink tea, and most men who drink beer also drink tea. You can avoid the consumption of beer if you think fit and drink something else, but to the vast majority of the people of this country tea is an absolutely essential article of diet.

I regret, also, that the Chancellor of the Exchequer, while claiming to throw his net widely and calling for sacrifice from all sections of the community, should have deliberately differentiated against one industry and have called upon road transport to bear so large a share of the burden. The Committee will remember the history of this tax. A tax on petrol was imposed before the war and shortly afterwards repealed. In 1929 the right hon. Member for Epping, then Chancellor of the Exchequer, wanted some revenue to finance his de-rating scheme and he turned to the road transport industry and imposed a petrol duty on light hydrocarbons of 4d. a gallon. In the financial crisis of 1931, the Chancellor of the Exchequer, looking round for something to tax, again fastened on this unfortunate road industry and in two successive Budgets of that year imposed additions of 2d. per gallon, making an additional 4d., and bringing the full duty up to 8d. a gallon. Subsequently, heavy oil became important because of the development of Diesel engines for road transport, and heavy oil was taxed, first one penny and then finally 8d. The Chancellor of the Exchequer yesterday again turned to this unfortunate road transport industry and called upon it to provide one penny more per gallon on light oils, and one penny a gallon more on heavy oils used for motor transport. Heavy oil in Diesel engines is to pay another penny; but not if it is used to propel a train; only if it is used to propel a road lorry. That, surely, is differentiation against a particular industry, and against that differentiation the Committee ought to protest.

The increase in the Income Tax is certainly preferable to the Prime Minister's disastrous experiment in National Defence Contribution, which started the unfortunate trend in our affairs which the Chancellor of the Exchequer noted yesterday. The increase in Income Tax is less alarming and more productive than National Defence Contribution. Moreover, we applaud the measures the right hon. Gentleman has taken to avoid hardship to Income Tax payers in the lower ranges of income, and to alleviate the burdens upon productive industry by increasing the allowance for wear and tear. We on these benches have' long advocated this increased allowance for wear and tear. The very proposal which the Chancellor of the Exchequer made in his Budget statement yesterday for increasing this allowance was the subject of an Amendment to the Finance Bill last year in the names of my hon. Friend the Member for Dundee (Mr. Foot) and my hon. Friend the. Member for Bradford. South (Mr. Holdsworth). I hope the Chancellor of the Exchequer may be persuaded to go a step further and to permit the allowance for obsolescence to be claimed annually, as is provided for in the fiscal arrangements of more than one British Dominion and several foreign countries, instead of only allowing it to be claimed on replacement. By adopting that proposal he would encourage manufacturers to run the risk of installing experimental machinery which if unsuccessful may never be replaced, but if successful may lead to striking and fruitful industrial developments.

It would, however, have been better if the Chancellor of the Exchequer had said that instead of increasing the Income Tax he proposed to employ six other methods of fortifying the revenue. Time forbids my entering in any discussion of them—or dealing with the question of tax avoidance, which I shall look for the opportunity of doing on some other occasion—but let me conclude by enumerating the six other methods to which I have referred. They are (1), an increase in the Surtax; (2), an increase in the Death Duties; (3), economy and elimination of waste, bureaucratic extravagance and profiteering in armarnents; (4), the taxation of land values, of which the Chancellor of the Exchequer was until recently so eloquent an advocate, and towards which even the Prime Minister has shown on two occasions some disposition; (5), the revival of overseas trade by the reduction of tariffs, the abolition of the quota restrictions and the adoption of the recommendations of M. van Zeeland's report; and, lastly, a constructive policy of peace, making it clear that it is not in national armaments, as the Chancellor of the Exchequer seemed to indicate yesterday, that we can find safety, but that war can only be averted, on the one hand, by confronting those nations which are still employing war as an instrument of national policy, with the collective resistance of all nations which are willing to abide by the rule of law, while on the other hand, making it clear, in specific and positive terms, that on the basis of disarmament and the acceptance of the rule of law there is no grievance or cause of dispute, financial, economic or Colonial, which we shall be unwilling to submit to the arbitrament of third party judgment, and no price which we shall be unwilling to pay for the friendship of all peaceful and law-abiding nations.

4.29 p.m.

Mr. Hely-Hutchinson

I thank you, Sir Dennis, for this opportunity of addressing the Committee, and I thank the Committee for its kind welcome. As I came to the House yesterday I was reminded of a previous and more joyful Budget occasion when I saw on a baker's van the legend, "Nevill's Cake." I do not think that many of us who came here yesterday were so optimistic as to think that we were going to receive any slices of cake from the Chancellor of the Exchequer; but on behalf of those who are responsible for large families, I should like to offer to my right hon. Friend my grateful thanks for the crumbs which he proposes to throw in our direction. I should like to pay a respectful tribute to my right hon. Friend for the almost ruthless lucidity with which he acquainted us with what I can only call the bad news. I am glad that he had the courage to resist the almost universal demand which we saw in the newspapers supporting this party that there should be no increase in taxation at the present time. In 30 years of financial business the most instructive lesson that I learned came from a very wise old man from Dundee, who carried in his pocket a notebook, on the first page of which were inscribed the words "Learn to say No." I suggest that that is a very valuable principle not only in the investment business in which my old friend was engaged, but also for Chancellors of the Exchequer and for Financial Secretaries to the Treasury. Last year when first we launched on what I might call a two-piece Budget as a means of preserving the outward forms of orthodoxy, I shared with many others a feeling of misgiving that that device might lend itself in future years to the use of borrowing to make up deficits. It is for that reason that I am especially glad that the Chancellor of the Exchequer has not availed himself fully of that loophole, and has caused the nation to face the additional burdens which are upon us now and which are foreshadowed in the future. I listened with respectful attention, as I always do, to the right hon. Member for East Edinburgh (Mr. Pethick-Lawrence). He accused the party on this side of the House, of which I am a Member, of using arguments to suit their convenience at one time and then abandoning them when they do not suit their convenience. I am bound to say that as I listened to his speech I felt that perhaps he himself does not always speak on these problems with one voice. I felt that in some degree he was showing us …the steep and thorny way to heaven, Whiles, like a puffed and reckless libertine, Himself the primrose path of dalliance treads, And recks not his own rede. I think I might describe the general tenor of his speech as that of orthodoxy. He attacked the present Budget as being one of a series of unbalanced Budgets. Yet I recall not so many weeks ago when the hon. and gallant Member for Thanet (Captain Balfour) introduced a private Member's Motion on the subject of economy, that towards the end of the Debate the right hon. Member for East Edinburgh rose and disposed of the arguments of my hon. and gallant Friend with a phrase which fixed itself in my memory on account of its inherent truth. The right hon. Gentleman said: We have gone a long way from pure Gladstonian finance."—[OFFICIAL REPORT, 9th February, 1938; col. 1197, Vol. 331.] Perhaps the Committee will allow me to recall memories of childhood days and quote from a speech of Mr. Asquith as Chancellor of the Exchequer in 1906: In regard to the Income Tax I do not hesitate to associate myself with the declaration of more than one of my predecessors, that Income Tax at a uniform rate of 1s. in the £ is impossible to justify in times of peace. It is a burden on the trade of the country which in the long run affects not only profits but wages. Since then we have had a quarter of a century with Income Tax at an average rate of 5s. in the £. It is interesting to recall that these remarks were quoted in the Budget Debate of 1913 by Mr. Walter Long, and used by him to embarrass the present Chancellor of the Exchequer who was then Attorney-General, and whose task it was on that particular day to defend the proposals of the right hon. Member for Carnarvon Boroughs (Mr. Lloyd George), who was advancing the reckless proposal that Income Tax should be raised from 1s. 2d. to 1s. 4d. in the £ I also listened with attention to the speech of the Leader of the Liberal party to-day and yesterday. The outstanding note of his speeches was a demand for a committee of investigation which would lead to economies in the national expen- diture. I noticed that he was careful to omit from the scope of these economies, expenditure on Defence, and that he most tactfully omitted economies on the social services. With economies in these two fields ruled out I should like to ask what possibilities of economy are there? There are only two categories left, one of which is the service of the National Debt, for which we are providing this year £230,000,000, which includes a statutory Sinking Fund of f £10,000,000, offset by the amount of interest on the national savings certificates which accrues but is not charged against current income. There is clearly no possibility of economy in the field of Debt services, and if we face the problem we must agree that the prospects are very much the other way, for we must expect a mounting total of debt during the next few years. Furthermore that figure for Debt service is presumably based on a continuance of the low rate of interest we are paying on £800,000,000 represented by Treasury bills on which we are only paying the very low interest rate of 11s. 2d. per cent. per annum. If that should rise to 3 per cent., we should have to find an extra £15,000,000 to £20,000,000 for Debt services. I think it is fair to say, therefore, that not only is there no possibility of finding economy under the category of Debt services, but that we must look for an increase in the years ahead.

The only other possible economy is in the field of administration. The total cost of the purely administrative departments in the year in which we are entering is only £85,000,000. Bearing in mind the observations made by the hon. and gallant Member for Thanet in the economy Debate to which I have referred, in which he said that it is not possible to look for substantial economies in the field of administration but only in the field of policy, I am afraid that the very awkward fact we have to face now is that there are no major economies which are politically possible. We have to accommodate our minds to a Budget, even after the spate of rearmament has passed, of something like £1,000,000,000 a year. We must look upon the present Budget primarily as a warning Budget. In the years ahead we shall look back on the year 1938 as the dawn of reckoning. We are leaving what I may call the old orthodoxy—I do not mean that the principles of the old orthodoxy are untrue, but merely that in present circumstances they are not applicable. But, unfortunately, no principles of the new orthodoxy have yet been enunciated which command general confidence.

If we survey the history of Government finance certain facts stand out clearly. I think it is particularly necessary for us at the present time to take an historical view of Government finance. It has now just become possible to take an historical view of the finance of the War and postwar periods, and it is only by taking such a view that we can hope to gauge the current in which we are swimming and hazard some sort of forecast of the shape of things to come. If we take the figures of the National Debt they tell us a very surprising, and, I fear, a rather alarming story. Before the War our debt was of manageable proportions; it was something in the nature of between £600,000,000 and £700,000,000. It rose to something like £750,000,000 after the Boer War, but we were on top of it, and we managed to reduce it in 1911 to about £650,000,000. In the year 1913-14 the total appropriations for Debt services were £25,000,000, and that included a figure of £5,000,000 for Sinking Fund, which was approaching 1 per cent. of the amount of the Debt then outstanding.

We can trace that figure through to the year 1927, which I think I may take as typical of what has come to be known as the "crazy decade" following the War. In the year 1927-28 we find that figure at £379,000,000, and it included £65,000,000 Sinking Fund and £30,000,000 for the service of the American debt. By 1935, which we may take as a year typical of recovery under the National Government, the figure had dropped to £224,000,000, a saving as against 1927 of £155,000,000. But £55,000,000 of that saving came from the elimination of the Sinking Fund, and £30,000,000 because we managed to let ourselves off the interest on the debt to America. There was, therefore, an economy on conversion of only £72,000,000. The point we have to realise is that that economy, that source of economy, has gone, and I suggest that we must look at the probability that the amount required for Debt services, which stands at £230,000,000 this year, is more likely to rise to £250,000,000 or to £260,000,000 in the course of the next few years. On Defence during the "crazy decade," when we were fooling ourselves we could economise on Defence, we were spending between £115,000,000 and £120,000,000 per annum. This year it amounts to £343,000,000, and with air-raid services added it comes to £355,000,000. It is difficult to see how even after rearmament falls away that that figure can fall much below £250,000,000.

The third great category of Government expenditure is in the Social Service Departments, health, education, pensions and unemployment assistance. Before the War the cost of these Departments was £45,000,000; in the "crazy decade" it rose to £206,000,000, in 1935 to £306,000,000 and for this year it is £345,000,000. These social services have acquired what I may describe as a sort of momentum, and I do not see how we can expect these Departments to cost much less than £400,000,000 in the years ahead. Finally, there is the administration Departments which cost £25,000,000 before the War, and £85,000,000 this year. We must look for a figure round about £100,000,000 for these Departments in the future. A normal Budget in the future, after the spate of rearmament has died away, looks like being in the neighbourhood of £250,000,000 for Debt Services, £250,000,000 for Defence, £400,000,000 for Social Services and £100,000,000 for administration. I do not see how we can get away from the prospect of having to spend £1,000,000,000 a year.

How are we going to do it? Fortunately it is not a question I have to answer, but these problems are making all of us furiously to think. It is a very good thing that this warning Budget should put the whole problem squarely before the country now. It will cause people to ask three questions. The first question is, what is the size of the internal debt which a country can support; what are the limits that most necessarily fall upon it? If there are no limits, we have no problem. The second question is, what proportion of the national income can we hope to collect in taxation and still preserve the illusion of freedom of contract?—freedom of contract which, I think, is just as necessary to trade unions in making their bargains as it is to business men in starting and maintaining their enterprises. The third question is one which must exercise all our minds—how would it be possible, with our present debt structure of some £8,000,000,000 and with taxes practically at war time levels, for us to pay for another war nearly on the scale of the last War, which cost us something like £7,000,000,000 or £8,000,000,000? How would we finance another major war costing between £4,000,000,000 and £5,000,000,000? The Committee has been more than kind in listening to me for so long; and I do not wish to detain it longer, but I would like to leave those questions for consideration. I do not address them to my right hon. Friend the Chancellor of the Exchequer, for if I did, I think he would naturally reply, "Sufficient unto the day is the evil thereof; I have enough to do with balancing this year's Budget."

I will conclude by telling the House of an experience which I had during the first week I sat here listening to Debate. The right hon. Gentleman the Member for West Bromwich (Mr. F. O. Roberts) was introducing a Bill which had an object with which the entire House was in sympathy, the shortening of hours of work in municipal hospitals. In his opening remarks, the right hon. Gentleman said he had not worked out the financial results of this Bill. He thought that without doubt they would fall somewhat heavily on local authorities, but he had no doubt that, in view of the praiseworthy object of the Bill, the taxpayer would be willing to make up the difference. I entered the House with old-fashioned preconceptions about its function as representing and defending the interests of the taxpayer, and when I heard those introductory remarks to the Bill which the right hon. Gentleman was introducing, when I realised that he had not worked out the financial consequences of the Measure he was introducing, I thought that that alone killed the Bill. In my innocence I waited to hear hon. Members on this side of the House get up and demolish the right hon. Gentleman's arguments on those grounds alone; but I was disappointed, for not a single Member on this side of the House even mentioned that phrase, not even the right hon. Member who gave the Government's viewpoint from the Front Bench. I was so surprised that after the Debate I consulted one of my hon. Friends, and received a reply in the terms of one who would humour an over-eager child, "Ah, my dear fellow, the House of Commons is not interested in finance." I do not believe that to be true; if it were true, it would be necessary for the country to think about it. If it is true, I apologise to the Committee for having committed the unpardonable crime of being a bore for no less than half an hour.

4.50 p.m.

Mr. R. C. Morrison

I listened with interest, as I am sure the whole Committee did, to the speech of the hon. Member for Hastings (Mr. HelyHutchinson), which was certainly not conspicuous for any spirit of optimism. I am bound to confess that, whatever the hon. Member may have been before he came to the House, he certainly has not added to his optimism by being here. He looks forward philosophically to a series of Budgets of £1,000,000,000. There is one point particularly on which I differ from the hon. Member. He referred to the period during which we were spending £120,000,000 a year on Defence as the "crazy decade," but it seems to me that when the history of these days comes to be written, the people of the future will rather put down this period as the crazy decade. I listened with interest to the speech of the Chancellor yesterday, and when the right hon. Gentleman, in outlining his task, compared the introduction of the Budget to a play in three acts, I could not help feeling that if this, like other plays which one goes to see, were dependent upon the support of the public, at the end of the three acts it would have been declared by the public to be an absolute failure.

It is customary in some circles to couple the Chancellor's name with simplicity, probably because a gentleman of the same name in days gone by had the advantage of being called "Simple Simon." The Budget certainly is a simple one. What the right hon. Gentleman was called upon to do yesterday, he did easily. First, there was the adding up of the expenditure, then the adding up of the potential revenue, and then, subtracting one from the other, which gave him a difference of £120,000,000, he announced that £90,000,000 would be covered by borrowing, which left him with £30,000,000 to raise by taxation. The simple question he had to ask was, "How shall I find £30,000,000?" He turned to the good old taxes, Income Tax, the Petrol Duty and the Tea Duty, to raise that sum, and there was the Budget, simple and without a single spark of imagination. This morning, one of the financial newspapers suggested that one reason the Chancellor did not raise the whole £120,000,000 by borrowing was that he wanted to impress upon the public that—to use the newspaper's expression, and not my own—this is rearmament with tears, and that another reason was that he wanted to impress certain dictators abroad with the fact that the British public, when it puts its back to the wall, is prepared to put up with any kind of sacrifice. I see from a newspaper report from Italy that what has most surprised the people of Italy in reading the Chancellor's speech are the enormous figures of rearmament. If one of the intentions of the Chancellor was to convey the impression to which I have referred, lie will be pleased to know he has succeeded. No one expected any remission of taxation, hut what shocked many people who do not know the Chancellor very well—mostly people outside the House—was the coldblooded and unimaginative way in which he marshalled his figures, as though the be-all and end-all of our existence nowadays was to find more and more millions for rearmament, and that nothing else mattered.

Notice taken that 40 Members were not present; House counted, and 40 Members being present—

Mr. Morrison

I was saying that what surprised many people outside the House, who do not know the Chancellor as well as some of us do, was the way in which he marshalled his figures, as though rearmament was the be-all and end-all of our existence. In presenting the figures, the Chancellor reminded me of a crippled ex-soldier who used to stand outside Waterloo Station with a card hanging round his neck, and on the card the words, "Kind friends have pity on me. I am an old soldier. Battles, six; wounds, five; children, four; total, 15." We can certainly prove a great deal with figures, but I suggest that what is important is not merely to produce figures and more figures, but that the Government should pursue a policy of international good will and of national well-being. If the Chancellor were to speak again, and if he considered my remarks worthy of notice, he would no doubt retort, as indeed he said yesterday, that the Government are pursuing a policy of international good will. He said: Nothing would contribute so much to the ultimate reduction of the burden as the increase of international good will and the general reduction of armaments which should flow from it. The policy which we are pursuing—the actual achievement of the AngloItalian Agreement is a striking and encouraging example—is aimed at this end. Obviously, the comment that one must make upon that statement is that, as far as one can judge, the Chancellor himself does not seem to have a great deal of faith in any considerable achievement by this policy, because of the fact that he not only announced enormous expenditure on rearmament, but went on to add that probaly this expenditure would increase as the years went by. As far as one can judge, the Government have no great faith in achieving any considerable results in this direction. I would like now to draw the attention of the Committee to some words which were used by the Chancellor in announcing the imposition of the additional tax on tea. He said: I well understand that even an extra halfpenny per week is a material and appreciable addition to the expenses of those with the smallest incomes. He then spoke words which I was sorry to hear: I believe that there is a willingness and even a pride in the humblest homes to take a share in this rearmament outlay, for defending those homes from peril, just as much as in the homes of more comfortable and wealthy people.''—[OFFICIAL REPORT, 26th April, 1938; cols. 62–66, Vol. 335.] Those words indicated very clearly to me that the Chancellor, with all his learning, does not realise that the ideology—to use a popular word in these days—of the poor has changed considerably since the days when he was a young man. Those were the days when the poor looked up gratefully to the rich, and said that if it was not for the rich people spending their money, the poor would have no work. That was commonly heard in the poorest districts 30 or 40 years ago. I well remember the first occasion on which I ventured to be a candidate for Parliament—when, incidentally I was successful. A lady who was an ardent supporter of my opponent, stood outside a polling station endeavouring to persuade people to vote for my opponent, and her slogan was "Vote for the rich man because the rich man will help the poor." Those days have gone, but evidently the right hon. Gentleman has not realised the fact, otherwise I do not think he would have used the words I have quoted. The right hon. Gentleman and his supporters need not think that they are going to get away with that kind of statement in the country as an excuse for imposing an additional duty on tea. The statement that the poorest of the poor will love to feel that they are contributing their part towards rearmament, might have gone down 40 years ago, but it will not go down now, as by-elections throughout the country will speedily show.

There has been a great deal of talk about national effort, and some hon. Members have been saying that this time of emergency is not a time for party politics. If the Chancellor of the Exchequer really feels that way, I will make a suggestion to him as to how he can go a long way towards achieving that end. If the right hon. Gentleman were to withdraw that part of his speech, and at the same time withdraw the additional duty upon tea, and substitute words in his speech similar to those which I am about to suggest he might achieve a great deal. Suppose the right hon. Gentleman, instead of imposing this additional duty on tea, and instead of uttering those sentences, which I will describe as unfortunate, but which some people might call hypocritical, about giving the poorest of the poor an opportunity of contributing—suppose that instead of taking that line the right hon. Gentleman had said, "I have still £3,000,000 to find, but I am determined to find it without imposing any additional burdens upon homes in which the standard of subsistence is already shamefully low. The policy of the Government is to maintain peace, but along with that we have decided to press forward a policy of securing that every man, woman and child in this country shall have enough food to eat, enough clothes to wear and a decent house in which to live—in other words the Government have decided, besides endeavouring to secure peace, to see that every citizen of this country is as well fed and well clad as Members of the House of Commons."

If the Chancellor of the Exchequer had taken a line of that sort he would have brought about a much greater measure of national unity than is evident now, or is likely to be evident, during the discussions of this Budget. Yet, for the sake of a paltry £3,000,000, a sum hardly worth mentioning in a Budget of close on £1,000,000,000, the Chancellor has lost a great opportunity of securing the confidence of the people of this country. Hon. Members probably know the feelings of poorer sections of the people better than many other people do, but the Chancellor of the Exchequer at present has no constituency, and that is unfortunate. He has left Spen Valley and at present he is in the wilderness waiting for something to turn up. The utterance of the right hon. Gentleman yesterday in which he said that he was imposing this taxation on the smallest and poorest homes in the country in order that the people in those homes should be able to go about with their bosoms swelling with pride because they were making their contribution towards national rearmament—that, I regard as one of the most hopeless utterances I have ever heard from a Chancellor of the Exchequer.

We hear a great deal of talk about breaking down ordinary party alignments. But there can be no unity if Members of the party opposite continue to follow the policy, that rearmament is the he-all and end-all of our existence, entirely divorced from any question of improving the social conditions of the people or lessening the gap, which is wider probably in this country than in any other country in the world, between the very rich at the top and the very poor at the bottom. I have not joined in the frequent discussions of foreign affairs recently in this House, but in visits which I have made to Germany I have been impressed by one fact. It is often asked why so many working-people support the present regime in Germany. It is, I think, because those extremes of rich and poor have been largely abolished. I do not profess to be an expert on the question, but I think it is true that those extremes have been abolished to a greater extent in Germany than in this country.

If, side by side with the rearmament policy, with which every party in the country is in agreement, the Chancellor were able to give the people some objective other than the piling up of armaments, he might hope to achieve something. But if the people are to slave and to be half-starved merely in order to raise £1,000,000,000 a year largely for the purposes of rearmament, with the threat hanging over their heads of an economy committee whose economies will probably start with the very poorest of the poor—if that policy is to be followed, then the Government will have an even worse time in the coming by-elections than they have had in the recent by-elections. I do not desire to make any party capital in these few disjointed remarks, but I do throw out the suggestion that it will be necessary for the Chancellor of the Exchequer and the Government to change their policy, because they cannot continue much longer on a policy merely of rearmament.

5.8 p.m.

Mr. Mebane

I should like to join in the congratulations which have been offered to the hon. Member for Hastings (Mr. Hely-Hutchinson) on his maiden speech, and perhaps my congratulations are the more sincere in that I feel that the speech which I am about to deliver will be largely a gloss on what the hon. Member said. It appears to me that we can approach this Budget in two ways. We can look upon it as just another Budget, or we can look upon it as a point of crisis in our political and economic life. If we adopt the first approach, we must begin, as the right hon. Gentleman the Member for Caithness and Sutherland (Sir A. Sinclair) did, by congratuating the Chancellor of the Exchequer on his courage. He has faced his problem, and within the limits of the armoury available to him he has won his battle.

We must also congratulate him upon the proposals which he has made for limiting tax avoidance. Some of us would have been prepared to support even more drastic proposals for limiting tax avoidance. We would have been prepared to support proposals which would have left the question of the intention of the taxpayer open to decision, in the last resort, by the courts. I know that any such proposal could be regarded as a violation of our principles of taxation but I believe that the country would have been prepared to accept such a departure and I believe the effect on popular sentiment would have been good. There will, however, be other opportunities of discussing in detail the particular proposals that are to be made and the Chancellor of the Exchequer may be prepared to accept further suggestions for limiting tax avoidance in particular details if some of us are able to devise new Clauses for that purpose.

We can also congratulate the Chancellor of the Exchequer on balancing his Budget this year. As those of us know who have pleaded in former years for a longer view, Treasury orthodoxy demands that we must be concerned only with this year's finances. Some of us in the past have argued that the Treasury and the House should take a longer view of our financial position, and that, instead of looking merely at one year, we might look at two or three years. But we must rest satisfied with the idea that we are concerned only with this year's finances. I know it is easy to argue that by balancing the Budget this year the Chancellor has by that very Act made it more difficult for him to achieve a balance next year and that, by the very taxes he has now imposed in order to collect the necessary revenue this year, he has, in advance, killed the revenue next year. Arguments like that have been used before. I have used them myself. I do not propose to use those arguments now and, if I did so, I should do it with less confidence than formerly.

It seems to me, therefore, that the only matter for discussion, if we are to follow orthodox lines, is whether the new taxes will produce the desired revenue, or whether other taxes would have produced that revenue more comfortably. Whether any new taxes should have been imposed at all or not does not seem to be a matter for discussion. There is a deficit of £30,000,000, and it has to be met. I have read and heard many criticisms of the taxes proposed by the Chancellor, but I have not heard a single alternative proposal that appeals to me any more than these proposals for producing the necessary revenue. Of course, such alternative proposals are extremely difficult to make. I think it will be agreed that at the present time, whichever way we turn to look for increased taxation, we are faced with the possibility that if we do increase taxation in any particular direction, there is grave danger that the ultimate yield will not be greater but will be less. But to attempt the orthodox approach to this Budget is to reveal the degree to which to-day the orthodox approach has become impossible, to reveal the extent to which the new wine of the twentieth century is bursting the old bottles of the nineteenth century.

For that I do not think the Chancellor is to blame. Budgeting is not what it was formerly. Formerly the results of the year approximated a great deal more closely to the Estimates. A surplus of £29,000,000 would have been a shameful admission for a Chancellor to make. Nowadays, little mistakes here and there, of £3,000,000 or £10,000,000 in the estimates of revenue, or of £20,000,000 or £30,000,000 in the estimates of expenditure, are made, and nobody minds very much. Again, it is impossible to press the Treasury very hard on that point. The essence of correct budgeting is stability of conditions. A year used to be a short time in our financial life. The current of financial events rarely changed much during that period. Nowadays it is a long time. Much more, and much more that is unpredictable, can take place within a twelve-month.

There is another reason why budgeting is much more difficult, and this has been touched upon by the hon. Member for Hastings. The Chancellor of the Exchequer used to come to this House expecting his proposals for expenditure and for consequent taxation to be resisted. The Departments were nervous of their Estimates because they were too high. Parliament has changed its practice. Parliament to-day is the greatest spending Department of them all. Departments are no longer nervous on account of expenditure which Parliament will resist, but on account of expenditure which it will demand.

An immediate evil effect of this change is that it has now become the settled practice in budgeting to budget for Supplementary Estimates, in utter violation of the principle that all revenue must be appropriated, a principle which this House spent many long, long years of bitter struggle to establish. A further symptom of this growing recklessness is to be found in the last item on the Revenue side of the account—the item "Miscellaneous receipts." This item, which may balance or unbalance a Budget, has varied in the last few years between £10,000,000 and £30,000,000. I wonder whether any Member or more than one or two Members of this House either know or care what "Miscellaneous receipts "are and why they vary. We ought to ask why they should be only £10,000,000 this year, and I was sorry. although I cannot blame him, that the Chancellor passed by this figure without an explanation of any kind.

In short, therefore, it appears to me that what I term the orthodox approach to Budgets has to-day become impossible and not a little ridiculous, and I prefer, as the hon. Member for Hastings has done, to approach this Budget as a critical point in our political and economic development. Whether wittingly or not, the Chancellor of the Exchequer has brought the House and the country sharply up against certain problems of the most searching character that will have to be considered before very long. He has compelled us to consider whether our present economic system will stand the strain which it is clearly going to be called upon to bear. As everyone knows, and as has been said more than once this afternoon, it is not so much this Budget which frightens, but the shadow it casts on at least the next two Budgets. The hopes of a balance this year may not be disappointed, but how is the balance to be achieved next year, when, as appears certain, the expenditure will be higher and when, on the basis of existing taxation, there is every prospect of the revenue being lower?

We all well know the principle of diminishing returns from taxation beyond a certain limit, and we are bound to ask ourselves whether, within the limits of our present economic system, there remain any directions in which it is possible seriously to increase taxation without as a result receiving a lower return. Is it possible, that is to say, in any circumstances to achieve a balanced Budget next year? Would it have been possible had we determined to meet all our expenditure by current revenue to have had a balanced Budget this year? There are grounds for thinking that that would not be possible, and again reverting to the speech of my hon. Friend the Member for Hastings, whose figures, I think, impressed us all, we are bound to agree that there was considerable force in his suggestion that even if we can return to a greater degree of normality in international affairs, there is every prospect that this country will have to face a Budget in the future of somewhere about £1,000,000,000 a year.

If that is so—and it seems to me clear, as I think it seemed to him clear—we must prepare ourselves for great and revolutionary changes. Two alternatives face us. There may be others, but I cannot see them. Either we must secure a striking reduction in national expenditure, or we must adopt an entirely new outlook on our whole economic and financial problem. Obviously, the former course would be the more desirable, and equally obviously the major opportunity for reduction is to be found in the Service Votes. Yet those Votes depend largely on policy, and therefore it seems to be right, as the Chancellor indicated yesterday, that it should be a principal preoccupation of the Government to secure, and to secure rapidly, not merely an alleviation of international tension, but an alleviation that can be immediately translated by the nations of the world into a reduction of expenditure on armaments. For the rest, I believe that a substantial reduction in expenditure could be achieved if this House once more resumed its function of control either directly or through bodies which exist, or which it could specially appoint, to perform the task. Look at the Service Votes. Look at the Civil Votes.

Is this Committee entirely satisfied that no waste, no needless expenditure, is taking place? Can this Committee really declare that it has given this matter close and continuous attention? Supply days are the occasions for the House of Commons to exercise its control, yet increasingly Supply days are used, not as an occasion for examining the use which Departments have made of public money, but as an occasion for the discussion of large matters of policy. If this change is going to continue, how can this House claim to be exercising that control on behalf of the taxpayers which I believe it is its first duty to do? That is one alternative—economy in expenditure—and frankly, again as the hon. Member for Hastings said, I cannot feel that the outlook is hopeful.

What is the other alternative that I see? It is the assumption by society, by the State, of a far wider control of the economic processes, and I do not think it is too early to point out that alternative. Our present economic system is based upon the theory that the greatest possible good is achieved by allowing the individual the greatest possible liberty in the disposal of his capital and labour. There have been progressive modifications in practice, but that remains the basic theory. The extent and the nature of production in this country is determined by individuals guided by motives of private profit, and we on this side of the House have been prepared to defend that as the method whereby the greatest possible good is achieved. To the extent that the system creates social distress, we levy taxes, on the whole, on the wealthier section of the community to provide a social system which mitigates such distresses without infringing liberty.. Have we reached the point: where that system is ceasing to work? This Budget now before us and the financial prospect ahead are, I think, provoking that question in the minds of many people. There is very good reason for believing that further attempts to collect more revenue by taxes upon the wealthier citizens indirectly would create more distress than the revenue thereby obtained would be able to alleviate. If that is so, then clearly we should have entered upon a vicious and descending spiral. I, personally, would readily consent to the easy proposition so often put forward by the other side to "soak the rich," if it could be done. The trouble is that it cannot be done. By a curious paradox, the process makes either the rich richer or the poor poorer, and the result is not, in consequence, one of social gain.

Instead, if we are to be careful of our national economy, we must be prepared to ask ourselves whether the unrestricted right of the individual in the disposal of his capital and his labour does produce the best results and does enable us to meet the bleak prospect ahead, indicated by the hon. Member for Hastings. He referred to freedom of contract. Like me, he believes that the maintenance of the principle of freedom of contract is important and that it should be preserved if possible. Yet I think I am interpreting his mind correctly when I say that he, like me, is beginning to wonder whether the financial prospect is not causing us to revise our thinking on this matter, whether, if we refuse to revise our thinking, we shall not simply be faced with a certain prospect of unbalanced and, what is worse, unbalanceable Budgets. It is clear that to proceed very far in the translation of that thought into action involves what traditionally would be regarded as a very material infringement of the rights of the individual. At present there would be opposition to such infringement on different grounds on both sides of the House. I am quite certain that there would be opposition from the hon. Member for South Bradford (Mr. Holdsworth).

Mr. Holdsworth

I never see it from the other side.

Mr. Mabane

I do not propose to develop my argument in detail any further. I believe there are trends far more powerful than the fixed and inherited opinions of a passing generation, and I believe that unless some great changes take place to ease our financial situation, to make the burden of national expenditure less, then our management of the economic processes must proceed in the direction which I have indicated.

I do not like that second alternative which I have suggested. If I were called upon to accept it, I should accept it with regret. I would much rather be able to foresee conditions which would enable us to proceed with a wise and economical management of our finances, untroubled by the alarms of recent years. I repeat that such conditions cannot be unless two other conditions are fulfilled. The first is reduction in our expenditure on armaments, and the second is rigid control by Parliament of all expenditure. To realise the first of those conditions, we need a wise and conciliatory foreign policy, supported by a united nation; to realise the second, Parliament must be prepared to resume its function as the taxpayers' watchdog.

5.27 p.m.

Mr. Stokes

I wish to call the attention of the Committee to the question of the excessive profits being earned in the rearmament programme. I have nothing new in the way of facts to lay before the Committee other than those which I stated in the House on 7th March, but I would call attention to the fact that those figures have, so far as I know, never been disproved, at any rate not to the satisfaction of myself or of anyone sitting on this side of the House. According to my computation, the profits being made on that class of manufacture—if my figures are correct, as I believe them to be—are not less than 20 per cent. net profit, and probably may rise as high as 30 per cent. net, and I suggest that there is a very good source to which the Chancellor of the Exchequer might look if he wishes to pick up his extra £30,000,000. I confidently believe that if this question of profits in armaments were tackled properly, there would not be need for any extra taxation on account of the £30,000,000 at all. I know it is impossible to believe all that one is told or all that one reads in the daily Press, but there is undoubtedly a great feeling of uneasiness throughout the country on the amount of profits that are being earned in armaments. There seems little doubt that fortunes are being made, and I do not believe that it is the desire of any Member of this Committee that such fortunes should be made out of armaments.

The right hon. Member for Caithness (Sir A. Sinclair) referred to a suggestion made by me with regard to a method of control of those profits, and he raised the doubt that there were sufficient auditors in England to carry out the form of certification which was suggested in my speech on 7th March. That only shows, I am afraid, that I cannot have made myself clear. Everybody knows that every firm's accounts are audited, and all I was suggesting was that the firm's own auditors should give a certificate as to the profits being made on any particular contract, and that the only stipulation on which the Government should insist was that the firms of auditors employed by firms manufacturing armaments should be firms of repute approved by the Government. I am satisfied as an ordinary business man that it is impossible to ascertain the true profits being earned on any particular contract unless the person who gives the certificate of profit is also the person who does the firm's financial books. I am not suggesting that there is any inefficiency on the part of the Government officials. They carry out a most thankless and objectionable task. I do not believe that all manufacturers are profiteers. There is a large body of manufacturers who, if they were invited to do so, would willingly agree to this form of control. It is a matter of some astonishment to many of us on this side of the House that the Government do not introduce some such scheme and invite the collaboration of manufacturers, because without their collaboration and without the use of their auditors I do not believe that profits will ever be properly controlled.

I want to turn to an entirely different subject, and I am glad to see that the Chancellor is in his place. It will always be a matter of astonishment to me that the source of income to which I am about to refer has never been properly or effectively tapped by any Chancellor. I do not propose to go into a long dissertation on what the right hon. Member for Caithness referred to as the taxation and rating of land values, but I want to put it in this way to the Committee. So fa i as I have been taught history—and I am not a historian—land and its natural resources in the early days was handed over to private monopolists in exchange for certain services which those private monopolists were bound to render to the country and the people. The time has long gone since they rendered those services, such as the supply of the police:force and of the Army, and all the time land values have steadily increased to an enormous extent. We are to-day faced with an enormous burden of taxation on account of those very services which the landed interests ought to be rendering. The figures are stupendous. No exact computation is available, because the land records have not been kept up, but I should say that, at a conservative figure, the capital value of land without improvements in this country is nothing less than £10,000,000,000. If we reckon a 5 per cent. revenue on that amount, it means that anything up to 500,000,000 a year is going into the pockets of the landed interests, not for anything which they have done, but merely because the presence of the cornmunity has given the land these values and enabled the owners to walk away with the value.

I submit that a great part of the money required for balancing the Budget, and balancing it much more effectively than it is being balanced to-day, could be found by a tax on those values. I do not pretend that it could be made effective this year, but, as an hon. Member has suggested, we are not looking only to this Budget. We recognise that next year the taxation will have to be heavier, and that the year after it may be heavier still. If a tax could be brought in now we should feel the benefit of it in 1939 and 1940. It may not be out of place, perhaps, if I remind the Chancellor of the Exchequer of his own views once upon a time on this matter. I know that people change their minds, but on a fundamental issue of this kind it must be difficult to turn round and face entirely the other way. Addressing the annual meeting of the Yorkshire Liberal Federation on l0th April, 1920, the Chancellor said: Time was when a keen Liberal might be counted on to hold that in a small crowded island it was essential that those who held any portion of the monopoly of land should strictly account for its true value in all their dealings with the State. Much more significantly, in this House on 15th April, 1925, the right hon. Gentleman said, when introducing his Rating and Land Values Bill: We who support this Bill believe that it is unjust that those values which are not due to the efforts or expenditure of any individual, but are due to the activities and expenditure of the community, should escape in whole or in part the burden of the rates which falls on other property. I throw that suggestion out free, gratis and for nothing to the Chancellor of the Exchequer with the hope that he may call to mind his own views in those days, and perhaps accept the proposal. The fundamental point to me is that if such a tax were introduced, in the opinion of those who believe in this form of tax and in this solution of a difficult economic problem, more would be done to solve what the Government supporters and the Prime Minister himself state to be the insoluble problem of unemployment. I do not believe that unemployment is insoluble. I believe sincerely that if land were put to its proper use and were not held out against the interests of the people, there would be work enough for everybody and wealth following on it.

I want to refer to the proposal in the Budget to increase the plant depreciation allowance. I think, and I hope most people will think, that that proposal is an excellent one. One of the things we want to do is to see that all plants are kept as much up to date as possible. I view with great favour the maximum alleviation of that kind. We on this side of the Committee would view the proposal with much more favour if there were a condition attached to it. There is no sense in merely giving that alleviation if the results are to be increased dividends. We should like to see the attachment of a condition that such allowances must be used up in the improvement of plant and machinery so that the community as a whole, and the workers especially, will get the benefit, and everybody will feel that they are getting a square deal all round.

I would say a word about raw materials, which form a large part of our rearmament programme and which, therefore, come within the orbit of this Committee with regard to general costs. I want to refer particularly not so much to the rearmament programme as to the effect that the appalling rise in the prices of raw materials will eventually have on our export trade. I have seen it coming already. In places like South Africa, where we have had to meet these increased costs at home by putting up our prices, our markets are gradually dwindling and being taken away from us by America and other countries. I suggest to the Government that now is the time to take some sort of control of raw materials in order that not only shall the rearmament programme be lessened in cost, but that we shall not find ourselves high and dry in three or four years time owing to the absence of our export trade. If these taxes must be borne, and undoubtedly they must, is it too much to hope that the foreign policy which is being followed by the Government should take on what I would regard as a line which is likely to lead to more permanent peace rather than immediate peace? It seems to many of us that the policy is short-sighted and not nearly long-distance enough. It should seek a permament appeasement so that we shall not have to find these appalling sums for perfectly useless purposes like armaments. We should recognise that we want to get back to a newly-formed League of Nations whose object should be not merely to knock the aggressors on the head, but to remove the economic causes of aggression. There would thus be some chance of permanent peace, and we should do away with the unnecessary expenditure on armaments and be able to devote the sums to the improvement of the social services.

5.41 p.m.

Sir Alan Anderson

What a fine thing it is to have a long political past. The hon. Member for Ipswich (Mr. Stokes) has been able to give to the Chancellor some valuable hints drawn from the eloquent speeches of Sir John Simon. I am sure they will be warmly welcomed by the Chancellor of the Exchequer. I have been struck in the Debate by the volume of agreement between us on the main points and by the comparatively small superstructure of difference. That difference, I believe, is in large part a difference of expression. If we are put to the test our views will not be so different as they appear. This is a crisis Budget. The right hon. Gentlemen who spoke for the Opposition and for the Liberal Opposition impressed on us the gravity of the position, and we all agree that it is a crisis Budget. The Chancellor of the Exchequer has spoken out his message in the plainest possible terms, and I believe he was right to do so. He has given a clear message to every class in this country. No one in this country will be deaf to it, and the message will reverberate throughout the world. We want it to reverberate throughout the world, for we want the world to know that we intend this country to be strong and united, and that we are ready to face the consequences of spending this money, much as we dislike it. Our stability in this country is the basis of all our trade and our progress, and to the world it is the basis of their hope of getting back to peace and retrenchment. The world's recovery is our hope, and our stability is the hope for the world.

Many hon. Members have suggested that this is a short-sighted Budget and that the Government are not looking far enough ahead. I take a different view We cannot stride ahead in times like these without making sure of our ground. We are making sure of our ground, and we are making this country safe as far as arms will make us. Many hon. Members have said that arms alone are not enough, on which we are all agreed, and that friendship is the only ultimate security, but we tempt nations to be unfriendly to us if we are weak. I think we are all agreed about that. Another point in the Budget which to my mind is of extreme importance and which was touched upon by my hon. Friend the Member for Hastings (Mr. Hely-Hutchinson), is the difficulty we shall find in balancing our Budgets in the future. It appears to me that the task of making ends meet is the acid test of democracy, a difficulty to which we must face up. Our gift to the world, our claim to survive as a great nation and as great civilised leaders, is the idea of freedom which we have given to the world. We have said that the ordinary man and woman can better govern themselves in their own country by being free than by having over them any dictator, and once a year we have to face up to the bill for all we have voted and to find the money for it, and if we fail the whole of our system would crack. Therefore, this annual Budget is the test of all our professions that we wish freedom and democracy to survive.

On the details of the Budget I have two or three things to say. The Income Tax is the widow's cruse to which every Chancellor of the Exchequer returns and it is the best tax, but I do urge the Chancellor to make notes, underlining them with pencil markings of all different colours, that Income Tax must be brought down as soon as there is any relief from the strain. That may be a year or two from now, but it appears to me that it is a point which has been neglected in good times. The Income Tax ought to be brought down as soon as ever the crisis is over. Another point which has been touched upon is the allowance for depreciation. Originally it was 5 per cent. on machinery. There was an increase of 10 per cent. on this 5 per cent. some years ago and now it is to be further increased to 20 per cent. on 5 per cent., making t) per cent. in all. In the view of many friends of mine that increase is not adequate for the depreciation of machinery, and I would also call the Chancellor's attention to the fact that many other items of capital cost may not be written down at all. I think the life beyond which an item is supposed to be everlasting is about 30 years. For example, buildings are not allowed to be written off for obsolescence, and so we have some out-of-date hotels. With the Income Tax at the present very high levels, and likely to stay there for some years, it is essential not only to see that the taxpayer plays fair by bearing his share of the burden but that the fisc plays fair by allowing remissions of tax in respect of sums which are not really profits. Obsolescence ought to be taken off before profit is calculated.

The Budget appears to be made more difficult to understand and to need the very clear explanation the Chancellor has given upon several grounds. One is its form. I do not know why we present our national accounts in this primitive and crude form. I suppose it is because at the time that form was introduced no better one was known, but we set out as a simple cash account this enormous collection of £1,000,000,000 of expenditure, and then by degrees we find that a cash account does not suit all the items, and we decide to spread our armament expenditure, for example, over a term of years. This spreading seems to me a more rational way of regarding expenditure that is going to accrue over years and to be available for years than the pure cash account, but it is difficult to put the new patch on the old garment, and so it is difficult to understand what the total account is, and one may not realise when the nation is overspending and getting into difficulties.

Another difficulty is that when one wishes for a reduction in the total of national expenditure one almost inevitably draws an analogy with private expenditure, and the analogy is false. The rich person who finds that his income is not adequate simply reduces his expenses; in other words, he does not employ so many people. Exactly the opposite happens to the State. In a recession of trade the State is obliged to employ or find sustenance for more people who would otherwise be employed by private industry. Therefore, I think that while we are paying our way at the moment, the great danger is the lack of margin of taxable capacity to meet the recession of trade which will certainly come, and that point it is difficult for any outsider to assess in looking at the Budget.

Another point which justifies all the emphasis which the Chancellor has given to the need for paying our way as far as we can is that the old automatic check upon over-spending has disappeared. In the old days we had the Gold Standard and the comparatively free movement of trade and any over-spending was immediately marked by the flow of gold out of the country. Money rates rose and checked further spending. Now nothing of the sort occurs. We do not quite know what is being done behind the scenes, because there is no barometer open for all to see. There is not the automatic check. What happens, I suppose, is that sterling falls if we overspend. Falls in relation to what? In relation to other currencies—the franc or the dollar—but if the franc and dollar countries are also over-spending the currencies all fall together and so no currency seems to fall, but they all fall together in terms of goods, and prices rise.

If the currencies did not fall in terms of goods, if prices did not rise, the natural progress of invention and enterprise and of trade would cause the price of goods to fall, and as every one is agreed that trade benefits from a rising price level it appears that over spending is a virtuous act because it causes the condition of a slightly rising price level which trade wants. Therefore, you may say that it is desirable that all the nations should over spend. Is that mad or is it sane? In its early stages and if not carried too far it may be quite sane, but just because it seems sane it is extremely dangerous, because directly you get beyond the very first few steps the process is as mad as a March hare, and everything goes wrong, and we get proposals for social credit systems and a hundred and one other traps. I have heard hon. Members say: "Cost. What do we care about cost? We want to achieve the great progress which we have in mind." The hon. Member for Bridgeton (Mr. Maxton) engaging in a jocular reference to the Members for the City of London said, "They come here just to see that if there is any reform it is done without cost, done on the cheap." He was wrong. The trade mark of British industry and commerce is not cheapness but quality, a very different thing. Only those of us who have to deal with trade realise that stable finance is the foundation of our force. If we have the right ideas and mean to carry them out, let us husband our force, not only of arms but of money, and our power to spend and to lead. I do not share the gloomy views which I have heard from both sides of the Committee about the inevitable doom of bankruptcy which is to overtake all of us. We have to keep ourselves strong and our heads cool. But the end to this trouble, if we play our hand right, is not going to be war but friendship. We have to make friends with other nations, and the sooner and the faster we get on with it, and the more united we are, the better it will be for the whole world, and the sooner we and other nations will get our Budgets balanced.

5.56 p.m.

Colonel Nathan

In one important respect this Budget Debate seems to differentiate itself from others at which I have been present, and that is that there has been remarkably little discussion upon the details of the proposals put forward by the Chancellor, but a good deal of consideration given to the broad problems arising out of our financial situation. I propose to follow that example, and to leave to some future, and perhaps more suitable, occasion the discussion of details. I wish to make some observations to-day upon one aspect of the budgetary position, present and future, which seems to be deserving of close attention. Looking, as a layman may, at the financial position, I have been very much struck by the difficulties with which we seem to be confronted, perhaps by reason of the arbitrary period for which our accounts are calculated. As the hon. Member for the City of London (Sir A. Anderson) has just said, the forms of Gladstonian finance have in this respect become perhaps somewhat obsolete in a world which is so much changed as it is to-day. The question which I was putting to myself as to whether the budgetary arrangement should not be spread over a wider period appeared in the leading article in the "Times" of yesterday, where it was stated: There are many reasons for supposing that we have reached a turning point in the history of post-war finance, and that the time has come to cast the national accounts without too much regard to the limits of a single financial year. That was in line with my own thought, and I find corroboration, too, in the statement made by the Chancellor of the Exchequer in his Budget speech yesterday when he said: We have to look beyond the present year. It is the traditional and convenient course that we should hold these financial inquests in the month of April once every 12 months, but there is nothing in the nature of the case to justify our confining ourselves rigidly to a period of 12 months and refusing to look forward and see what is likely to happen later."—[OFFICIAL REPORT, 26th April, 1938; col. 61, Vol. 335.] I desire to look forward for a period longer than 12 months, and I hope to carry the Chancellor of the Exchequer with me in some of the suggestions which I venture to make. It now seems to he pretty clear, and the Chancellor agrees, that 1937 is likely to prove the peak year of the national income in the present cycle. I think the speeches of industrialists and the records of economists all point to the same conclusion. As the Chancellor pointed out yesterday, the yield of Income Tax will certainly increase again in the current revenue year, though it may have begun to decrease by 1939–40. The yield of Surtax should be increasing both for 1938–39 and 1939–40. The other principal items of revenue, however, are much more dependent upon current economic activity.

Customs and Excise Duties reflect immediately the course of trade and of our imports and exports while Death duties are dependent upon the trend of security values—which have been going downward for the last 12 months. The yield of Stamp Duties and, to a smaller extent perhaps, motor duties, is also affected by current trade activities. In these circumstances it is possible to expect a further substantial advance in 1938–39 in the yield of direct taxation, but there is likely to be a certain regression in indirect taxation. I agree with what has been said by hon. Members on both sides of the House that it will probably prove impossible to effect any substantial curtailment of expenditure. Armament expenditure has already been fixed at a high level for the next few years. Civil Service expenditure will be very difficult to curtail, on balance, because the net cost of certain services, such as unemployment and health insurance, will be bound to increase.

Experience of the depression in 1931 and 1932 shows how small are the economies in public expenditure which can be effected by deliberate cuts in the Budget. The most effective economies nowadays result from the automatic decreases in the cost to the State of the social services which occur in times of good employment. Therefore, I postulate for 1939 and 1940 and the two subsequent years the maintenance of expenditure at the present level. At least, that seems to be inevitable. On the other hand, it seems probable that 1939–40 will begin to produce for the revenue difficulties that will be intensified in the following years. There is no doubt that the national income is already tending to decline from the high level of 1937. The continuance of a fall in the national income means a continuance of the fall in the yield of indirect taxation and—perhaps in 1939–40, or perhaps not until 1940–41—there will be a beginning of a fall in the yield of direct taxation.

Now, given a tendency towards a fall in the national income, what can be done to avert the consequences upon the level of the national revenue? Taxation is already substantially higher than at the onset of the last depression, and the deflationary effect upon consumption of further rises, prohibits any substantial increase in that taxation. In addition, the national revenue, by reason of the tariff policy of the Government, has now become much more immediately sensitive to fluctuations in trade activity than it ever was before. The difficulties of the future situation will arise partly owing to the increased dependence on increased indirect taxation, but it will also be due to the evolution of our sharply progressive system of direct taxation by which each accretion of income is taxed more heavily than the last. The effect of this sharply progressive system is that at a time of prosperity the rise in the yield of direct taxes exceeds the rise in the national income; for, as individual incomes increase, they pass automatically into a higher taxation level.

On the other hand, in times when the national income is falling and with it individual incomes—that is the future which we have to face—very large increases in the rate of taxation are needed in order to maintain the yield, since individual incomes are continually falling back into a lower category. The maintenance, in the event of a declining national income, of the national revenue by substantial tax increases in 1939–40 and later years must, in my judgment, be ruled out of court. If the budgetary problem of the next five years is to be solved satisfactorily, every effort must be made to maintain the national income at its present level, as far as possible, and to maintain within the income a healthy balance between consumption and investment. The maintenance of the national income and the balance between saving and consumption within it, demands in turn the maintenance of the total and the balance of State expenditure.

When the rearmament programme was first launched two or three years ago, civil investment activity was extremely high and the industrial capacity of the country was very fully occupied, and the national savings were fully used for economic purposes. The imposition of a large Government demand created a certain strain and disequilibrium in the economic machine. Since the setback experienced by the capital market in 1937, it would seem that the volume of national savings is likely to exceed the volume of new capital investment by private enterprise, and that is the usual prelude to a cyclical slump. Expenditure by the Government of a part of the national savings, collected through the gilt-edged market by borrowing, should not, I think, have adverse consequences, but there is no valid economic reason why borrowing, if it is necessary, should be confined to the finance of rearmament expenditure. The credit of the Government is sufficiently strong to permit the financing of further public works projects. Be it noted that unemployment is up by more than 300,000 during the past few months, and, further, that the international position of the currency, safeguarded by the Exchange Equalisation Fund and the enormous holding of gold, at present valued at pre-war prices, is sufficiently sound to permit of credit expansion through central bank policy.

The principal essential in cyclical budgeting is that a balance should not be sought for within the arbitrary period of 12 months, but over a rational economic period long enough to cover all variations in economic conditions, whether favourable or unfavourable to national revenue. Owing to the demands for rearmament purposes, it seems likely that this country will be forced, even against its will, into cyclical budgeting by deficit financing over the depression on which we are just entering. If this should be so, it is surely better that the fact should be fully acknowledged and publicly recognised. I believe that publicity is in the best interests of the Government, since the basic financial strength of the State is much greater than is generally realised. To mention only one factor, Great Britain is the only country in the world with a depreciated currency which has not yet taken into the Budget the enormous book profit which can be realised by a revaluation of the gold stock.

Examination of the current composition of the Budget and of its probable development in the near future reveals a number of factors which will need serious attention in the not very distant future. In the background and always looming before us is the impending decline in population, which cannot fail to have widespread effects over all branches of our economic life. In the past, as long as the history of this country runs, the rise in the population has been an automatic factor making for economic progress and for steady expansion of the national income, in the long view. It involved a steady increase, both in the productive capacity of the nation and in its consumptive capacity. In future, we shall not be able to count upon this general progressive force. The national income will not be tending to increase by the automatic influence of an increase in the number of producers and the number of consumers. On the contrary, the national income, other things being equal, will tend first and in the near future to become stabilised, and then, in the not very much more distant future, to fall, but it is impossible that State expenditure should fall at the same time or at the same rate and to the same extent.

In fact—I think some hon. Members had already pointed this out to-day—as the average age of the population becomes higher, certain items of national expenditure, such as old age pensions and health insurance, will automatically increase. Accordingly, if progressive improvement in the social services is to be achieved, we have to face the prospect of an increased taxation per head in this country in the future. Where does that lead us? Careful attention will have to be directed to the maintenance and the increase of the national income by the stimulation, by means of active steps on the part of the Government, of productive and consumptive capacity, so that the effects of a fall in population on the national income are offset by higher production and higher consumption per head. Hitherto, the increase in economic productivity has largely been allowed to look after itself, but it will become in future increasingly the concern of national economic policy. There are enormous possibilities for the maintenance and the expansion of the national income through the improvement of the average standards of life among the people of this country, which could be produced by an increasing diversification of production, and a concentration upon specific aspects of the rise of the standard of life, such as the obvious one of improvement of nutrition. The achievement of steady progress in this direction should not be beyond the powers of national economic policy, provided that the objective and the means of reaching it are clearly understood beforehand.

One of the essential preliminaries, as I think was indicated by the hon. Member for the City of London, would be the recasting of the Budget in an intelligible form, and then the overhauling of our taxation system. There are strong arguments for including on the income side the extra-budgetary funds such as the National Health Insurance and the Unemployment Insurance Funds in the national accounts, along with the Government's other commercial and financial enterprises like the Post Office. The profits made on certain of these accounts, such as the Savings Bank, are included already in the miscellaneous revenue and are in the Budget under that heading, to which the hon. Member for Huddersfield (Mr. Mabane) has referred this afternoon. The State already subsidises social insurance funds heavily out of the proceeds of taxation, and the contributions of employers to those funds are practically indistinguishable from taxation; they are, in fact, taxation, except that they are allocated to specific purposes, as were the motor vehicle duties before the abolition of the Road Fund. If the Road Fund can be included in the national Budget why cannot also those other funds be included? Now that the Road Fund has lost its separate identity and has been absorbed, the exclusion of those other funds becomes the more anomalous. They should be included, if we wish to get a true view of the national expenditure and income.

There is a strong case for regarding all contributions to social insurance schemes as ordinary taxation, and the outgoings of those funds should appear as a direct charge on the Budget. It cannot be too much stressed that the presentation of an honest income account, reflecting all incomings and outgoings of the central Government, is an essential first step. The second step would be the separation of current and capital items and the construction of a capital account showing, not merely as at present the gross indebtedness of the State, but the assets held by the State. The third step would be the preparation of a much more explicit consolidated account of local government income and expenditure. In the whole industrial world nowadays, with its great combines, all the talk is of consolidated accounts. Let us have a consolidated account of central Government and local government expenditure. At the present time, much of the Civil Service expenditure in the national accounts consists of grants-in-aid to local authorities, who actually spend the money plus what they raise themselves by local taxation and by borrowings on their own account. Local government expenditure also requires to be divided into current and capital expenditure.

It is strange that at the present time it is virtually impossible to gain an accurate impression of the amount of capital expenditure undertaken by local authorities. Since these, be it not forgotten, are the principal agencies through which State capital expenditure is undertaken, it is highly important that the public should know what the position is. Having suggested the method in which the national accounts should be reconstructed, and the period over which they should be spread, and having given, I hope, reasons which, while they may not commend themselves to every Member of the Committee, are at all events responsible reasons, for the adoption of that course, I have only to add that we must follow this by an overhaul of the whole taxation system, which is long overdue. Its object should be to improve the elasticity of the public revenue and to get back to the sound principle that taxation should be simple, should be equitable, and should be effective in raising the money for the national requirements.

6.17 p.m.

Sir W. Davison

The hon. and gallant Member for Central Wandsworth (Colonel Nathan) has referred to the fact that, so far, in these Budget discussions, there has been very little discussion of details, but a great deal of discussion of broad general principles. I propose to go back to the more normal practice, in Budget discussions, of dealing with details, and in particular I wish to deal with the decision of the Chancellor to add a substantial amount to the Income Tax. Before I do so, however, as I see the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) in his place, may I refer to the interruption which I made during his speech this afternoon when he seemed to me to suggest that a large number of Income Tax payers and Surtax payers were adopting dodges to avoid their responsibilities? I interrupted him and said that that at any rate was not the view of the Chancellor of the Exchequer. I had not then the reference before me, but, if I may be allowed to do so, I will read the sentence from the Chancellor's speech on which I founded that interruption. The Chancellor said, at column 44: I must call the Committee's special attention to the Income Tax yield. The Income Tax yield of just £298,000,000 is, of course, very satisfactory indeed. Half of the £10,000,000 surplus that it shows is due to the fact that the incomes and profits of 1936 which came under charge in 1937 was greater than were estimated. The other half is to be attributed to an unexpectedly high proportion of payments made of tax due on 1st January before the end of the financial year. I made inquiries, and I am assured that this is not brought about by any exceptional pressure on the part of the collector. It is the general experience that the rate of collection of tax improves in times of good trade, and my advisers believe that this rapidity of collection in the early months of this year may also reflect the taxpayer's recognition that the present time is one in which it is of exceptional importance to the national finances that taxes should be promptly paid. A little further on, referring to tax avoidance, he said: These devices are resorted to by the few. The great majority accept the full and natural burden and discharge it without any effort to avoid it. We as a nation are entitled to take pride in the general standard of ethical performance of the taxpayer's duty which prevails in this country."—[OFFICIAL REPORT, 26th April, 1936; cols. 44–45, Vol. 335] As I have the honour to be chairman of the Income Tax Payer's Society, I thought it only right to draw the attention of the Committee to this testimonial to the action of the Income Tax payers of this country, and to the fact that, where they feel that there is a national emergency of any kind, they rush in to pay their tax. [Interruption.] The Chancellor of the Exchequer has said so. He has given the figures. It is no use the Socialist party jeering; I am quoting the Chancellor's own statement on the matter. Further, while we welcome anything that can be done to stop avoidance of taxation by a few persons who, in all sections of the community no doubt, endeavour to avoid taxation, that avoidance is by the few only, and is not at all general.

Mr. Pethick-Lawrence

The hon. Member is quite entitled to make that statement, and I should like to make it clear that I said nothing in my speech which is contrary to what he has said. If he will read my speech to-morrow, he will find that I myself agreed with the Chancellor of the Exchequer that the great bulk of Income Tax payers fairly and honourably pay their share of the burden. What I said was that a certain proportion—I do not know what it is, but it is pot by any means a majority—avoided taxation, and I thought that small people, who were often harried to pay, had a grievance against that small section who escaped or delayed payment.

Sir W. Davison

I am very glad to hear that statement from the right hon. Gentleman. When I interrupted him I understood that he was referring to a considerable number of taxpayers. I am absolutely satisfied with what he has now said, and I am sure we are grateful to him for having made that statement, because, when people are bearing this tremendous burden, it is not very helpful to them to think that any section of the community takes the view that they are not loyally bearing the burden that Parliament has placed upon them. The society which I represent, and Income Tax payers as a whole, only wish Godspeed to the Chancellor in stopping any of these tax avoidance plans, because they only mean that the bulk of the community have to find the money of which they wrongfully avoid payment.

While I join with other speakers who have congratulated the Chancellor on the clarity of his exposition of his Budget, I am disappointed at the lack of originality and foresight which he has shown in once more taking so obvious a course as to throw an additional burden on the backs of those whom I have previously described in Budget debates as the dumb oxen bearing patiently their load of Income Tax. An addition of 3d. was made to their burden in 1936; still another 3d. was added in 1937; and now an additional 6d. is being added, to produce a sum of no less than £26,500,000 in a full year, and £22,250,000 in the current year, notwithstanding the fact that this same small class of the community, which is little more than 2,000,000, because 1,000,000 of them are being largely absolved under the statement made by the Chancellor of the Exchequer, produced no less than £40,000,000 more last year than was the case in the previous year. Every year something further is being placed on the backs of these unfortunate oxen who are bearing so much of the load of the finances of this country.

This is a matter which, in my opinion, affects not only the Income Tax payers but the Income Tax itself. The Income Tax in the past has always been considered as a war tax, as an emergency tax, as a great reserve upon which the nation can draw in times of war and emergency. But in recent years it has been used simply as a pool to increase the social services and other benefits which Governments of various complexions desire to bestow on various sections of the community. During the War it was felt that the highest possible Income Tax which the country could endure was 6s. in the £, and yet to-day, in a time of peace, we are having imposed on the Income Tax payers of this country a tax of no less than 5s. 6d. in the £, thereby, as I submit, most seriously undermining the national reserve which we have to meet unforeseen emergencies.

It must also be remembered that the same class of the community are shouldering, in addition, the heavy burden of Surtax, and the Surtax payers are the only class of the community from whom the additional burden which was put upon them at the time of the crisis some years ago has not been removed. In addition to that, the Income Tax paying class is also bearing to a very large extent the new National Defence Contribution, which this year is to produce no less than £20,000,000, and in future years, up to the period of five years, is to produce £25,000,000. If the Chancellor is unable, with all his ingenuity and with all the resources he has at his disposal, to find any other source of taxation to meet the comparatively small sum required to balance his Budget, I submit that unquestionably the balancing sum should have been raised by loan. The present generation are bearing a heavy burden of war expenditure which was incurred in their interests by previous generations, and it is not unfair that subsequent generations also should bear a part of the burden which this generation are having to levy in order to protect themselves and future generations. Moreover, it should be borne in mind that last year only £65,000,000 was borrowed for national defence, instead of the £80,000,000 estimated. That represents a capital sum which the Chancellor has at his disposal. In the second place, there was a realised surplus on last year's accounts of no less than £28,000,000.

There is a further reason why the necessary sum might have been borrowed. The Prime Minister announced a short time ago that the estimated expenditure on Defence, amounting to £1,500,000,000, was, owing to speeding up and other reasons, likely to be greatly exceeded, and we now understand that it is likely to be in the neighbourhood of £2,000,000,000. I submit that, if £4.00,000,000 is a proper amount to borrow in connection with a defence expenditure of £1,500,000,000, obviously a sum considerably greater than £400,000,000, or £80,000,000 a year for five years, should be borrowed in con nection with an expenditure of £2,000,000,000. For all these reasons it is clear that, rather than jeopardise the national industry or discourage enterprise at a time when, as is stated in the "Times" to-day, the impetus of recovery has begun to slacken, it would have been very much better if the Chancellor had borrowed the money rather than imposing this additional Income Tax. With reference to what was said by the Leader of the Liberal Opposition. I agree that an immediate inquiry should be made into our National expenditure for I entirely disagree with what has been said by some hon. Members, that we must reckon upon a permanent annual expenditure of £1,000,000,000 in future years.

In any event, we should have some official commission or committee to examine the national finances and the national expenditure, as suggested by the right hon. Member for Caithness and Sutherland (Sir A. Sinclair). I have been profoundly concerned in recent years with regard to the practice which has been adopted of devoting automatically reductions in public expenditure to new and extended social services, instead of allowing the taxation of the country to have the benefit of these falling expendi tures. Let me give two examples. There has been no financial relief to Income Tax payers consequent on the reduction of War pensions from £106,646,000 in 1920–21 to £40,570,000 at the present day and the reduction of the National Debt Services from £350,000,000 in 1920–21 to £224,000,000 since 1933–34, whereas national expenditure on the social services, which was £31,000,000 in 1913–14, has steadily and rapidly increased to £230,000,000 or more at the present day. I hope that the Government will accept this suggestion, which will have the support of the Liberal Opposition, and that full inquiry will be made into the position of this country with regard to expenditure, and that we shall see where we are really getting to.

There is another matter with which I want to deal. It was referred to by my hon. Friend the Member for South Croydon (Mr. H. G. Williams) last night. I agree that it would not be in order to go into it in any length, but as it was referred to by the Chancellor I think I can mention it. We should know a little more about the effect of the Agreement with the Government of Eire on the finances of the current year. I understand that we are remitting to the Southern Irish Government £5,000,000 a year which we previously received in respect of land annuities, for which we have given full value in that country, and that, in return for the same, we are to receive two years' purchase, or £10,000,000—instead of £5,000,000 a year going on for a great number of years. As far as the capitalisation is concerned, I read in today's "Times" that Mr. de Valera, on returning to Dublin yesterday, stated that he had had a very successful conference with the representatives of the British Government in London and that the British Government had surrendered their rights under agreements made by Mr. de Valera's predecessors, which amounted in capital value to no less than £78,000,000 under the heading of land annuities and a further £20,000,000 for other items—that is, I presume, in connection with naval stores and other matters at Berehaven, Lough Swilly and other naval ports which were left to this country under the Irish Treaty. That is a capital sum of nearly £100,000,000, and we know we are losing £5,000,000 a year. In exchange for all that we are getting a capital sum of only £10,000,000. The House should be informed why that £10,000,000 at any rate is not being brought into account. Is it not being paid in cash at once? If so, how is it being treated in regard to the current year?

I also wish to refer, before I sit down, to the question of fire, marine, accident and burglary insurance companies reserve funds and the National Defence Contribution. As I understand, representations have been made to the Chancellor of the Exchequer as to the unfairness that insurance companies suffer in having to pay the National Defence Contribution on their reserve funds, which are in no way different from the reserve funds of say Courtauld's or other companies. Life insurance funds are in a different category, but these that I have mentioned are under entirely the same conditions as those of any other public company which does not have to pay National Defence Contribution on its reserve funds. While the insurance companies have no desire to avoid any obligations which Parliament decides to lay on the community generally, they resent having to pay a particular tax which other bodies similarly placed do not have to pay. I understand that, with the consent of the Chancellor of the Exchequer, an Amendment was brought forward when the last Finance Bill was before the House, to deal with this matter, but, unfortunately, for some reason it was ruled out of order. As I understand, the Chancellor proposes to make certain Amendments in the forthcoming Finance Bill with reference to the regulations dealing with the National Defence Contribution. I hope he will bear this in mind, and see that insurance companies, as far as payment of National Defence Contribution is concerned, are put on the same basis as other similar bodies.

6.37 p.m.

Mr. Benson

I was very interested in the proposal of the hon. and gallant Member for Central Wandsworth (Colonel Nathan) for what he described as a cyclical Budget. From one point of view, there is a good deal to be said for taking a longer period than 12 months as our financial unit; but there is a very great deal to be said against it, and I think that what there is to be said against it was said most effectively by the hon. Member for the City of London (Sir A. Anderson), when he told the Chancellor that Income Tax must come down as soon as the strain is relieved, and by the hon. Member for South Kensington (Sir W. Davison) when he demanded that the Budget should be balanced by borrowing in what is financially a very prosperous year. The difficulty about cyclical Budgets is that every Chancellor will invariably say, "This is just the year that should be unbalanced." I think that the financial rectitude of any Government is very greatly helped by the traditional balancing of the Budget every 12 months. If one could trust the financial rectitude of the Government beyond 12 months, I should feel inclined to support what is, I think, a sound economic proposition, that our taxation should be viewed over a longer period, particularly so when taxation has now reached something like 20 per cent. of the national income; but until I have better guarantees of financial rectitude than the present Government have shown, I am going to stick to the demand for an annually balanced Budget.

The other proposal of the hon. and gallant Member for Central Wandsworth was a recasting of our national finances. He proposed to bring into the national account the whole of the health insurance income, and, I take it, expenditure. That surely is a very far-reaching proposal. As far as I can see, if that is to be done it means the destruction of the approved societies, it means completely destroying the whole actuarial basis of health insurance accumulations, and it means putting the whole of health insurance benefit not upon the accumulations of the approved societies and the quinquennial valuation, but under the control of this House. It means a complete reconstruction not merely of our financial accounts, but of the whole health insurance system of this country, and I am sure we on this side are not prepared to go so far at the present time.

Mr. Mander

I beg to call attention to the fact that there are fewer than 40 Members present.

The Deputy-Chairman

There are 40 Members present.

Mr. Charles Brown

May I draw attention to the fact that there are only three Members of the Liberal party present?

Sir W. Davison

That is the second time the hon. Member has done it.

Mr. Benson

There is one section of the Budget to which I wish to refer primarily. It has already been mentioned once or twice. That is the question of tax evasion. I use the word "evasion" quite intentionally, in preference to the politer word "avoidance," because the methods adopted now, although they may be legal, are definitely evasive in intention and result. The Chancellor of the Exchequer has announced that he proposes to introduce several new methods of stopping these practices. As far as one can judge by the Budget Resolutions, he is merely playing with the whole problem. The pressure to avoid taxation is, one must admit, extremely high. On the higher ranges of income, Income Tax and Surtax together amount to 13s. 9d. in the pound, and, human nature being what it is, undoubtedly there are a large number of people who will endeavour to evade taxation as stiff as that. If we are to counter their efforts we shall have to take much more drastic steps than have been taken in the past and than the Chancellor proposes to take at the present moment. These various steps have proved very ineffective in the past. Our whole Surtax system is nothing but a leaking sieve. The Chancellor attempts to stop up one hole, quite oblivious of the fact that there are 20 or 30 smaller holes which, if the large leak is stopped, will themselves become large.

One of the difficulties of attempting to stop up a single hole is that when you define clearly and definitely what is outside the law, you also clearly define what is inside the law. Let me give one single example. The one-man company, as it is called, is a company which is under the control of not more than five people, but all you have to do is to put your tax-avoiding company under the control of six people, and you are outside that provision. When tax avoidance can be so easily modified to produce immunity, surely it is no use going on, as in the past, just trying to deal with one form of evasion at a time.

The first time this matter was dealt with was in the Finance Act, 1922, which contained various Clauses against one-man companies. What has been the result? They have had to be continually amended and strengthened. The one-man corn-panics Clause was strengthened in 1927, 1928, 1930, 1936. and here again we are trying to do it in 1938. Trusts and settlement Clauses were increased and strengthened in 1930, 1936, and again they are being strengthened in 1938. That is not the whole history. There have been various other Clauses in Finance Bills to deal with other specific methods of tax evasion. If you stop up one hole they merely use other holes. In the Finance Bill of 1936, when we took a really important step, I pointed out three methods of evasion to the Chancellor of the Exchequer. He replied that he did not propose to deal with them and intended to deal only with the more important methods. These three particular methods are now to be dealt with in the new Finance Bill.

When we examine the Clauses of the Finance Bill we shall be able to point out some of the holes, which may not be very important at the moment but which in a couple of years at most the Chancellor of the Exchequer will have to attempt to stop. Why deal with it piecemeal? Why not drop the present methods, which are bound to be endless, and pass comprehensive legislation which will enable the Commissioners of Income Tax to look at reality and not at mere form? As long as it is possible by various methods to transform income into capital there will be tax evasion. Give the Commissioners of Inland Revenue, subject, if you like, to appeal to the courts, the power to look at realities and to ask, "Is this income, whether it be in the form of capital or not, or, is the taxpayer enjoying a certain sum annually as income in whatever form it may be? If he is, let it be liable to tax." I was very glad to hear the hon. Gentleman the Member for South Kensington say that his society disapproves of this sort of thing, because I may have been doing the society a wrong. I spent part of my Easter Recess in reading a couple of textbooks on tax evasion —one being called "Tax Avoidance" and the other "The Avoidance of Income Tax, Surtax and Death Duties." [Interruption.] I must admit that I read the preface rather carelessly, but I was under the impression that it had received the imprimaturof the Income Tax Payers' Society. I advise the hon. Gentleman to read it and he will find out how easy it is to avoid tax if he is prepared to do it.

Sir W. Davison

I have not personally seen either of the books mentioned and I know the Income Tax Payers' Society are strongly opposed to anything which would enable anyone to avoid a tax that should be paid. It is in the interests of the community and of the Income Tax payer that the burden shall be shared and not shoved on to anybody else.

Mr. Benson

I am very pleased to hear that, and I hope to have the support of the hon. Gentleman in trying to screw up the Chancellor of the Exchequer to take really drastic steps. The Chancellor of the Exchequer yesterday suggested that there had been a good deal of exaggeration in the Press and elsewhere as to the amount of evasion that goes on. It is extremely difficult to tell how much evasion there is, but certainly the evasion is a great deal wider than the net which the Chancellor of the Exchequer has cast this time. My right hon. Friend the Member for East Edinburgh (Mr. PethickLawrence), quoting the "Times," said that Surtax now has become a voluntary gift, and, judging by some of the schemes outlined in the textbooks on tax avoidance, I do not think that the "Times" is exaggerating. That article in the "Times" further says: Another needed reform is that the Revenue should itself seek the assistance of tax experts in order to find out what tax avoiders are doing. At the moment the most successful schemes escape because their existence is unknown to the Treasury. I do not know whether the Treasury are as ignorant as all that. I used to have great faith in Government Departments and in their knowledge until I discovered that the Government did not even know that there were Italian soldiers in Spain. I am quite prepared to believe that even the Board of Inland Revenue do not know what is going on among tax evaders, but it is possible to form a pretty general idea of how much tax avoidance is taking place. The Inland Revenue returns are published every year, and an examination of them will give us guidance. I will give the Committee some figures from which it will be seen that evasion takes place on a very large and widespread scale. I will take the 10 years from 1928–29 to 1937–38. The incomes subject to Surtax—that is, incomes over £2,000—have dropped from £597,000,000 in the first year to something like £470,000,000 in the last year. That £470,000,000 is an estimate. There is, therefore, a drop of £127,000,000, or a reduction of over 21 per cent. in these incomes. In the incomes below £2,000 there has been a very sharp increase. In the corresponding year 1927–28—I am taking these years because they correspond with the incomes upon which the Surtax has been raised, although they are different financial years—the incomes below £2,000 amounted to £1,819,000,000, and in 1936–37 that figure jumped up to £2,370,000,000, an increase of £550,000,000. That figure has to be adjusted because there has been a reduction in the exemption limit which brought in £228,000,000 or £230,000,000 of income. Therefore the incomes under £2,000 amount not to an increase of £550,000,000, but to £323,000,000, which is an increase of 17 per cent.

Thus, in the 10 years under consideration incomes over £2,000 have dropped by 21 per cent., while incomes adjusted in respect of the new exemption basis under £2,000 have increased by £323,000,000 or 17 per cent. If there had been a proportionate increase of the incomes over £2,000 as compared with incomes under £2,000, the amount of incomes coming under review for Surtax for this year would have been £700,000,000 and not £470,000,000, a difference of £230,000,000. There are two explanations only of that extraordinary discrepancy. There have either been widespread evasions, or, in the past 10 years, there has been a very extraordinary redistribution of national income. There is no alternative to those explanations.

Sir W. Davison

I think that a third explanation would be that there have been a considerable number of irrevocable settlements, which are perfectly legal and proper. That is to say, a rich man, a large part of whose estate is perhaps landed property, during his lifetime makes an irrevocable settlement in favour of his son which is perfectly legal.

Mr. Benson

I will compare that which the hon. Member said a few moments ago with that which he has said now. The man whose estate will be liable to Death Duties makes this irrevocable settlement in order to avoid tax.

Sir W. Davison

Oh, no.

Mr. Benson

That is what the hon. Gentleman suggests.

Sir W. Davison

If I had an estate which would be liable to Death Duties, it would be legal for me in my lifetime to give it to my children or to any other relatives. I could divide it up and nobody could complain, but the settlements referred to here are those where the settlor really continues to receive the income and does not give it away. It is a sham settlement and he still continues in control. In order to be legal it must be an irrevocable settlement whether a man gives it to his son, brother or wife or anybody else.

Mr. Benson

I admit that morally there is a distinct difference, but it is really a matter of degree. The hon. Gentleman the Member for South Kensington said that the reason he makes this distribution is to avoid Death Duties. Here quite definitely the motive is admitted by the hon. Member. I am prepared to admit that this is one of the factors which have caused this extraordinary discrepancy. All I was saying is that this discrepancy in Surtax is due to motives of that kind, some of which may be partly legitimate, with a desire to avoid either Death Duties or Surtax, and I am very pleased to have the admission of the hon. Member for South Kensington.

This figure of £230,000,000 is so staggering that I will go a little further and justify it. We have to decide whether this extraordinary figure is due to Surtax evasion or to the alternative of a very remarkable redistribution of national wealth. Is it true that the rich have grown relatively poorer during the last 10 years? It is possible to obtain evidence, and all the evidence that we can obtain points in one direction, even over long periods, to the extraordinary stability of the various classes in this country and their relative economic positions. That extraordinary fact remains. There has been a statistical inquiry carried out by Messrs. Daniels and Campion, statisticians, of Manchester University. They took 1913–14 as their basis and compared it with 1934. They found that as far as capital ownership was concerned, even through the War period, there had been practically no change whatever in the relative wealth of the various classes. They found that in 1914 6o per cent. of the wealth of the country was owned by per cent. of the population, and they found an identical distribution of wealth in 1934. That is over a long period. Colin Clark last year issued a book entitled "National Income and Outlay," in which he makes a statement in regard to incomes. He takes 1911 as his basis and, writing in 1937, he makes the categorical statement that there has been little or no change in the distribution of income over that long period.

There is one other piece of evidence which is much more precise and it applies to the two years that I have been cornparing—1927–28 and 1936–37. We have in the annual return of the Board of Inland Revenue the estates coming under review for Death Duty, and a careful examination of the grouping of those estates over the last 10 years confirms completely the extraordinary stability which statisticians and economists have found in their wider review. Take estates that were left in 1926 over £40,000. They represent 42.6 per cent. of the w hole. In 1935–36, instead of 42.6, they represent 41.2 per cent., and there was practically no variation in the intervening years. I have chosen to give the proportion of estates rather than the actual gross amount because it might be argued that over the period of 10 years, with fluctuating changes in the rate of interest and variations in capital values, one was not comparing like with like, but, if one takes the proportion of estates over £40,000 in the earlier year and compares it with the proportion of estates over £40,000 in the later year, we are comparing like with like. In those 10 years, while there has been an extraordinary drop in Surtax income, there has been an actual rise in the amount of these large estates, but what is more important is that the proportion that these large estates bear to the whole of the estates coming under review from Death Duties has not changed more than 1 per cent.

We are faced with this position, that the rich have apparently suffered an extraordinary diminution in income at a time when the incomes of other sections of the community were increasing, but when we come to examine the capital that they own, there has been no diminution. There has been an actual increase, while the proportion is the same now as 10 years ago. I am not prepared to believe that this decrease in income, actual and proportional, and the increase in actual capital and the maintenance of the proportion are both correct. There is something wrong somewhere, and the only possible explanation is that there has been wide Surtax evasion. [Interruption.] If the hon. Member can give some other explanation—

Mr. Mabane

The yield on capital.

Mr. Benson

I thought I made that quite plain. I compared the proportion of estates over £40,000 in 1926 with the proportion of estates over £40,000 in the later year in order to avoid any variation that might be taking place owing to fluctuations in capital values.

Mr. Mabane

It is clearly a question of the rate of interest. If you have £1,000 of capital and the rate of interest is 5 per cent., you receive £50. If the rate of interest is 2 per cent. the income is £20.

Mr. Benson

The hon. Member has completely failed to follow my argument. Income above the Surtax level of £2,000 has declined actually and relatively to the amount of income below the Surtax level. There has been a relative decline of 25 to 30 per cent. compared with income below the Surtax level. When you compare capital values, excluding the actual values themselves and taking the proportion, there has been no decline in the proportion of estates over £40,000 in the same period where there has been an enormous decline in income. If there is a reduction in the rate of interest, that ought to have affected incomes below £2,000 as well as incomes above. There are salaries and earnings above £2,000.

Again quoting Mr. Colin Clark, he states that one remarkable thing is the increase in very large salaries in the £5,000 range which has taken place lately. You cannot square the fact that there has been this extraordinary decrease, both actual and relative, in incomes with the increase in the actual capital of the Surtax payer and the stability of proportions. You have there got something which, if not an accurate measure of the total figures of Surtax, is a measure which gives you some idea of the extent to which Surtax evasion takes place. I will give the hon. Member 30 per cent. of error, but that still leaves income amounting to £150,000,000 a year which is avoiding Surtax. When you get income avoiding tax to that extent, mere fiddling, niggling proposals that Chancellors have hitherto relied upon will not do. We have to take some drastic steps, and I suggest to the Financial Secretary that he wants to withdraw the various avoidance Resolutions that he has on the Paper now and produce a comprehensive Resolution which will give the Inland Revenue power to deal with this abuse. If he does it this year he will, at any rate, have the knowledge that in the next financial year, which is going to be a difficult year, he will have a very large increase in the yield of Surtax. If he leaves it over there will be a time lag. This is the year in which he ought to legislate for Surtax evasion.

7.10 p.m.

Sir John Withers

I want to ask the Chancellor of the Exchequer whether in these particulars he is able to arrange for dealing with the piece of land in Great College Street, Parliament Square. At present the Government can get it, but at a very large price. It is practically a swindle, but that is the price that the Middlesex County Council had to pay for it and there it is. If it is not bought at that price now it will be handed over to the speculative builder and there will be large buildings of a horrible character put up and new vested interests will be obtained. We cannot allow an eye-sore of that kind at the centre of the British Commonwealth of Nations. The consequence will be that we shall have to pay more. So I sincerely hope that in his Miscellaneous Payments there is some payment hidden which will enable us to deal with this matter. It horrifies me to think that a small piece of land like that should cost £140,000 plus all the money that we have paid before, which comes altogether to about£300,000. I sympathise very much with the hon. Member who put forward the idea of the taxation of land values. Although sitting on this side of the House, I have been a confirmed supporter of the taxation of land values for many years, and this is a case that makes me support it even more than before. I very much hope that the Chancellor will be able to tell us something about this piece of land in Parliament Square.

7.13 p.m.

Sir John Mellor

I feel that it will be a very great misfortune if the great increase in the general civil expenditure of the country is masked by the relatively greater increase in the cost of our Defence services. I feel that, the greater the increase in such expenditure, the more careful should be the scrutiny to which that expenditure is constantly submitted. Of course, I recognise without the slightest hesitation that the whole of this expense upon our Defence services is essential in the national interest, and I think it would be necessary to make far greater provision than has been made in this Budget had it not been for the services that the Prime Minister and his colleagues have rendered in the past month or so in making arrangements which promise to bring the peace of Europe materially nearer, and I think we can be extremely grateful for what they have done. But I wish to consider for a moment the method by which the Chancellor of the Exchequer proposes to finance the cost of our Defence services.

There is no doubt that in recent years expenditure upon our Defence Forces was subnormal. We spent far less than was necessary, even had we been assured that the peace of the world was settled for some time to come. We put ourselves in a very precarious position. Now the position is being corrected. We have to spend having regard to an entirely abnormal, as we hope, state of affairs. I think it is most important that the Government should try to form some estimate of the degree of the abnormality, with a view to considering the method by which our Defence Services are to be financed. They should endeavour to decide what would be the necessary normal expenditure now upon our Defence Forces, supposing we could see a fair certainty of peace for some years ahead, and discriminate between that normally necessary expenditure and what I am trying to describe as the abnormal expenditure necessitated by the exceptional menace which threatens us and other countries at the present time. There can be no doubt that we are embarking on exceptional expenditure on armaments out of a real fear that if we do not do so we shall almost certainly be drawn, sooner rather than later, into war.

It is important that the Government should try to reach some sort of apportionment upon these lines—to try and form some idea as to the amount we should have to spend in any case even if the imminent menace to peace were removed. I know that it is a very difficult figure to arrive at. It would necessarily be a very tentative figure, and would depend upon an immense number of hypothetical considerations. Nevertheless, some attempt should be made to arrive at such a figure, and having arrived at it the Government should be prepared to find out of taxation the money necessary for what I have described as our normal requirements, and further to find also out of taxation whatever is necessary for Sinking Fund requirements in respect of what we should have to borrow for the purpose of meeting the abnormal part of the expenditure. As to the rest which is required for the purpose of meeting the exceptional risks, I suggest that it should be borrowed.

I know that with the world in a state of flux this is an extremely difficult proposition to handle, but I do think that it would satisfy the people of this country that the right apportionment between borrowing and taxation is being made if the Government could reach some provisional figure which they could present to the country. I feel that instead of taking that course in the Budget the Chancellor of the Exchequer has proceeded upon rather haphazard lines. For instance, last year only £65,000,000 was spent out of borrowed money instead of the £80,000,000 which was permissible. In addition, the realised surplus of £28,000,000 last year now effectively reduces this year's permissible borrowing from £90,000,000 to £62,000,000. Therefore, in the first two years, out of the £400,000,000 to be borrowed over the five years' period, we are spending very much less than what would have been the proportionate figure for the first two years. The Chancellor of the Exchequer in his Budget speech presented to the Committee a very large number of arguments in justification of that course, arguments which from a purely financial point of view are quite unimpeachable, but I suggest that the situation really concerns not only the financial aspect but also the psychological aspect.

I understand from to-day's course of business that the City has taken the Budget with surprising calmness, and the Chancellor of the Exchequer might reasonably claim, therefore, that the psychological position has not been unduly disturbed. I sincerely hope that he would be right about that, but it may happen that things will veer round more into the direction of pessimism, and the result may be that the increase in direct taxation will defeat its own object, so that although it increases the rate it may ultimately reduce the yield. I think that may happen because of the inevitable discouragement to business due to an increase in direct taxation. We have seen already an appreciable loss in Stamp Duty. That loss may be further extended if Stock Exchange business is discouraged, and with lower capital values the amount of Stamp Duty on individual transactions will be proportionately reduced. Again, owing to the reduction of capital values I think there will be a further serious loss in respect of Estate Duty.

On the other hand, suppose the Chancellor of the Exchequer had chosen the course of borrowing more and taxing less. I do not think it would have appreciably disturbed confidence in British credit. I do not think it would have made a difference in the rate of interest we should have to pay in borrowing to the extent of one-thirty-second of i per cent. if we had borrowed the whole of the £30,000,000 required. I say that because I feel that at the present time the people of this country and the people of the world consider that British credit depends far less upon the state of our overdraft, and far more upon the defensive strength of the Empire. I hope that while the proposals of the Budget will be carried successfully into effect, in regard to the future the Chancellor of the Exchequer will seriously consider the desirability of being prepared to borrow rather more liberally and to tax rather more leniently.

There is one further point, relatively of detail, to which I should like to refer. The Budget makes provision for the expenditure of £8,500,000 on Air-Raid Precautions Service, which shows that the Government take a serious view of this service. I hope the Chancellor of the Exchequer in framing the Finance Bill will give one matter his serious attention, and that is with regard to the question of the effect of the construction of air-raid shelters upon the assessment of private property for taxation. He said a little whole ago, in answer to a question by my hon. Friend the Member for Duddeston (Mr. Simmonds), that no deduction would be allowed from trading profits in respect of expenditure of a capital nature. Further, I understand the view is taken that any increase in Schedule A assessment consequent upon the construction of air-raid shelters will have to be accepted by the owners of the property concerned, that they will have to pay more, and that at the present time the Government do not propose to take any steps to relieve them of such liability.

If that situation is allowed to persist, it will have a seriously deterrent effect upon private owners of factories and other forms of property, and will deter them from constructing air-raid shelters, which I know the Government wish them to undertake. Therefore, I would ask the Chancellor of the Exchequer to consider very carefully this particular matter. It is a small thing from the point of view of revenue, and I know that my right hon. Friend does not really desire to get revenue from that source. It is merely a question of whether or not we shall amend the system. I hope he will consider it worth while in the Finance Bill to make the necessary amendment of the present law of assessment in order to secure that those people who construct air-raid shelters upon their property are not penalised in consequence.

7.27 p.m.

Mr. Ridley

The speech of the hon. Member for Tamworth (Sir J. Mellor) was of a kind which one is rather tempted to follow, but I will resist the temptation as far as I can, except on one point. He spoke of the service which the Government have performed in the cause of peace., May I suggest that that service should be examined in the light of experience not merely of the last 12 months but of the last seven years? It is indisputable and incontrovertible that after seven years of the National Government we are nearer to war than we were seven years ago and further from peace than we were then, while the interests of democracy are less secure on the Continent of Europe and even in this country as well. Perhaps the hon. Member will find what consolation he may in those reflections.

I am sorry that the hon. Member for Cambridge University (Sir J. Withers) has left the Committee, because I desire to say how courteously we always listen to his infrequent contributions to debate, and with what interest and pleasure we hear him. It was not a surprise to my hon. Friends on these benches to learn that he had for many years been associated with the movement for the taxation of land values. I wish my hon. Friend the Member for Burslem (Mr. MacLaren) had been present to hear the hon. Member's reference to the subject of land values. It is a delight to us to find the hon. Member in our Division Lobby now and again, and we all appreciate the erudition that we derive from his presence.

I am sorry that the hon. Member for South Kensington (Sir W. Davison) is not present. It is interesting now and again to hear the voice of honest and authentic Toryism. The hon. Member not only knows what he wants, but he says quite frankly and courteously what it is that he does not want. The hon. Member has told us that he desires to see a reduction in Income Tax as speedily as possible, and he also desires to see a committee of inquiry into national expenditure, presumably another May Committee. It is interesting to hear of a Tory who still wants to see a lowering of the charges for social services in order that the burden of Income Tax may be lowered. I can never regard Income Tax as a burden. I take the simple view that, no matter what the range of the tax, as long as you have extracted the tax and have left the payer with an income sufficient to enjoy a tolerable existence, Income Tax can never become a burden.

I think the hon. Member derived more comfort than he was justified from the observations of the Chancellor of the Exchequer in his clear and logical speech, as to the small proportion of people who engage in Income Tax and other forms of tax evasion. The Chancellor of the Exchequer, as a result of his long practice and experience elsewhere, introduced his speech with a delightful opening, but I think he was a little unfair to himself in the cast of his play. In later years in connection with the theatre it has become the fashion more and more not only to write plays, but to make sure that you have a successful part in the play. The Chancellor of the Exchequer failed to take us into his confidence when he said that his ambition was to be regarded as a sort of lawyer-detective in the pursuit of fraudulent people, but not too energetic and with not too much success. There will still be people who will do all they can to dodge him.

One story has been told already during the Debate. May I tell another? I knew a man who was distinguished for his anxiety to give advice to young and inexperienced people, and on one occasion he told me how he advised a friend of his on the best way of filling up his expenses sheet. He told him that on the first line he was to put one penny for a bus fare, and then the figures 8.9.11 on the second line, then deduct 6d., and he would gain the confidence of the cashier that he was not an avaricious person; and the cashier will entirely overlook the fact that he has added in the date. How anyone can really persuade himself, or try to persuade the Committee, or who can pretend that he has persuaded himself that he has a Budget balance on the one hand and at the same time borrowing £65,000,000 on the other, I do not know. To pretend that you really have money in hand on one account and at the same time a large overdraft on another is asking too much of this House.

I hope before the Debate concludes that we shall have an answer from the Chancellor of the Exchequer or the Financial Secretary to the question, "What is the Government's Debt policy." Up to the conclusion of the financial year 1931–32 we were contributing to the Sinking Fund and reducing the deficit year by year. That policy has been totally reversed. Not only is the Chancellor of the Exchequer not proposing to contribute to the Sinking Fund, but he is even employing new borrowing powers, thus adding to the Debt burden year by year. The party on these benches were supposed to have allowed the national finances to get into such a parlous condition that other people had to come in to rescue them. But we were not then postponing our current obligations and imposing them on future generations. We must know what the Government's policy is in the matter of the National Debt; whether they propose to allow the debt to accumulate year after year, until it gets to astronomical figures, and how this stupendous debt burden is eventually going to be dealt with. Is it going to be dealt with by repayment, and, if not, in what other fashion is it proposed to handle it?

The hon. Member for the City of London (Sir A. Anderson) made the definite statement that trade recession will certainly come. One of the extraordinary things about the speech of the Chancellor of the Exchequer was the entire omission of any reference to the possibility of a trade recession, a trade slump, and consequently there was no reference to any steps or methods which the Government propose to employ or have in contemplation for dealing with the economic situation which may arise on the completion of the armaments programme. I think the right hon. Gentleman owes it to the House to say what plans the Government have in mind; whether they propose to make any financial or economic provision to protect this country against the full blast of what may, in fact, be a new economic slump. Are we not by the very process of borrowing, since that means expenditure of income in anticipation of income, instead of financing current expenditure by current revenue, aggravating the possibility of a slump, even if not actually contributing to it? Two months ago I said that a Conservative Government might very well be driven to feel regret that prejudice and acquisitive selfishness rejected the idea of a Surtax or a special form of a capital levy.

The Conservative mind reviews itself in the Budget. I wish the country could realise the stupendous way in which for the last five years the burden of armament expenditure has grown. In 1923–24 the total was £106,000,000, and the contemplated figure for 1938 is £253,000,000, or 130 to 140 per cent. increase in just over 10 years. I will concede the point that these figures have grown because of a need, urgent and imperative; but I ask the Committee in all seriousness, has the need ever been less urgent or less imperative to feed the hungry schoolchild, or to reduce the size of classes, or to provide the children of the working classes with healthy, modern schools in which to derive the full benefit of the education given? Has it ever been less urgent and imperative to vitalise the Special Areas, to encourage the development of schemes, to increase the purchasing power in the Special Areas by abolishing the means test, and by improving un employment benefit and allowances? Is it, can it be, less urgent and imperative to make the life of the old age pensioners a comfort and not a misery? When all these Measures have been urged upon Conservative Governments we have been assured by successive Chancellors of the Exchequer that the money could not be found for these urgent needs, but in this Budget an amount of money far in excess of the amount which would be required for these social services has been found by the Chancellor of the Exchequer without any considerable difficulty. Some of it has been found in a fashion about which, I think, the Chancellor of the Exchequer is very unhappy. A great speech many years ago unfolded what was called the Newcastle Programme, in which one item was a free breakfast table, for which the Chancellor of the Exchequer at one time voted. I discovered that in the Debate in 1924 the right hon. Gentleman said: I found myself on three very simple propositions. The first is that food taxes are the most objectionable of all taxes and nothing has given more widespread satisfaction to the country, certainly nothing has given wider satisfaction to my friends, than the boldness with which the Chancellor of the Exchequer has done his utmost to get rid of food taxes. I want to see that course continued because I consider that food taxes are the worst of all taxes."—[OFFICIAL REPORT, 17th June, 1924; col. 1996, Vol. 174.] Yesterday the Chancellor of the Exchequer announced that he is going to take a step which means that no Chancellor has ever stooped so low to pick up so small an amount. He is taking the miserable, mean and miserly course of putting an extra duty on tea. The Tea Duty is harsh and inhuman. It is not a tax upon a luxury. It was Disraeli who said that the luxuries of one age tended to become the necessities of the next. It may be that 100 years ago tea was a luxury, but it is no longer a luxury: it is an element of essential food. This tax will hit the poorest homes, for the poorer the home the cheaper is the tea consumed. I hope hon. Members have not been deceived into thinking that this 2d. on tea means that the tax on tea is just 2d. in the pound. The tax on tea will be 8d. in the pound, and for preferential taxes 6d. per lb. That means that the kinds of tea which are bought by people with limited incomes at 1s. 8d. per lb. are taxed tremendously in excess of the tea bought by wealthy people at 5s. and 6s. per lb. This iniquitous tax falls heaviest on the people who are least able to bear it, and it ill becomes the Chancellor of the Exchequer to cover such an iniquitous proposal with the suggestion that working class people, who are living to-day on a submerged standard of life, are going to find some peculiar kind of pleasure and enjoyment in paying this small tax, which will still further, submerge a standard of life which is already sufficiently submerged.

I am sorry that the Financial Secretary has left the House, because in a Debate two or three months ago he sought to correct me regarding the tendency of direct and indirect taxation. My general argument was that in the immediate postwar years, the weight of direct taxation tended to grow and the weight of indirect taxation tended to lessen, but that that tendency had been completely reversed during the last few financial years. I will quote. to the Committee some figures which justify my argument. In the financial year 1923–24, indirect taxation was 36.54 of the total national revenue; in 1924–25 it fell, through the instrumentality of a Labour Chancellor of the Exchequer, to 33.07; in 1929–30, it rose to 35.85; it fell again, in the Budget of the second Labour Government, to 34.12; and in 1937–38 it had risen to 39.30. The right hon. Gentleman the Chancellor of the Exchequer will be able to supply the figure for 1938–39; but whether or not there will be any change as a result of the proposals contained in the coming Finance Bill will not materially alter the argument, whichever way the change may go. The fact is that the whole tendency of financial provisions during the last five or six years has been steadily to increase the burden on the backs of the poor people because of the growth in the weight of indirect taxation, and to relieve the wealthy people as a consequence of a proportionate fall in the weight of direct taxation. Because the Budget includes no provision of any kind for expansion of the social services, and because it proposes to finance what I continue to regard as current expenditure by deferring, it is, in my view, a bad instrument of finance, and will certainly not secure either the approval of this side of the House, or, I hope, the approval of the majority of the electors in the country.

7.48 p.m.

Mr. Loftus

I hope that the hon. Member for Clay Cross (Mr. Ridley) will forgive me if I do not follow him in the details of his argument, but the Debate has covered such a wide field and has dealt so much with general principles that I would prefer to continue it on those lines. In particular, I would refer to the remarkable speech of my hon. Friend the Member for Hastings (Mr. HelyHutchinson), which I think set the tone for many of the subsequent speeches, the speech of my hon. Friend the Member for Huddersfield (Mr. Mabane), and also the speech of the hon. and gallant Member for Central Wandsworth (Colonel Nathan), a speech with which I found myself in practically complete agreement, except that I disagree with the hon. and gallant Member when he states that a slump, a recession, a severe set-back, is inevitable in the next two or three years. I am grateful to the hon. and gallant Member for Central Wandsworth for bringing forward certain points which are of immense importance, such as the balance between savings and expenditure between investments and expenditure on consumption.

Several hon. Members have asked, with rightful apprehension and fear, how this country is to bear this immense and crushing load of taxation to-day, but still more, how it is to bear the immense future load of taxation. I think it was the hon. and gallant Member for Central Wandsworth who pointed out that in the future there would be a stationary and later on a falling population, and that introduces a very serious factor indeed. After the great Napoleonic wars, there was heavy taxation in this country and a heavy debt. What happened? National production was expanding and there was a rapid increase in population, and that increase of national production naturally lessened the burden of debt. A year ago, when speaking on the Budget at that time, I said that the only method by which this nation or any nation, under any system of government, could bear such a weight of taxation would be by increasing national production. After all, the whole of our social services, all the taxation we raise and the whole national income come from national production. The great problem before us now, to which we must all direct attention, is how to raise national production to the maximum.

That, of course, involves increasing purchasing power very considerably to equate potential national production.

In looking at the Budget which my right hon. Friend introduced so clearly yesterday, the first question I ask myself is whether it is a deflationary Budget. I remember that a year ago, on the Budget introduced by the present Prime Minister, I said rather rashly on the day the Budget was introduced that I felt that there was at that time a tendency towards prices getting out of control, a tendency towards general inflation, and I supported the National Defence Contribution tax the first night on that ground. I feel that any deflationary action by a Government at a time when prices are not rising—when they are falling—might intensify the recession of trade and might be dangerous. I would ask this question: Does the condition of this country and of the world in general call for deflationary action, or does it, on the other hand, call for an expanding policy rather than any contraction of purchasing power? That is an important point. Let us take our own case. Is the price level in this country yet satisfactory? The Ottawa Conference advocated the raising of the price level for the benefit of primary producers throughout the world. The Ottawa Resolutions were endorsed and emphasised by the Empire delegates after the World Economic Conference broke down. I could quote the opinions of individuals in opposition to me politically. For instance, the chairman of the "News-Chronicle" stated that he wanted to see the price level restored to the 1929 level. It is nothing like that yet. Hon. Members opposite must realise the enormous importance which the price level has on the life of all classes, but particularly how it affects the working classes. I will give one quotation from a recent number—24th October, 1936—of the "Economist," which stated: During 1936, those commodity prices whose abrupt fall in 1929 ushered in the great depression made an equally sudden movement upwards. With the rapid rise in these prices, world purchasing power revived, the value of trade increased, the volume of trade increased. debtors began to envisage the resumption of debt services, and creditors even contemplated the possibility of fresh loans. Shipping revived, the yield on foreign investments recovered, unemployment fell, industrial capacity was more occupied. That was the effect of a moderate rise of prices. I admit that it has not gone far.

I admit that industry to-day could be far more prosperous and that capital, industry and labour could be far more employed if the price level were a little higher. As an instance, I will give the figures from the Calcutta index of wholesale prices: In 1924, the figure was 178; in 1937, 88; and in November, 1936, 93. That means that the purchasing power of 300,000,000 of the Indian masses has been destroyed and not yet restored, and the workers in the Lancashire cotton mills are suffering from that to-day.

The next question I addressed to myself in considering the Budget was whether there has been any deflationary action here during the past year. That is a point of immense importance. I think there has been, and I think that is proved by the figures which I will quote. I will take the 1929 figures as a basis at Ion, and I will take the "Economist" wholesale price level, monthly averages for 1933 and 1937, and then for January of this year. In 1933, the price level was 68.3, compared with 100 in 1929; the cost of living was 85.4, and there were only 9,681,000 people employed in this country. What happened? The price level rose, from 1933 to 1937, from 68.3 to 89.3, and the employed rose from 9,681,000 to 11,496,000, and the cost of living rose to 94.5. There was a big improvement in 1936–37, but what had happened by January, 1938? The price level began to fall again. According to the "Economist," it dropped from 89.3 to 82.5, and simultaneously the number of employed dropped by about 400,000. I suggest that that is a sign that deflationary influences have been at work during the past 12 months.

Of course, we are influenced willy-nilly by the situation in the United States. In that country, between February of last year and 2nd March of this year, the volume of bank deposit money decreased by nearly 8 per cent. I think that what happened was that the United States Government were frightened a year ago that prices were getting out of hand, and that there would be too sharp a rush up of prices. As a consequence, they started deflationary measures, and in addition. the American banks started to sell securities; and between them, they overdid it, and there has been this catastrophe in America, falling trade and industry and an immense increase in unemployment. Now they have suddenly veered round and are trying by extreme measures to overcome that recession. Here I do not say that there was a fall in the amount of money, but there has been a reduction in the increase of the total purchasing power. Comparing month with month there is no decrease in the total volume of money, and by money I include currency notes and bank deposits—and three-quarters of our money is bank deposits. But 1937 shows not only a considerable reduction in the volume of money in the early period of the year, but a big drop for the whole year in the rate of enlargement.

That is, in 1936 the increase in currency plus bank deposits, was at a much faster rate than it has been in 1937. There is a slowing down and I submit that with well over 1,000,000 unemployed our policy in 1937 should have been enlargement rather than reduction and also that with rapidly increasing national production a further enlargement of currency, of money, of purchasing power was necessary in order to prevent a fall in prices. That is why I view this Budget with a certain amount of hesitation. We have had in the last 12 months a period of falling prices and increasing unemployment and, in such a period, we want to do nothing to intensify such movements. Rather should we do everything to counteract them and I fear that the effect of this Budget may be deflationary and that it may tend to intensify those movements to which I have referred.

It may be said that it was necessary last year in this country to slow up expansion because, owing to the fall in prices in the United States, it was necessary to keep the pound and dollar exchange level. Therefore it was necessary to produce a mild deflationary effect here. I feel that it is a mistake to sacrifice the internal price level of our own country to the rigid fixing of the exchange with foreign countries. I am sure that industry generally in this country would support me in that view. While industry and trade want a reasonable balance of exchange, they would not sacrifice home industrial conditions for the rigid fixation of the dollar exchange or any other exchange. It is possible that in the coming year we shall see marked changes in the value of the dollar and in its purchasing power, either a fall in dollar prices or a very sharp rise in dollar prices. I hope that we shall not, in order to keep the exchange rigid; chase after dollar prices whether they go too high or too low.

I have said already but I think it will bear repetition, that the only way in which we can look forward to the future with any feeling other than despair, is by making up our minds to plan both for the increase of our purchasing power and above all for the increase of our national production. I have been suspicious of planners in the past but I am coming to the conclusion that, as my hon. Friend the Member for Huddersfield said, in the world of to-day we have to plan and organise far more than we have done in the past. I say this to hon. Members opposite. There is no easy road. No solution, no catch-phrases, no patent medicine of any kind will serve the purpose. There is no formula. We have to recognise that the old political economy founded by Adam Smith is dead. That political economy worked in its time. It worked in the last century. It was based on flexible prices, flexible rates of interest, flexible wages, and, at the cost of a good deal of hardship and injustice, it did function. It did automatically correct excess production and under production. It did, more or less automatically, increase national production and utilise labour and capital. But it is dead today and it is dead for these reasons.

In the first place, we have no longer flexible prices and that is a factor which we have to bear in mind when we are considering the planning of the future. In all industrial countries now there are two ruling sets of prices. There are the old flexible prices in such things as textiles and agricultural produce, but the modern corporation has established a system of inflexible prices in certain manufacturing industries. Instead of reducing prices they reduce production. That is a factor against which we have to organise in any plan for the future. It is a factor which has altered our whole system of economy. I can give instances of it. During the slump in America the makers of agricultural implements reduced production by 80 per cent., but reduced prices by only 15 per cent., while the makers of cement reduced production by 65 per cent. and prices by only 17 per cent. On the other hand, prices of textiles dropped by 45 per cent., and agri cultural prices by 65 per cent., while production of agriculture dropped only 6 per cent. I suggest to my right hon. Friend the Chancellor of the Exchequer that the whole weight of deflation must nowadays fall on the flexible prices and therefore agricultural products and raw materials are forced far lower by deflation. They bear all the weight involved in the maintenance of an inflexible price level in certain manufactured goods.

The second point I suggest is that to maintain and increase national production we have to maintain the right volume of money—neither too much for inflation, nor too little for contraction. It is a difficult task but we shall have to try it. I do not believe in the national banks advocated by hon. Gentlemen opposite. [HON. MEMBERS: "Why not? "] For this reason. I cannot imagine any more hopeless task than that of nationalising an institution which has to advance loans of all sizes from £5 upwards. I cannot imagine any more hopeless position than that of a Member of Parliament who is being approached by his constituents because the nationalised joint stock bank has refused to lend him a certain amount of money. But I feel that it is necessary to plan the amount of money and of purchasing power which is available. Most of our money to-day is created by the banking system but it is apt to be created without reference to the correct amount required in the national interest with the result that when trade is booming, there is more and more money available in the way of bank loans and when trade is falling the amount available contracts. That is a business precaution but it may not be in the national interest. Therefore, I feel that possibly in future the central bank will have to control more strictly the volume of bank credit allowed to be issued by the joint stock banks.

My third point is one which has already been alluded to by the hon. and gallant Member for Central Wandsworth and that is the absolute necessity under any system of economy of maintaining a right balance between spending and saving. That is a problem which must face every kind of system, whether Communist or Capitalist. It is extremely difficult to maintain that balance. It was done in a rough-and-ready way under the old Adam Smith economy. I would only say this. Saving can be stimulated by encouraging the creation of new capital or by Government public works and over-saving can be checked by increased expenditure even on social services. We have to realise that one function fulfilled to-day by Government public works is that of affording an opportunity for the utilisation of the savings of the people and when there is a slackening in the demand for private capital and that is a very necessary function.

Finally, as to policy. Judging by commodity prices to-day, I feel that the general effect of this Budget may be deflation and, frankly, in view of the fall in prices and the rise in unemployment during the past 12 months, I am of opinion that greater recourse might have been had to borrowing. I would have no hesitation in borrowing if it did not force up the price level. I am not afraid of the word "inflation." Inflation is only dangerous when it forces the price level above that which is desired—that price level which is suitable to maintain capital and labour at the maximum point of employment. My right hon. Friend the Chancellor doubtless felt, and rightly felt, that the colossal future expenditure on rearmaments, coming in the next 18 months, must circulate a greatly increased amount of money and that then, when the full programme comes into operation, there may be a tendency for prices to get out of control and to rise too sharply. Probably in view of that tendency he thinks it better to tax heavily to-day. That is a matter of opinion, of course, but if I may humbly express my opinion, I repeat that I think it would have been better to have waited until inflationary tendencies were clearly evident before imposing additional taxation.

President Roosevelt last year feared inflation had begun, and by his measures he wrecked American recovery. I feel that we must organise so as to get our national production at a maximum. The United States Government and people have realised that the fall in price level which they have had during the past 12 months has been a national and a world disaster, and they are taking extraordinary steps to rectify it and to raise the price level. Is it not possible for Great Britain and the United States to work together in harmony? Could we not, by co-operation, decide what is the suitable price level for the raw materials of the world? I think that by our financial power we could get that level established and that that would do far more for peace, and incidentally for the happiness of mankind, than, I think, any other action that we could take. I would suggest that the United States Government and our own might co-operate even in controlling the price levels of the raw materials of the world, and that they might even utilise the vast power of their Equalisation Funds for that object. Greatly as I admire the courage of my right hon. Friend, I feel that it would have been better on this occasion to have borrowed more heavily and to have avoided any possibility of increasing the deflationary effect which we have had during the last 12 months.

8.16 p.m.

Mr. Tomlinson

Following the speech of the hon. Member for Lowestoft (Mr. Loftus), I felt as though some of the things which I had heard about financiers, before coming to this House a little while ago, must be true, for it seemed to me as though he had suggested the necessity for planning all that the Bank should do and had pointed out how essential it was that the Bank should do that, and yet, in some mysterious way, he felt that if we controlled the Bank itself, it would not be capable of doing it. It seems strange to me that an individual who should object to the nationalisation of the Bank should at the same time believe that all its functions should be in the national interest, and I suggest that if he wants to accomplish that purpose, the best way is to take over the control of the Bank and to see that it does plan and function in that way.

Mr. Loftus

The central Bank in this country is largely controlled by the Treasury. The central Bank and the Treasury between them largely control the issue of currency by the joint stock banks, but I want that control organised on a system.

Mr. Tomlinson

That is exactly what I want, except that I want Parliament to he in control. I want Parliament controlling the Treasury and the Treasury controlling the Bank rather than, as I sometimes fear is the case, the Bank controlling the Treasury and the Treasury controlling Parliament. It seems to me that it would work better if we were the masters in our own house, and particularly if we owned the house. I listened with very great interest to what was my first Budget speech. I had been given to understand, before coming here, that Budget day was a great day, that everybody hung in a sort of fascinated wonderment on what the Chancellor of the Exchequer was about to disclose, and that there was a tension about the House all the time. I must say that I listened to the Chancellor explaining and totting up those tremendous figures, and I enjoyed following them and doing the sum along with him. It was not difficult, after all, for him to balance his Budget, and I wish that after having found what he required and having looked round for somewhere to find the difference between what he required and what he had, he had thought of other people who were attempting to balance budgets too, and having even greater difficulty than he had.

It has been suggested that the right hon. Gentleman has great difficulty in balancing his Budget, but I want to say that in a little village in which I live there are close on 1,000 housewives who are attempting to solve a problem beside which the problem of the Chancellor of the Exchequer is quite simple. These people will be called upon, under this Budget, to perform now a still more difficult task. I have listened to-day to a good many speeches, and I have heard hon. Members almost weep because of the position in which the Income Tax payer is placed. I am very much of the same opinion as the hon. Member for Clay Cross (Mr. Ridley). I am not prepared to weep over the Income Tax payer. Probably it is because I come in contact more with people who are not called upon to pay Income Tax than with people who are paying it, and when I find sacrifices being called for, the strange thing to me is that the people who are called upon to bear the greatest sacrifices are those who are the least able to bear them.

I maintain that the greater part of the new taxation will fall inevitably upon the workers. I know it is the Budget statement that the Tea Duty is 2d. per lb. additional, but I suggest that when it comes down to the people about whom I am speaking, those who are finding a difficulty in balancing their domestic budget, that 2d. will have increased to 4d. Many of our poorer people are called upon to purchase their tea in 2-oz. packets, and I cannot see the 2-oz. packet going up by ¼d.; it will probably go up by ½d. The suggestion is that it is not much, and the Chancellor of the Exchequer yesterday suggested that, inasmuch as the money was to provide the means for home defence, the people would pay it willingly. Without this added burden, they are already paying a great deal towards the defence of their homes, and they are entitled to ask for a good deal better standard of life than they have now, before they are called upon to undertake additional burdens.

Another thing that the Chancellor mentioned yesterday was that he had been fortunate in that he had a saving of £8,500,000 on the Unemployment Assistance Board's working. Hon. Members may have thought that that£8,500,000 had been saved to the Chancellor because the need for it was not there. If such is the impression, I want us to get it out of our minds, because the money has been found, not by the Treasury, but, in my judgment, largely by the local authorities. Those people, who should have gone on to unemployment assistance and for whom this money was provided, have been kept on public assistance rather than having been transferred to the Unemployment Assistance Board, and, therefore, the charge has been a local instead of a national charge, and the ratepayer has had to pay instead of the taxpayer. What does that mean? It means that the individual about whom I am speaking has been hit twice. He is not only having to pay now something towards that increase in the national taxation, but he is also having an increased demand from his local authority.

When this House calls for anything which means added expenditure it means that the worker, the individual who is trying to exist upon a low wage, is called upon to pay more than his fair share. Somebody suggested that this was a warning Budget, and the hon. Gentleman the Member for Lowestoft suggested that it would be delightful if we could go back to the political economy of the last century. This is the second occasion, in the short time I have been in the House, when that suggestion has been made. It seems strange that when difficulties arise we should have the suggestion, first from the Government Front Bench, and then from one of the Government's chief supporters, that if only we could get back to the political economy of 50 years ago everything in the garden would be lovely. The people with whom I am particularly concerned, however, had a difficulty in balancing their domestic budgets 50 years ago; the same anomalies existed then as exist now, and even though Income Tax was only 1s. and Chancellors looked forward with horror to the possibility of an increase to 1s. 3d., people in those days were being called upon to put up with any number of hardships even though they were doing the hard gruelling work.

Lancashire has been referred to several times. Our people in Lancashire are endeavouring to solve what I consider to be an insoluble economic problem. They are attempting to live on inadequate wages. There are thousands who this week will be attempting to make ends meet, to keep the house going, and, in some instances, to keep a family on less than 30s., which is a good deal less than public assistance allowance and unemployment assistance. The Minister of Labour cannot help them and the Minister of Health has said that he cannot help them. We cannot subsidise wages and we cannot pay unemployment benefit to people who are not unemployed.

I thought that the Chancellor would have found some way in his Budget of helping these unfortunate people. Yet what is the result of the Budget? It is that those who are down at the bottom will either have to drink water in future or pay an additional burden in their difficult position. The majority of the people about whom I am speaking would jump for joy if they have the opportunity of being able to pay Income Tax. They would not mind if it were higher even than 5s. 6d. if only they had the chance to pay it. An hon. Member opposite suggested that Income Tax payers in the main were enthusiastic and that they would pay willingly. It was strange, however, that he afterwards said that they were dumb, driven cattle who bore all these burdens and he objected to the suggestion that there were any number of them avoiding the tax.

I was a little disappointed when I heard the hon. Member for Chesterfield (Mr. Benson) suggest that the Chancellor had not devised sufficient ways and means to insist upon these very honest people remaining honest. I felt yesterday, when the Chancellor was explaining how he was going to insist upon people paying their right dues and demands, that it was a good thing that for once we had a lawyer as Chancellor. The only people who can find their way out of a maze are the people who have some time or other got into it. I do not understand this matter because I am not a lawyer or a financier, but I think that some of the things at which the Chancellor hinted as being necessary to strengthen the law revealed a laxity on somebody's part in past days in enabling these people, who are so anxious and enthusiastic about paying, to get away without meeting their dues and demands.

I have learned another thing to-day. It is that some of the lessons I learned as a child were true. It seems that all the pessimists on the Government side of the Committee are among the people who want to pay now and that all the optimists are among the borrowers. The individual who is always looking forward to a good time is the individual who lives on borrowing and hopes that something will turn up sometime. He takes the line—" We need all these things and for Heaven's sake let us have them, and do not ask us to pay for them; so long as somebody else is paying it is all right.'' I have heard the suggestion many times that the Chancellor would have done better if he had borrowed the money instead of insisting upon meeting expenditure now. To the extent that the things we are getting for the money are essential, and to the extent that the things we are insisting upon are right, we should pay for them now. It has been said that posterity has done nothing for us, so why should we concern ourselves about posterity. What right have we to build up a debt for those who are coming after us? If, as a result of our folly, we have to spend money hand over fist in what everybody recognises to be futile preparations to avoid disaster, the least we can do in this generation is to pay our share for the folly into which we have allowed ourselves to be led.

Another amusing thing to me is that whenever we get into a difficulty of this kind somebody suggests the appointment of a committee. What is the object of doing so, 99 times out of 100? On one or two occasions I have been induced to sit on committees in connection with local matters, and it has always appeared to me that the committee had been formed to go through the worker's pockets to see whether he had anything that could be taken. An hon. Member mentions the May Committee, and hon. Members can take that as an example if they wish. The only thing that seems to come under review is "What more can we take from the worker and leave him "—I will not say respectable—" able to get along." It would be different if a committee were to be appointed to see whether the £300 which has been fixed as the profit upon an aeroplane under the rearmament programme could be brought down to something like reason, because it must not be forgotten, when we think of the people interested in the making of aeroplanes, that it is their country which we are fighting to save as well as our own. The fortunes go to them more than to those who are being called upon to pay the increased Tea Duty. After all, they are among the people who have a stake in the country, and why we always insist that the people who never get a steak of a different kind to eat should be called upon for all the sacrifices in order that the financial stake should be secure, passes my comprehension.

I suggest to the hon. Member for Lowestoft that if he would consider not only the nationalisation of banking but the nationalisation of the armament industry, so that we should make for ourselves the things which we need, we might get somewhere. An hon. Member opposite has suggested that this is a warning Budget and asked three questions. He asked, first, how much this country could pay out of its income in the form of taxation and continue; the second question I forget; and the third question was whether we could pay for another war if one came along. I think it ought to go out to the world that we could not pay for another war because if it were made known that if the war were fought it would not be paid for probably it would be the greatest deterrent of war that we could find.

8.38 p.m.

Mr. Colman

I listened yesterday with a great deal of interest and much admiration to the Budget statement delivered by the Chancellor of the Exchequer. We all appreciate that the duties of the Chancellor of the Exchequer are vital to the welfare of the nation, and that great responsibilities rest upon his shoulders, and, if I may be allowed to say so as a humble back bencher, I am bound to say that he discharged those important duties in the manner we should expect of a man who possesses his great ability and his rare gifts. It is a matter of common knowledge that the present Chancellor is one of the greatest advocates of our time, and I submit that that is a very good thing indeed for the nation, but I am wondering at the moment whether it really is such a good thing for me, because I desire to plead a case before the Chancellor, and it is a case in which, I am afraid, I must be a little critical. Therefore, I am all too conscious of the fact that if the right hon. Gentleman, when he comes to wind up, should be good enough to make reference to my remarks, it would be perhaps an easy task for him to counter any arguments I may put forward, or even to cut them to pieces.

The reason I have decided to intervene in this Debate is that I desire to raise a matter which affects the wellbeing and the welfare of a large number of people whose interests I have very much at heart. The question to which I wish to call attention is that of the Entertainments Duty in so far as it affects living entertainment, that is, as it affects the producers of plays and those responsible for musical productions in concert halls, the actors and actresses who perform in them, and the large number of people employed in that industry who are dependent upon it for their welfare and, indeed, for their very existence. I say frankly that I was bitterly disappointed when my right hon. Friend made no reference whatever to this matter in his Budget statement. Not only I, but a very large number of other people in the country, had confidently expected that the right hon. Gentleman would announce that he intended to repeal the Entertainments Duty, if not from every source of entertainment at least so far as it affects living entertainment. When I say that I cannot help feeling that I must have, or at any rate I ought to have, the sympathy of the large majority of hon. Members, because I am given to understand that at some time or other about 50 per cent. of the Members of this Honourable House have sent memorials to the Chancellor begging him to do away with this unfortunate and disastrous tax.

We know perfectly well that not only the present Chancellor, but all who fill that great office, are 10th to give up any form of taxation which is recognised and from which the Exchequer continually derives a certain amount of revenue, and I suppose that I must admit at the outset, although I am very 10th to do it, that this form of taxation has come to be recognised in our country, but I do seriously submit to my right hon. Friend that even though a tax is recognised that surely does not imply that it is good, or that it is prudent to apply that form of taxation, or that we are justified in continuing it if we find the results are damaging. I am well aware that I am bringing under review the question of a tax which covers a relatively small field compared to many great national questions, but it does affect the lives of thousands of people, and I feel very strongly indeed that of all the taxes we are called upon to pay, this particular one is the most difficult to justify. I do not think I am putting it the least bit too high when I say that it is the worst of all in its damaging effects both socially and economically.

When we consider this problem we should always keep uppermost in our minds the fact that this tax is one which those who are called upon to pay it have to pay in addition to all the ordinary taxes which are imposed upon other commercial enterprises; and, worse than that, they have to pay whether they make a profit or whether they make a loss. It is, in fact, a tax on turnover. I find it very difficult to satisfy myself that you could ever justify a tax upon turnover, because I believe that to tax any commercial undertaking upon its turnover and not upon its profits is fundamentally unsound, and not in the best interest either of the State or of the undertaking concerned.

Another thing we should keep before us in considering this problem is that the only source of revenue upon which producers of stage plays and musical concerts can rely is their box office receipts. I have made inquiries, and I find that, as a result of this penal form of taxation upon entertainments, those box office receipts have been reduced on the average by at least 17½ per cent. That would be a serious matter to any form of business, but when such a reduction takes place in an industry which is speculative in character, the matter becomes grave indeed. I think no one would contest the statement that the theatrical business is highly speculative. I know of no undertaking which is more speculative than the promoting of a stage play. My right hon. Friend the Chancellor of the Exchequer may say—I do not know that he does say so—" What is all this fuss about in the country, in regard to the Entertainments Duty as applied to theatres? "He may say:" We apply a somewhat similar taxation in the case of other industries. We apply a revenue duty to the distilling and brewing industries." That is true, but the difference in the case of those industries is that if the commodity which they produce is not sold, owing to public demand not coming up to expectations, it is not wasted, but can and does become stock-in-trade. It still has a monetary value. Although the industry may be disappointed in the magnitude of the demand, it can slow up production; it may make less profit but it is not so seriously affected as is the theatrical business.

Moreover, a business such as distilling is not struggling for existence, nor is it faced with the continual necessity for cutting down prices. Be it remembered that the cost of production in the theatrical industry remains the same, whether all the seats are filled or only a few are occupied. My right hon. Friend need not be afraid about doing away with this tax. I know that he did not originally bring it in, and it is well that we should be reminded that this duty was a War measure, when it was brought in as a matter of emergency. I should be glad if my right hon. Friend would take courage and do away with it altogether. Let us look at the revenue of this duty. I have figures showing that it was recently stated in the House of Commons that the amount raised by this tax upon living entertainment during the 12 calendar months of 1937 was only £1,139,000. That is not a vast sum, when we are talking in hundreds of millions at a time. If my right hon. Friend were to do away with this tax, the whole of that revenue would not be sacrificed. He would bring relief and happiness to many people who are sorely troubled and harassed at the present time. I suggest that it is safe to assume that one-quarter of that money would be restored, if not one-half, by the saving in unemployment benefit, and in the increased Income Tax which would result by the keeping on of plays in respect to which the Entertainments Duty would otherwise be a deciding factor for their being taken off.

I would say a word about unemployment in the industry. I do not think that it is generally understood that it is unusual for people in the theatrical profession to enjoy what we regard as permanent employment. It is true that some of them have fairly long-term engagements when they are successful and are at the top of the tree, and it is equally true that in very rare instances enormous salaries are paid when they go on the films, but the vast majority of those employed in the theatrical business are not salaried people. I would emphasise the fact that they are wage-earners and are frequently out of work. I have a special interest in the subject, because I represent a constituency, Brixton, where a large number of those who are employed in the theatrical profession reside. It has always been so. I can tell the Committee from personal experience that my post box over and over again reflects the distress of those people, and that from personal interviews which I have had with my constituents I am absolutely satisfied that they are deserving, not only of sympathy, but the utmost consideration, and certainly of more favourable treatment than they are now receiving from the Treasury.

More money is now being spent on entertainment, I believe, that has ever been the case before, but the greater part of it goes to benefit such forms as dog racing, cinematograph theatres and broadcasting, and not to the benefit of living entertainment or of those employed in the theatrical profession. The decline in the theatrical business is most noticeable in the case of production in the provinces, where intensive competition has to be faced, and where managers not only have seldom been able to increase their prices of admission, but have frequently been obliged to reduce them. We are constantly told that the decline in the small theatre in the provinces is due not to the Entertainments Duty but to competition from counter-attractions. That may in part be true, but I submit that it constitutes a powerful argument for the abolition of the tax. If so much of the revenue of the theatres were not deducted at the source they would be able to meet that competition and to keep in employment a large number of people who are now put out of work. British Actors Equity, the organisation which looks after the interests of the actors and actresses, employed in the theatrical profession—and remarkably well they do it—have gone very carefully into this question. They have recently been making attempts to improve the standard of living and raise the wage levels of those employed in the small theatres in the provinces, but they have met the insuperable difficulty that if they were successful in doing what is a very right and proper thing, they would close theatres altogether, and that all they would have done would be to cause the people whom they represent to lose the appointments which they now hold.

I turn to another point. We all want to see the British film industry prosper and go from strength to strength, but I believe that about 80 per cent, of the films shown in this country at the present time are of foreign origin, and that no less than£7,000,000 is sent abroad every year in payments on account of various film rights. This Entertainments Duty which is levied on living entertainments has a direct bearing on the British film industry, for the simple reason that the theatre and the concert hall are the nursery for the essential material without which there is no hope of real success in our British film industry. If there is a decline in the standard of acting and of performance at our concerts, how can we expect that we shall be able to establish a great British film industry, or facilitate the interests of broadcasting?

I want specially to emphasise one matter in connection with this subject. Those of us who have repeatedly endeavoured to obtain the repeal of this tax have been met over and over again with the argument: "You do not pay it; it is paid by the public; it is a surcharge on the price of admission." I want to deal with that argument, because, believe me, it will not do; it is a most fallacious argument, and is entirely contrary to the truth. The fact is that it is impossible to-day for those who are responsible for the theatres to increase their prices of admission, on account of competition, and there is no way by which they can pass on this tax to the public. They have to give up a considerable portion of their box office receipts, which they would be able to retain if the tax were done away with. Therefore, I cannot see why we are always met with this threadbare argument: "You do not pay; the public do." To-day the West End theatres, after they have paid the Entertainments Duty, the charges of box offices and so on, are only able to retain approximately the same number of pence per seat that they did in 1914, but the cost of production in the intervening years has gone up enormously—in some cases, I am told, by very nearly, if not quite, 100 per cent.

We hear a lot to-day about culture and recreation. We pride ourselves in this country that we can maintain a fairly high standard in all the arts. We do not see fit to devise some special tax to impose on painters, sculptors, writers, doctors, and, incidentally, barristers. Why, then, I ask, should we single out for this unfavourable treatment the members of the profession who are responsible for dramatic art, and who are struggling for their existence? I submit that to do that is not only grossly unfair, but extraordinarily unwise. I understand that, owing to a recent interpretation of the Finance Acts, exemption from Entertainments Duty can be, and is, obtained by some musical productions and theatrical performances. I believe that, in order to obtain that exemption, it is necessary to comply with two conditions, the first being that the entertainment is educational, and the second that it is proved that it is not run for profit. Is it really wise, is it a proper thing to do, to place on the shoulders of a Government Department the decision as to whether some production has an education value or whether it has not? It seems to me to be an entirely wrong thing to do. Grand opera, I believe, is regarded as having a distinct educational value, 'but that form of production happens to come from Germany and from Italy as a rule. But Gilbert and Sullivan, which happens to be a British entertainment, is not, apparently, favoured by being included in that category. Those who have greater knowledge of these matters than myself could no doubt explain the reasons, but I am afraid I have been unable to find them.

I am not suggesting for a moment that grand opera has not an educational value; I believe it has, and that it is a really magnificent form of entertainment. I pay the greatest tribute to it. But the fact remains that that is not necessarily the opinion of everyone. Indeed, I know some men who, when their wives are going to take them to grand opera, seem to look forward to it with no greater relish than a child looks forward to being given a dose of Gregory. To carry the argument a little further, why is it that the wonderful artistic and musical productions that we have seen recently in London by Noel Coward and Ivor Novelle, are not exempted on account of the educational value which I understand they have? The real fact is that the tax should be done away with, because apparently, if a production happens to please some people, it can get exemption, but if it does not it cannot be exempted.

Members of the theatrical profession have always been notable for their willingness at all times to give their services free of charge in the cause of charity. Not only have they done that for the benefit of those members of their own profession who have met with hard times and fallen by the way, but they have done it in innumerable instances for many different good and charitable causes. I apologise to my right hon. and gallant Friend the Financial Secretary for having occupied so much of the Committee's time. I will conclude by saying that I regret very much having had to be a little critical in my remarks, because the present Chancellor has no greater admirer than myself, and I am only too happy to think that the finances of this country are in his strong hands. If he cannot see his way now to abolish the Entertainments Duty on living entertainments, I would beg of him, when he comes to reply in this Debate, to be definite and to give us some assurance that he will abolish it at the earliest opportunity.

9.5 P.m.

Mr. David Adams

I have no doubt that the Chancellor of the Exchequer, having delivered a maiden Budget speech, would have been gratified if the House could have pursued the customary method in the case of maiden speeches and expressed its universal agreement that this was one of the most delightful efforts which had illustrated and adorned the House, and that the more frequently the right hon. Gentleman addressed it on these lines the more gratified the House would be. But it is not the intention of hon. Members, on this side at all events, to pursue that course. As far as his speech was concerned, let me say, as a critic of diction, that the form, the design and the delivery were models for all future Chancellors—who, no doubt, will be mainly Labour Chancellors; but, as for the contents of the speech, the corpus, the real substance, it was, in my judgment, quite unimaginative, relatively commonplace and mediocre, and we find much to dissent from in it. It was admittedly monumental in character, and, for that reason, can we assume that it will be also historical; that the future will not see anything so colossal in the way of financial liability as the present Chancellor has submitted to the House? Unfortunately, he, like the other occupants of the Treasury Bench, was in pessimistic humour, which was certainly very depreciatory of the labours of the Prime Minister, who has been indirectly and inferentially assuring the House that he has the key to that pacification of Europe and the world which will cause entirely new relationships to be created among the great Governments of the world.

The fact is that this is an election Budget. I have not heard that view expressed in the House during this Debate. It would seem almost absurd to make that assertion, because the Chancellor could not have selected any two less popular methods of raising taxation than by an increase in Income Tax and in the Tea Duty, particularly the latter. But the Chancellor is an exceedingly wise Chancellor, and he, no doubt, in association with the Prime Minister, has decided that now, and probably, if they are in office again, next year, they will accentuate the burdens to be borne by the general community, and make them as detestable as possible, in order that a grand contrast may be provided when the Prime Minister at the appropriate moment discloses his method of solving the difficulties under which we and other European countries are labouring in the matter of crushing armament burdens.

If the Prime Minister can secure these agreements with the two principal dictators, and come to the country and say, "This morass in which we are plunged to-day, these colossal and unbearable burdens, can be lightened by the magical wand which I possess, I have the key to the solution of our difficulties," will not the contrast which the Chancellor has provided in this Budget to-day be of overwhelming weight in the judgment of the electors, in inducing them to accept the propositions which the Prime Minister will in due course submit to us? But we on this side believe that, whilst it would not be difficult for a junior Minister to obtain agreements with Messrs. Hitler and Mussolini, it certainly will require armies to enforce them.

My great grievance in regard to this Budget is that it is directly and very quietly intended to be of benefit to capitalist manufacturers. Those who have observed the progress of this Government are bound to agree that it takes up the different capitalist interests in turn and gives them benefactions at the hands of the public Exchequer by subsidies or in other ways, so that they all receive doles without a means test. In this case, we have the same system carefully pursued. I dissent entirely from those manufacturers who have spoken from different parts of the House and have commended the raising of the allowance of the rate of relief from Income Tax for wear and tear of machinery. I see no justification for such a course. We are existing at a time of colossal profits, in the main, throughout the country. The standard of income of these concerns is in many trades—indeed in great areas of trade—higher than it has been before in the history of the country. Is there any justification for a Chancellor of the Exchequer turning his attention, undirected and unapplied to, to these concerns, and saying, Here is an additional grant to you beyond that which you have enjoyed for many years past "?

In 1932, Mr. Philip Snowden, who was then Chancellor, increased this allowance by to per cent. on what it had been in 1930–31. Last year the total amount permitted to be set aside was £125,000,000 sterling. This new allowance will give an additional £11,000,000 sterling, assuming that the total amount has not been exceeded this year; but as there have been a considerable number of industries bringing into use additional plant and machinery, the figure of £125,000,000 is likely to be substantially exceeded. The allowance, based upon the £125,000,000, will be an additional amount of £11,000,000, and the grant given to the manufacturers under this head, with Income Tax at 5s. 6d. in the £, will amount to the sum of £3,030,000. I should like the Chancellor of the Exchequer or the Financial Secretary to the Treasury to give some justification for that grant of £3,000,000 to these well-to-do manufacturers who already receive the benefits of derating at the expense of the general body of taxpayers and ratepayers of the United Kingdom.

What a contrast there is in the treatment of our poorest people, who, the Chancellor of the Exchequer tells us, are swelling with pride at the thought of bearing an additional burden for increased armaments? It is a shocking and a disgraceful contrast? It is to the poor and most needy people in the community that the Chancellor of the Exchequer ought to have turned his attention in his Budget and indicated some way of meeting their troubles. Many of these people are old age pensioners of both sexes who have given to the State great services. They have given of their all: they have given their labour. Their present position is due to the fact that they have not received an adequate return for the services they have rendered to the State. Surely it was the business of the Chancellor of the Exchequer on this occasion, during the amazing prosperity in the great trades of the country, to have made some grant towards alleviating their position instead of taking out of the pockets of these people £3,250,000 in a full year in the tea tax. Then taxation is already in excess, proportionately, of the taxation of the incomes of any other section of the community. They are taxed both indirectly and directly, and there is no relief for them.

Their food and all other commodities have been taxed. As one of these aged veterans observed in my constituency, '` We are now taxed, day in and day out, upon everything we drink, eat and wear, and upon everything that shelters us. I am told that they are proposing that our coffin wood now will be taxed." I wish to know why the Chancellor of the Exchequer did not again turn his attention to the National Defence Contribution. Should it not be augmented? Everyone knows that the contribution was less than the manufacturers and the great profit-makers out of this national expenditure were prepared to make. The figure of £25,000,000 was unanimously assented to as being a very reasonable contribution to the national necessities under that head. Why did not the Chancellor of the Exchequer turn in that direction, where, without inflicting the least hardship upon any living person or industrial concern, he could have received many more millions sterling in the general interests of the community?

The Chancellor of the Exchequer, in my judgment, spent an altogether undue proportion of his valuable time in dealing with the question of Income Tax avoidance. The censure, if there be censure of those who are guilty of tax avoidance, should be placed upon the shoulders of the Board of Inland Revenue. They have permitted tax avoidance by perfectly legal methods, and the obligation should be placed upon their shoulders. The Treasury themselves are substantially to blame in this particular inasmuch as the Board of Inland Revenue issues to its inspectors secret documents upon which they base questions of the payment of Income Tax. I want to know why these documents, which are available to chartered accountants, lawyers and others who prepare the financial statements of industrial concerns, are not made available to the general public, but are treated as secret documents? The result is that many accounts are made up in ways which are in law avoidances.

I should like to see a method adopted which would prevent the export of capital under the conditions which exist at present. In the North of England we had a case in which the principal proprietor of a large shipping concern sold his fleet, declared that he would not pay Income Tax in this country, immediately proceeded to reside in the Channel Islands, and in that way escaped paying British Income Tax. Is that sort of thing to be tolerated after the advantages which such a person had enjoyed for a lifetime under the protection of the State? The free export of such capital ought not to be permitted. If any particular section of the labouring classes of this country desired to live outside the purview of this country, the State could very quickly prevent this. Why should not the same principle apply as far as capital is concerned?

We have had an indication that the taxation of ground values would, in the process of time, not many years, bring in an income to the State of some £500,000,000. No one denies that there has not been a steady rise in ground values. In the City of Newcastle-on-Tyne, with which I am associated, there is a magnificent illustration of the rise in ground values. It has extended over a period of 600 years. It was a grant made for the purpose of establishing a hospital for lepers, with some adjoining fields, in King John's reign. The city archives were able to trace the progress of the growth in the ground values of this charity. In the reign of Elizabeth and the Charleses they were a few shillings or pounds. To-day that charity of the hospital of St. Mary Magdalene is worth many thousands of pounds. It has been the source of the endowment of a grammar school and huge sums are invested in Consols. This increase has ensued owing to the existence and the expenditure of the people of Newcastle. It happens to be a public charity, but the same thing occurs in the private ownership of land. Clearly the hour has struck and passed. We have reached a stage in our history when no Government ought to be permitted by its supporters to avoid tapping this deep well in which there is a huge source of income to the community. There was no necessity to turn to the miserable tax upon the poorest section of the community. It was an act of injustice, hardship and cruelty equal to that which in 1931 placed a burden of 10 per cent. on the income of the poorest section of the community. For that reason we hope that in process of time the Budget will be so amended that it can be described more equitably by its supporters as being a wise, judicious and humane effort on the part of the Chancellor.

9.28 p.m.

Mr. Harold Macmillan

The hon. Member appeared to be trying to persuade the House, by what seemed to be rather a tedious route, that this was a Capitalist Budget. If he can believe that a Capitalist Budget is one that raises another £24,000,000 by direct taxation, he can believe anything. Hon. Members will remember that by long practice before eight o'clock in the morning Alice and the White Queen could believe almost anything. If the hon. Member can persuade himself by a similar practice that this Budget is really intended to benefit the Capitalist class, he can persuade himself of almost any proposition. The Chancellor of the Exchequer told us that he was not going to think only of a single year but, in spite of that, he did not make any broad survey of economic tendencies. His argument was, as one would expect from so great a master of explanation, clear and cogent, but the theme that he presented was somewhat circumscribed and the treatment of it was lucid rather than luminous. He made no attempt, as Chancellors on similar occasions have sometimes done, to give us a general survey of our economic situation, but in the Debate to-day we have had a very broad and interesting treatment of this great question. In almost every speech we have had not a detailed discussion of the propositions in the Budget, but rather a general account of the economic and financial position in which we are, viewed from different aspects.

I should like to add my tribute to the admirable maiden speech of the hon. Member for Hastings (Mr. HelyHutchinson). The hon. Member for Huddersfield (Mr. Mabane) followed in a speech of a general character, and the hon. Member for Ipswich (Mr. Stokes) followed the same theme. It is true that he recalled to the Chancellor some of the echoes of his past in the emphasis that he laid upon the taxation of land values, but that is now a very dim past and, whatever memories it may evoke, certainly this Budget will never be compared with the Budgets of those days and will never be called a people's Budget. The hon. Member for the City of London (Sir A. Anderson) made one of those speeches that we are accustomed to hear from the great pundits of the City. Like Pilate, they ask several questions, and, like Pilate, they do not stay for an answer. He remarked that the acid test of democracy was the capacity to make both ends meet. That observation was made in a more interesting manner many years ago by Micawber about personal matters. I do not regard it as a particularly acid test of democracy. Can anyone tell me of a tyranny which has ever made progress? Is there any dictatorship which is making any attempt to raise a revenue equal to the expenditure? A number of Members, with extraordinary knowledge and clarity which I should be the last to under-rate, have told us that the bill would be quite bearable if we presented the figures in a different way, and that, somehow or other, if we consolidated all the accounts and altered the assets on one side and the profits on the other, things would be much better. We have all heard that before, and one or two Members of both Houses of Parliament have got into considerable difficulties by following it. We cannot juggle with these figures. We had much better face them.

If I may give a brief retrospect, what in fact has happened in recent years? Although rearmament has been proceeding for one or two years, this Budget is the first to confront us with any serious attempt to finance it. The recovery started in 1932. It was promoted by two main changes in our economic system, first by the reversal of the deflationary policy which followed the abandonment of Gold. Secondly, it was assisted by the internal expansion which followed the adoption of Protection. Both those great forces carried us forward upon a stream of recovery during the years which followed their adoption. The national income was increasing and up to the last year or two it was possible to finance the increased expenditure of the nation out of the increasing national income. Out of the natural increase in income there followed a natural increase in revenue, and, although we felt that there were less easy times coming, it is only this year that we have really had to face the issue.

During the past year there has been a check to the expansion of national income, and together with that sympton there has been this immence increase in the national expenditure. The national income is estimated to be something between £4,300,000,000 and £4,500,000,000. The national expenditure, therefore, is taking something between one-fourth and one-fifth of our national income. We are raising in taxation something between one-fourth and one-fifth of our whole national income. That taxation, whether upon land or upon bicycles, whether it be something that we could invent that no one would notice, or whether it be something that everybody would notice and would pay, the fact remains that taxation comes out of this fixed national income, fixed at this moment in the sense that it is ascertainable income.

There are only two ways in which this matter can be dealt with. I am not here to discuss merely the problem upon which sections of the community shall fall the chief burden of raising this revenue, or who is to pay for it out of earnings that may very easily decline as a result of paying it. What we are discussing is whether we have it in our power to do the only thing that has ever in our history enabled us to meet and to confront these problems, and that is, to raise and expand the national income, to increase the wealth and prosperity of this country so that these great burdens which seem so formidable to-day can be shouldered by ourselves or by our successors, without undue difficulties.

Are we to resolve it merely on what I would call the pint-pot principle by saying: "Here there is only one pint in the pot, and we can only divide it into one-fourth or one-half," or are we going to say that the power to produce and to expand lies in our hands; and if we apply our minds and our efforts to it, we can relieve ourselves and meet the obligation which the Chancellor of the Exchequer lays upon us by a new endeavour to raise the productive capacity and the wealth of this great nation? If we follow the first course, then we return to recriminations as to whether we should put the burden on the Income Tax, on the Tea Duty of on the Petrol Duty, and so forth. In taxation as in matters of morals we are very prone to Compound for sins we are inclined to By damning those we have no mind to. We are apt to look with a comparatively lenient eye upon those taxes which least affect us personally; but from whatever point of view we look at it—whether from the point of view of hon. Members above the Gangway on this side, or from the point of view of hon. Members below the Gangway, or from the standpoint of the Members of my own party—we cannot escape the obvious truth that a Budget of this kind imposes great sacrifices upon all classes of people, rich and poor, that we are making huge demands upon all classes of our people, and that with all these sacrifices we are also taking great risks. There are risks to our system of social service and to the prospects of future social reform. I observed in the "Times" to-day this rather sinister statement: One effect of the Budget is that Members now realise that there is no new money in the national till for schemes of social reform, and the result is likely to he a revival of the demand for economy in those services which are not essential to the national existence. We are also taking great risks for the future of the revenue itself, at a period when, during the last year, business has been in a rather wobbly condition. Both the "Manchester Guardian" and the "Times" of to-day reflect the obvious sentiment that—I am quoting from the "Times" leading article: The danger is that the additional burdens which this Budget imposes may accelerate this contraction, which the Treasury should rather have been concerned to counteract in order to increase, or at any rate to maintain, the yield of taxation in future years. In modern conditions and with modern sentiment, obviously the second of the two courses that I propose is the only one which we can take. We have 1,750,000 workers standing idle. We have plant and capital still unused. We have the resources of this country still not working to the full. Are we to sit down here and say that the national income can never be expanded and that this vast burden of £1,000,000,000 a year, which we all agree is likely to be the future Budget, is going to become an increasingly heavy burden, and that we can do nothing to counteract it? The hon. Member for Central Wandsworth (Colonel Nathan) truly observed that the fall in the population itself, unless counteracted by other methods, will impose an additional difficulty upon us.

I do not believe that with the circumstances that I have mentioned, when so many men are unemployed, when plant is unemployed, when effort is unemployed, we should sit down and face the grim choice between guns or butter in this country. The thing is nonsense. Sooner or later the Government will be forced to recognise that the position is not as it was in the Gladstonian days, with a 2d. or a 6d. Income Tax, but that under modern taxation the Government are the chief partners in industry. They take in Income Tax between one-fifth and one-third of the profits of industry. If we take Super-taxable income the Government take up to one-half of the earnings. No one is more vitally interested in the production of profit-making industry than the Government, but it is a sleeping partner and it takes half the profits.

Take the change in our position apart from the increase in Income Tax. Take that part of our revenue which depends on the new tariff system. In the days of Free Trade it was different. To-day we are receiving from Customs, instead of 14 per cent. of our revenue, 23 per cent. Take the effect of economic conditions on our social services when unemployment increases, and note the increased charge that the Chancellor of the Exchequer has to meet. In every aspect of our economic life, in and through the whole problem of the organisation of industry, the Government to-day is in a position wholly different from that which prevailed when the Chancellor of the Exchequer's predecessors of 50 or 60 years ago were at the Treasury. They took a very modest tribute with which to pay the modest, the tiny expenditures of those days. When it was a case of a 2d. or a 6d. Income Tax it did not very much matter how the organisation from which the money was being taken was operated, but to-day the tax takes one-third, one-fifth or one-half of the income and it depends upon the products of the Customs, and the expenditure upon social services depends upon the employment capacity of the country.

Right through the whole national system of industry the State, whether we call it individualism or Socialism I do not care, is a partner with the people, and the State to-day from its own interest has a duty as well as a right to demand effective organisation of commerce and industry in order to produce the results from which the Government may secure its revenue. Therefore I feel that this Budget cannot be merely regarded from the static point of view, that so much money has to be raised. If we are to face the difficult years that lie before us they must be faced from the dynamic point of view. What can we do; what can the Government do to increase the sources of wealth, to make more effec tive its production and more economic its distribution?

I have tried on one of the rare occasions on which I address the House to put some of my views forward as to part of the problem. May I just give one example? We were told the other day—I hope it is true—that the Government which has done so much, I frankly admit it, for the rationalisation and organisation for which I have asked, was now contemplating embarking on the possibility of making more available at better rates some of the most necessary products for the consumption of our people. I refer particularly to milk. I read in the newspapers during the short Recess that the Minister of Agriculture intended to introduce a Bill for the better organisation of the distribution of milk. I observe that it was immediately followed, as these plans are always followed, by a great shout of disgust and horror from those people who thought they might be injuriously affected, and particularly by those newspapers which find it convenient to lead this kind of movement. But is there any justification that the retail price of milk in England should be 26d. per gallon when the cost of one hour's unskilled labour is 13d., and the retail price of milk 26d. per gallon in the United States where the cost of one hour's labour is 33d.? Is there any justification that in Sweden the retail price of milk should be 12d. per gallon, exactly half the English price, while the cost of labour is half as much again as English labour? Is there any reason why the cost of distributing milk in Sweden, with a higher wage level, should be just one-half the cost of distributing milk in England? These are the kind of things I want the Government to do.

I take one more small example in the field of economic enterprise by which we may do two things. We may alleviate the burden which any Budget of this kind puts on the poorest of the people by making more effective the distribution of things which they mainly need; by making their houses cheaper, their food cheaper and all the necessary things of life cheaper, by better organisation. The Government have started with organising the producers, but so far have not ventured on the organisation of distribution. When they do that they will meet with a real result. If we are to start out on this task, the most formidable task the House of Commons has to embark upon, when Members on all sides of the House, Liberals, Conservatives, and Labour, admit that for all practical purposes it is impossible to reduce our Budgets below this enormous figure, when we see that we have to face Budgets of nearly £1,000,000,000 for many years to come, when anyone who studies the mere statistics of our social problems knows that there is a necessarily accumulating charge in many parts of our social services, owing to changes in the character of the population and changes in the age groups, what other solution is there?

How long can we hold up this burden except by making some new effort to face the realities? I think it could be shown that the Roman civilisation failed because of the vast burden of debt and expenditure in proportion to the total production. Many civilisations have fallen because the debt burden, the whole structure of finance and organisation and government, became too heavy. The only thing which keeps it going is production, and whether you organise production under Socialism or individual enterprise, or as I have sometimes tried to indicate under a mixture of the two, all I say is, let it be the Government's task to go still more strongly forward than they have done in the past. They have done a great deal. I do not wish to be thought a complaining critic. I welcome the great reforms which are passing through Parliament, but let the Government go forward and remember that to-day we are not just accountants to write out the figures of the Budget and say all must contribute something to this and something to that, something on tea, and something out of income.

All modern governments to-day, whether of the Right or Left, must be partners in production and they must plan together production and distribution. If we do that we are going to do far more than by making speeches about democracy which we are so fond of making; about the great advantages it has over dictatorships. We shall be proving that in a Parliamentary and democratic system we are able to organise the system of production more effectively than any other system, that we are able to use the powers of science and technique to develop wealth unknown before. In this new world, there is no conflict between government and industry: it is a partner ship between all classes in the nation to achieve the only means by which we can carry these staggering burdens, and that is to make them relatively smaller by a continual expansion of the national economy.

9.54 P.m.

Mr. Morgan Jones

The hon. Member for Stockton-on-Tees (Mr. H. Macmillan) has again delivered a most weighty speech which has interested Members in all parts of the Committee. I sometimes wonder how long it will be before the hon. Member finds his spiritual home. He roams around the home a good deal. The door is open, and whenever he has the courage to cross the threshold I can offer him a warm welcome inside.

Among the subjects dealt with by the Chancellor of the Exchequer there is one upon which I crave the indulgence of the Committee to make a reference at this point. The right hon. Gentleman referred to the fact that last year he promised the House that he would make a public statement twice a year as to the state of the Exchange Equalisation Account, and that further, he would take steps to acquaint the Public Accounts Committee, which is one of the finance Committees of the House, with a detailed statement of the position. I have not the authority of my colleagues on the Public Accounts Committee to commit them, but I do not think I shall be going too far if I say to the right hon. Gentleman that we examined a distinguished witness representing the Treasury this year, that he placed before us a confidential statement which he supported with a verbal statement that was fair, full and frank, that he submitted himself to a cross-examination and I can say that, judging from our experience then, the Chancellor of the Exchequer was justified in making the promise, which he has fulfilled, and I hope that he regards the experiment as having justified its future observance and development.

I will turn now to the Debate which has taken place. My right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence), in opening the Debate this afternoon, said that he could not avoid making a reference to the events of 1931. I think it is a fact which we must not forget that exactly seven years ago the May Committee was in process of re- viewing our national expenditure at that time. As a result of its review in private, it produced a document which scared the nation. I think I am entitled also to add that that document, and the Press and platform campaign which followed its publication, did untold damage to the financial situation of the country, however bad it was at that time. In the light of the present situation, as disclosed by the Budget statement yesterday, we are now able to see what a shameless campaign was conducted in 1931. Two propositions were emphasised, were indeed shouted from the housetops, during that campaign. One of them was that we were spending at the rate of £1,000,000 a week in order to aid the unemployed. The figures disclosed by the Chancellor yesterday show that we are spending nearly £1,000,000 a day on armaments. In 1931, it was a ruinous procedure to spend £1,000,000 a week on the unemployed; in 1938, it is statesmanship to spend £1,000,000 a day on armaments. The May Committee, on page 15 of its report, also called attention to the fact that we had a deficit of £120,000,000. It said: If, in regard to other items of revenue, we make the fairly optimistic assumption that receipts in 1932 will in the aggregate equal the Budget Estimates of 1931, we are left with the position that to produce a properly balanced Budget in 1932, including the usual provision for the redemption of debt a deficiency of the sum of £119,000,000, say £120,000,000, has to be made good by fresh taxation or by economy, apart from any further liabilities that may be incurred under pending legislation. There was included a provision for redemption of debt, which was about £55,000,000. The actual deficit was from £65,000,000 to £70,000,000. That was enough to cause a scare in 1931. Yesterday the Chancellor of the Exchequer informed the Committee that he has a deficit this year of £120,000,000, and he proposes to meet £90,000,000 of it by borrowing and the other £30,000,000 by way of taxation. Then he tells us that that is not by any means the end of the story, for he says there are further Supplementary Estimates to be anticipated this year and that we have not yet reached the peak, that we may not meet it even next year, and that it may be the year after. The situation as we now find it, compared with the situation as it was in 1931, when we were supposed to be pursuing so ruinous a policy, is indeed one which provides us with food for re Election. Let me add that in the present Budget there is no provision for redemption of debt, whereas in our Budget there was such a provision. In 1931, we had a National Debt of some £7,500,000,000. We are now contemplating a debt of something between £9,000,000,000 and £10,000,000,000. It stands now at £8,000,000,000; we have committed ourselves to expenditure of £1,500,000,000, and we shall be lucky if we keep below £2,000,000,000, without talking of the possible further expenditure which the right hon. Gentleman adumbrated yesterday. Yet no one has raised the cry of ruin.

Sir Arthur Salter

The hon. Gentleman said that we are contemplating expending £1,500,000,000, possibly rising to £2,000,000,000, as though that were an addition to our National Debt. Surely, whatever may be the unknown possibilities of the future, that is not the present position. That amount is not to be added to the debt.

Mr. Jones

That is so. I think that if I put the figure at £9,000,000,000 rather than £10,000,000,000, I shall not be very far wrong in the end. In 1931, we provided £360,000,000 for National Debt services, and in that £360,000,000 we provided something like £27,250,000 for the American debt and £66,800,000 for the Sinking Fund. This year, the Chancellor is called upon to provide not£360,000,000 but £230,000,000; there is no Sinking Fund, and of course, there is no provision for the American debt. By now the American debt has become a sort of King Charles's head in our annual Debates. The hon. Member for Huddersfield (Mr. Mabane) seems to be amused by my reference to this matter, but I trust that he will forgive me, as I trust the Chancellor will forgive me, if I make a reference to it. I had the privilege of travelling in America for some three months before the end of last year. I am not arguing now the question of paying these debts, I would like to see all of them wiped out—but I will tell the Chancellor, on my own behalf, that I consider that our failure to arrive at a satisfactory settlement, by agreement between our Government and the American Government, militates to a considerable degree against a cordial understanding between the American people and ourselves. They may have wrong ideas about it. They may make erroneous deductions concerning the situation, but I am satisfied that their feeling about the matter, whether it be justified or not, does make it difficult for us to realise that rapprochementbetween American opinion and our own which we all desire.

I have drawn a sketchy contrast between the position in 1930–31 and the present position. I see no sign of crisis to-day. I hear as yet no cries of alarm. No May Committee is proposed. There is no Press campaign against the Government's ruinous expenditure. There are no recriminations against the spendthrifts. Indeed hon. Gentlemen opposite are obligingly acquiescent. I remember Viscount Home—Sir Robert Home as he then was--standing in his place in the 1931 Parliament, denouncing the late Labour Government for having spent money upon public works and saying that we could not afford it. But when the present Government announced the Defence Loan Lord Home said that we could take it in our stride. It is curious how different can be the attitude of mind of certain people, when they appreciate the purposes for which public money is being mortgaged.

Mr. Beverley Baxter

Hear, hear. Quite right.

Mr. Jones

If my hon. Friend thinks it is all right, I accept that from him. If he thinks it is better to spend hundreds of millions upon armaments, which, if no war comes, will be worth just the price of scrap iron, and nothing more—if he prefers that, to spending money, as we did from 1929 to 1931, on public works for keeping our unemployed people alive, very well, I leave the choice to him, but I prefer the second alternative.

I ventured last year to say that we were within sight of the £1,000,000,000 Budget. We have it this year. The hon. Member for Hastings (Mr. HelyHutchinson), in a most excellent speech, expressed the opinion that such Budgets have come to stay. I am inclined to agree with him. Whatever happens, even if the armaments expenditure comes to an end very speedily, as we all hope, I believe it probable that we shall not be able to bring our Budget provision below the £1,000,000,000 mark for some years to come. Let us examine these astronomical figures. The Chancellor last night in his broadcast which was a particularly lucid one, said he was expected to provide this year something like £1,034,000,000. How is this sum made up? Interest and management of debt represent £230,000,000; Supply Services, £253,000,000; Defence Loan, £90,000,000; War Pensions, £39,500,000; Air-Raid Precautions, £3,500,000. If these five items are added together they make £616,000,000 out of the £1,034,000,000. Therefore, of that huge sum, six-tenths is attributable to expenditure in respect either of past wars or preparations for future wars. No less than 12s. out of every pound is for smoke and powder—for war purposes, past or prospective.

Nor is that all. As I said before, the right hon. Gentleman has warned us that there may be Supplementary Estimates this year. We do not know how much they will be. They will probably be at least £10,000,000, and they may be more. We have not yet reached the peak of this expenditure. We may reach it next year or the year after. Who knows? There is no provision for redemption of debt. The right hon. Gentleman will forgive me for saying that this is the colossal price we are paying for the foreign policy which he initiated in 1931. I like the right hon. Gentleman very much in regard to many things, but he will allow me to say that I look upon him as an expensive luxury at half that price. You cannot, we are told in the Old Book, gather grapes from thorns nor figs from thistles. This is the result of the international policy which the Government have followed since 1931. They tell us they are keen on pacification. The old English king who paid Danegelt thought, I suppose, he was pacifying the aggressor in that way. But the Danes came again, and so will the dictators whom the Government are trying to pacify.

If you paid the Danegelt out of your own resources there might be something to be said for it, but in this case you are not doing so. You are abandoning China to Japan. You have abandoned Abyssinia to Italy. You are abandoning Spain to Germany and Italy. You are paying Danegelt out of other people's resources, and I think you will find in the end that your policy of pacification is less fruitful than you now seem to believe.

And do the Government themselves really believe in it? What does all this armament expenditure mean, except that the Government still have a feeling of insecurity in spite of their pacification policy?

Let me carry my contrast with 1931 a little further and see how we have found some of this money. In 1931 we extracted £121,000,000 out of Customs; in 1931–32, £135,000,000; and in 1938–39, £228,000,000; that is to say, we have added over £100,000,00o to the tribute which we are extracting from consumers in this country. I believe it was my hon. Friend the Member for Clay Cross (Mr. Ridley) who addressed himself to the question of the maladjustment of direct as compared with indirect taxation, a subject on which I have spoken on previous Budgets. I am satisfied that the trend of Government policy has had the effect of adding steadily to the proportion of indirect taxation and relatively of decreasing direct taxation. Hon. Members have pleaded year after year that the Income Tax is becoming exceedingly heavy—and, of course, it is; I do not deny it—and that the incidence of the tax is becoming so onerous as to be almost impossible to bear. But I think they must keep clearly in mind too that the degree of remission of taxation through the medium of allowances by the Treasury has in the last 10 years tended steadily to increase, and while hon. Members keep on referring to the figure of 5s. or 5s. 6d. in the £ as the Income Tax, I submit that it is a little erroneous merely to cite that fact by itself as an indication of the incidence of direct taxation.

A much fairer way of testing it would be to estimate what the incidence of taxation is, spread over the whole income, after the allowances have been deducted, and hon. Members will perhaps be surprised if I tell them that if we take the year 1932–33, the average effective rate of tax in the £ was 23.45d., but that in 1935–36 the average effective rate had dropped to 20.3d., largely because of the changes that had come about in the allowances given from time to time. I therefore submit to hon. Members that actually, although the Chancellor of the Exchequer yesterday proposed to raise the Income Tax by 6d. in the £, and nominally it will go up on most Income Tax payer to 5s. 6d. in the £, when they have deducted the allowances they will find that it still remains, spread over the actual income, well below 2s. in the £. For that reason I welcome very much the Chancellor's decision to adhere to taxation in respect of this £30,000,000 rather than to resort to borrowing. As a matter of fact, I think this is true too, that the Income Tax figures show that the incomes subject to taxation have returned now to the pre-slump figure, and, therefore, I think it is fair to deduce that the Income Tax payer can bear this extra 6d. without any necessity to apprehend undue injury.

On the other hand, I cannot agree that the Chancellor of the Exchequer was justified in imposing some of the taxes which he has imposed. I refer particularly to the additional duty on tea. The proportion of indirect taxation is already unduly large; and there are many employed and unemployed in receipt of very low incomes. May I emphasise that point for a minute? I know that the Ministry of Labour Gazette shows that the aggregate wages are substantially up, but I would remind hon. Gentlemen that there are large numbers of workers who are receiving very low incomes indeed and, therefore, cannot bear this extra burden upon their tea. I would urge, further, that there are other and better ways open. The Death Duties might very well have been increased. They remain almost constantly round about £80,000,000 a year. A non-party deputation went to the late Chancellor to urge upon him the possibility of a tax upon patent medicines. They anticipated that it would produce something like£3,000,000 in a full year. That is another form of tax which could have avoided this additional 2d. on tea. Lastly, there is a form of taxation about which the right hon. Gentleman has spoken so much, namely, the taxation of land values.

I am not sure that I agree with the claim made for an extra remission in respect of wear and tear of machinery. The figures show that this remission has gone up in the last 10 years from £70,000,000 to £120,000,000 a year. That is pretty substantial, and I very much, doubt whether the Chancellor is wholly justified in urging this further remission at this particular moment, especially as so large a number of those who will benefit from it will be making substantial profits through the armaments campaign. I missed from the Chancellor's speech yesterday a review, which we might have had from him, of our industrial prospects. He ought to have given that yesterday because, as speeches in the Committee to-day have disclosed, all of us are apprehensive about the future. There was a slight oblique reference in the Chancellor's speech which will repay examination: Judging by this experience and especially in view of the knowledge of my advisers as to how the year has worked itself out it would appear that the first six months of the year were more prosperous than the second six months, though the latter were still good, and this is a trend which must be noted in forecasting the immediate future."— [OFFICIAL REPORT, 26th April, 1938; col. 46, Vol. 335.] I do not read more into it than the Chancellor said, but there it is. It does indicate that he, perhaps more than most of ns, has to watch this tendency very closely. All of us are apprehensive, and if we look at the returns supplied to us yesterday we see a simple little fact. I read nothing into it, I state only the fact: there were £5,000,000 worth more Saving Certificates paid out last year than were bought. That may be a mere accident, but for me the fact has some significance.

In addition to that, though we are told that we are on a wave of prosperity we have 1,750,000 unemployed. We have got this prosperity—and for such as it is, let us all be grateful—but it has been occasioned by three causes which we cannot repeat. First, we have gone off gold; secondly. we have gone over to Protection; thirdly, we have rearmament. Those are three trump cards which we cannot play again. When we have exhausted the benefits of rearmament in two or three years from now, will the Government tell us what they propose to do to meet that grim and forbidding future that lies ahead of us? The late Chancellor of the Exchequer once introduced a Budget and said, "We have left Bleak House; we are now realising Great Expectations." The truth to-night is that we have abandoned our Great Expectations and are back again in Bleak House, and a ramshackle sort of place it is. I wonder how long even that sort of shelter will be afforded to us when the storms of industrial adversity beat around our homesteads.

The hon. Member for Huddersfield (Mr. Mabane) propounded a proposition to us; I was glad to hear him do it, and I hope that he will keep on propounding it to himself. The question he asked was: "In the forbidding time that lies ahead can we expect the present economic system to see us through?" I think that is a fair rendering of his point. The answer from this side of the Committee is quite explicit. It cannot see us through. We on this side believe that the system is slowly but inevitably crumbling under the pressure of facts and of conditions. We shall have to build a new economic structure on firmer foundations.

The Chancellor of the Exchequer reminded me yesterday very strongly of Charles Dickens' "Christmas Carol," in which Ebenezer Scrooge was confronted by the ghost of Jacob Marley. Ebenezer Scrooge sat in his counting-house turning over the leaves of his ledger when Marley appeared. It was the Marley of 1931, our Foreign Secretary of 1931, which was appearing to the Chancellor. The right hon. Gentleman said of the League of Nations, "It is humbug." [Interruption.] No, he does not say so in words, but his attitude has implied it from the very beginning.

The Chancellor of the Exchequer (Sir John Simon)

I know the hon. Member would not intentionally misrepresent me, but if he should happen to repeat that remark outside I hope he will make it quite plain that I never said anything of the sort.

Mr. Jones

I made it quite plain here. I will repeat it as it ought to be. Ever since 1931 the right hon. Gentleman has implied that he regards the League of Nations and its machinery as "humbug "—as Ebenezer Scrooge said. He is the Scrooge of foreign politics. So we have the bill, which is the consummation in terms of money of the treachery which the right hon. Gentleman and his colleagues have shown towards the business of pacification through the League since 1931. This is an indication of the failure of the Government's policy, and future generations will have to pay dearly. The old Scrooge could make amends, but the right hon. Gentleman can make no amends at all. Future society will have to pay dearly, and is already being called upon to pay, for the blunders of foreign policy since 1931.

10.31 p.m.

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

My right hon. Friend the Chancellor of the Exchequer has good cause to be pleased with today's discussion. I have seldom heard a full day's discussion of a Budget when there has been less criticism than there has been to-day of the central proposals of the Budget, and the hon. Member for Caerphilly (Mr. Morgan Jones) has not managed to make our flesh creep with his final ghost story. I am glad first of all to make a reference to the hon. Member's courteous acknowledgment of the fulfilment of the promise made by my right hon. Friend to give what information he could to the Public Accounts Committee in relation to the Exchange Equalisation Fund. The hon. Gentleman performs a very valuable service as chairman of that Committee and his acknowledgment in this regard is appreciated. I am glad to be able to say that, because I now part company with him.

The hon. Member and his right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) contrasted the present position with that of 1931, and were at great pains to ask why to-day there is no panic and no apprehension—I think that was actually the phrase which the hon. Member used. They sought to prove that 1931 was a less unbalanced year than 1938, and that there should not have been trouble in 1931 if there is none now. But there was trouble in 1931. Why? The answer seems to be that in 1931 there was a lack of confidence in the Government of the day, shown not only in this country but in every country abroad. That confidence is present with us to-day. In fact, our problem has not been to stop foreign money from going out of this country as was the case in 1931, but rather the reverse, because abroad this country is now regarded as the safest place to which to send money. When the hon. Member asked so blandly and simply why there is no panic or apprehension to-day, I think that the answer which I have given is sufficient.

The hon. Member also proceeded to say that in his view and in the view of his colleagues the whole of our rearmament expenditure—I think he was almost ready to go further and to say the whole of our armament expenditure—

Mr. Morgan Jones

indicated dissent.

Lieut.-Colonel Colville

Very well, I will say the whole of our rearmament expenditure—was due to the foreign policy of the National Government. The right hon. Gentleman the Member for East Edinburgh was a little more frank about it. Perhaps the remark slipped out unintentionally, but he said that in 1931 there was an emergency equally brought about by the international situation. I think that the right hon. Gentleman and his friends frequently claimed, not always with success, that everything that happened adversely at that time, was due to an international situation over which they had no control at all. If the hon. Gentleman and his Friends say that the rearmament expenditure is directly due to the foreign policy of the National Government, while I think that in this Debate, in which I propose to deal with financial matters, it would not be right to argue that question, I would point out that there is a complete cleavage of opinion upon it between the hon. Member and ourselves. I know that he will entirely disagree with what I say, but it is my opinion, and the opinion of many outside the House. If we had listened to the advice of the Labour party on foreign policy in the last few years, we should have run a very great risk of being already at war with three major Powers, and that at a time when the Labour party were voting against the Defence Estimates, and were, therefore, not prepared to give us adequate armaments with which to carry out such hostilities. The very fact that the hon. Member disagrees with what I have said shows that there is that cleavage of opinion. I will leave it there for the present, but I believe that the view I am expressing is held by the majority of people in this country.

The hon. Member for Caerphilly and the hon. Member for Clay Cross (Mr. Ridley) spoke of the incidence of indirect taxation. People sometimes speak as though indirect taxation were borne entirely by the less well-to-do section of the community. I do not say that the hon. Member says that, but I have frequently heard it said in this House and on platforms outside. It is far from being true, however. Indirect taxation is of course borne to a large extent by the majority of the population, but rich as well as poor smoke, drink, and go to entertainments, and they use petrol for motor cars; and some portion of the indirect taxation is borne by British or foreign manufacturers who do not pass it on. It is of interest to see that the proportion of the estimated revenue under the Budget proposals which will come from direct taxation is just over 63 per cent., and the proportion which will come from indirect taxation just under 37 per cent. The percentage of direct taxation is higher than it was last year, when it was 60.8 which in itself was higher than the percentages in the two preceding years. In 1936–37 the percentage was 59.7, and in the previous year 59.6. The figures, therefore, show that the tendency which was marked in certain years earlier than that has been reversed, and it appears from the figures I have given, and certainly from the figures resulting from the proposals of my right hon. Friend, that the tendency is towards direct taxation and away from indirect taxation. It is of great interest to note that in the year 1913–14 the percentage of direct taxation was actually lower, namely, 57.5.

I am not able to deal with all the points that have been raised, but I hope to deal with a number of them before making some general observations on the Budget statement. The right hon. Gentleman the Member for East Edinburgh raised a number of interesting points. He spoke of the tax avoidance proposals as being inadequate. I hope, however, that he will scrutinise them closely, and I think that, when we come to deal with them on the actual Resolutions and in Committee on the Bill, he will be convinced that they are much more far-reaching than he at present imagines. We believe that they have been wisely conceived to stop up gaps, and that they will be effective. Opportunities for closer discussion of them will come later. The very point that the right hon. Gentleman made about income being turned into capital and therefore used without taxation, is, I believe, effectively met.

The right hon. Gentleman the Member for Caithness (Sir A. Sinclair) opened with warm congratulations to my right hon. Friend, and, indeed, there were very few of the speeches to-day that did not congratulate him. It is a rather remark able fact that, with a Budget which imposes heavy additional taxation, that should be so. The right hon. Member recognises that it is wise and necessary, and that we must be resigned to having to bear these burdens. But he made certain observations in addition to his congratulations. He described this as an austere and honest Budget; and then he went on to speak of the need for economy. I could hardly believe my ears, because, as Financial Secretary for the last year and a half and in other capacities before that, I have watched the part played by the right hon. Gentleman and his party when we have been urged to undertake additional expenditure. On what are we to economise? I think that question was put to the right hon. Gentleman very clearly by the hon. Member for Hastings (Mr. Hely-Hutchinson), to whose speech I shall refer in a moment. Perhaps the right hon. Gentleman will tell me on what he wishes to economise.

Sir A. Sinclair

Certainly. On waste and on bureaucratic and Departmental expenditure. I stated that clearly in my speech.

Lieut.-Colonel Colville

What waste and bureaucratic expenditure?

Sir A. Sinclair

Waste in armament expenditure, for instance.

Lieut.-Colonel Colville

I think the right hon. Gentleman would find it difficult to close so great a gap as £30,000, 000.

Sir A. Sinclair

I did not say you could.

Lieut.-Colonel Colville

I have on a number of occasions stood at this Box and dealt with expenditure on various services, but I cannot recollect an occasion when the right hon. Gentleman has supported us in the direction of economy.

Sir Percy Harris

Subsidies.

Lieut.-Colonel Colville

I have looked that up, too. I find there are occasions when the party has abstained from voting, and occasions when they have voted in different Lobbies at the same time, but I cannot find any case of active support for economy, which has bulked so largely in the right hon. Gentleman's speech to-day.

Sir A. Sinclair

We actually on one occasion moved an Amendment in favour of the adoption of the recommendations of the Royal Commission on the Private Manufacture of and Trading in Arms, which would have stopped waste in armaments expenditure.

Lieut.-Colonel Colville

On one occasion I remember the hon. and gallant Member for Thanet (Captain Balfour) moved a Motion which very clearly brought the House up against the question of national expenditure. The right hon. Gentleman's party voted against it. The right hon. Gentleman has made certain other proposals. He spoke about Surtax and Death Duties, but, on the advice before us, the method we propose is better than that which he has suggested. The only other contributions from the party of the right hon. Gentleman in this Debate have been attempts twice to count the House out. I do not know if that was a party matter or an individual matter.

Sir A. Sinclair

Freedom of action.

Mr. McGovern

Agreement to disagree.

Lieut.-Colonel Colville

The hon. Member for Hastings, whose speech has been highly complimented on all sides—and it was really a most interesting speech—said he came into the House with the old-fashioned notion of defending the interests of the taxpayer. I hope he will cling to that old-fashioned notion, and that we shall often hear him on that and other matters. His historical review of the growth of public expenditure deserves very close consideration, and I hope those who did not hear it will read it to-morrow. The hon. Member for North Tottenham (Mr. R. C. Morrison) was among the small minority who disapproved of my right hon. Friend's proposals. He made one point which I should like to answer. He said that the Government were endeavouring in their policy of negotiation to obtain a better understanding between European nations, but, at the same time, they were proceeding with their rearmament programme. We hold at this stage that it is clearly right to show no slackening whatever in our Defence programme. We negotiate in no weaker condition by doing this at the present time. The hon. Member for Huddersfield (Mr. Mabane) made several points, all of which I cannot answer to-night, but he spoke of the growing practice of using Supply days in Parliament for general Debates rather than for a minute examination of details. He will understand that I cannot put that right, but I hope that his words will be listened to, because it might be valuable if we had from time to time a closer examination instead of spending the day entirely on general subjects.

The hon. Gentleman the Member for Ipswich (Mr. Stokes), whom I do not see in his place, raised a question relating to the profits on armaments, and I was not quite clear whether the hon. Member was referring to the rate of profit on turnover or on the capital employed. I think it was the latter. In that connection it is wrong to assume that, because an individual company may pay a dividend of, say, 20 per cent. on its ordinary shares, the profit earned on the total capital employed in that business is at anything approaching that rate; nor is it fair to assume that, because a particular company which has Government contracts pays a high dividend, a higher rate of profit has necessarily been earned on Government contracts than on other contracts which the company is carrying out. The question of what is fair and reasonable profit must be determined, having regard to the facts of each case, and it is impossible to prescribe a uniform rate applicable to all contracts. But all the information at the disposal of the Government, based upon particulars obtained through costing large numbers of contracts, goes to show the rate of profits earned on Government contracts to be considerably lower than the figures which have been quoted. I can only say at this stage that the Government are fully alive to the importance of the subject.

My hon. Friend the Member for South Kensington (Sir W. Davison) was among the few who said that it would be better to borrow than to increase taxation. The general consensus of opinion in the House was that my right hon. Friend had chosen the wiser course. There were several other points raised by hon. Members, but I shall have to leave them, because I must make a general statement. I hope to deal with these points in the many Debates which we shall have before we dispose of the proposals arising out of the Budget statement.

A good deal has been said about the burden of the Tea Duty. I would emphasise that the average consumption per head of the population per year is about 9¼ to 9½ lbs., and, with the addition of 2d. a pound, assuming that it is wholly passed on to the consumer, the average individual will have about 1s. 6d. extra to pay in the year. The addition in the case of a family of four or five persons will be from 6s. 8d. to 8s. 4d. a year, that is to say, less than 2d. per week. I do not maintain that that is no burden at all, but, having regard to all the circumstances of the case and the expenditure which we have to meet, it is not an unfair or an excessive burden. The new rate of duty of 8d. per lb. on foreign tea and 6d. per lb. on Empire tea—and it must be remembered that Empire tea forms by far the larger part—is not the highest rate which has ever been imposed. Looking back over the long years between the reign of Queen Elizabeth and the Chancellorship of the right hon. Gentleman the Member for Epping (Mr. Churchill)—and the tax ran continuously during that long period—I noticed that a rate of 8d. per lb. on both foreign and Empire tea was imposed in 1904, and again under the Liberal Government in 1914 on both Empire and foreign tea, and, of course, during the War it was higher still, and it still stood at 8d. on foreign tea, with a smaller preference than at present for Empire tea, in 1922 and 1923. It is therefore wrong to suppose that the present rate is higher than it has ever been before. It has on several occasions been higher,

It is also wrong to suppose that there has been a steady upward curve in the cost of living. Actually it has shown a drop in the last month or two. At present the index figure is 154. The Government's tariff policy has not had the damaging effect on the cost of living which some critics feared. In the years immediately preceding the slump years, when the tariff policy was not operating, the figure in 1928 was 164, in 1929 it was 162 and in 1930 it was 157. I have taken April of each year.

Mr. George Griffiths

What was it in April, 1934?

Lieut.-Colonel Colville

Of course, it has risen from that date, but it has been falling in the last month or two.

Mr. Griffiths

Was it not 138—an increase of 16 points?

Lieut.-Colonel Colville

Yes, but it is lower than it was in April, 1930, when the hon. Member's Government was in Office. With regard to the other indirect taxes, I should like to point out that the additional Oil Duty does not apply to oil produced in this country. Oil from Scottish shale or British coal or petroleum wells, if they should be operated, is free of all duty. Home-produced oils will thus enjoy a larger preference than formerly. That is in line with the policy of the Government, which has given considerable help to the production of oil from shale in Scotland and is encouraging experimental work in producing more oil from coal.

My right hon. Friend had a big question to decide, whether to tax or to borrow in order to bridge the deficit. The balance that he has struck between taxation and borrowing has met with very little real criticism. There has been some criticism from the Labour party, which would apparently meet the whole of the Defence expenditure from taxation, but I think most people will agree that it is right to pass on to posterity some portion of the expenditure which is designed, by making up for lost time, to make posterity safe. The Labour party do not deny that Defence expenditure on the present scale is necessary, and the effect of their policy would be that, not merely the £30,000,000 which we have to meet by increased taxation, but the £90,000,000 of borrowed money, would also have to be met out of taxation. I do not believe that the country would agree with the imposition of sufficient new taxation to secure that amount of money. The other angle of criticism—and very few hon. Members have put it forward—is that the Chancellor ought to have met the additional expenditure by loan. He has rejected this course for reasons which will appear, I think, more and more forcible the more they are studied. We must not lightheartedly pass on all the burden to posterity. We must bear a fair share of it. We must not let the world think that we of this generation are shirking the task that we have set ourselves. It is essential that we should keep our credit high. I think the majority of thinking people who have reflected upon the statement made by my right hon. Friend have already come to the view that he has chosen the wise course.

I recollect the many Debates we have had during the past year and a large proportion of them, and also a large number of questions at Question Time, have been devoted to rearmament and foreign policy. Strong pressure from various quarters of the House has been put upon us, especially from hon. Members opposite, to adopt a firm line in foreign policy when dealing with the authoritarian States, and general anxiety has been shown from all sides that the rearmament programme should be speeded up. How, then, can it come as a surprise if more expenditure is necessary in these circumstances?

We are urged to show firmness. Let it be remembered that firmness can be shown in more ways than one. The hon. Member opposite says that we have not shown it. I can conceive of no way in which this country could more clearly show resolution than by the courageous shouldering of the financial burdens which our Defence entails. It can be said without fear of contradiction that the world realises that our arms are intended for Defence and not for aggression. The manifestation of our inflexible resolve to defend our rights and liberties, so far from having a disturbing effect abroad is regarded by the lovers of peace in every land as a great factor contributing towards world peace. But rearmament alone is not enough. We readily agree that that is so. It is coupled with, and must be coupled with, the policy of seeking economic and political appeasement, a sphere in which, I believe, the Prime Minister's name will become as famous as it has already become in the realm of finance. Economically, we have made great contributions to world recovery. We are by far the largest buyers in the world. The raw materials from our Empire are available without let or hindrance for all countries, provided only that they can pay for them; while the soundness of our financial structure is an essential feature in the preservation and enlargement of world trade.

It is said that in these days democracy is on trial. Personally, I am inclined to doubt that. Other forms of government have yet to show that they can provide the same lasting benefits for their peoples as a wisely governed democracy. But if there is such a challenge, we readily take it up, for we can show that in the provision of security, well-being and freedom there are few countries which can compare with this old democracy. But the very foundation of that well-being must be sound finance, and it is for that reason that I believe the country will accept my right hon. Friend's proposals as wise and statesmanlike. This House, which fairly represents the feelings of the people of the country, has asked for proof of firmness and resolution. It is here in this Budget.

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.