HC Deb 03 May 1960 vol 622 cc889-1042

Order for Second Reading read.

3.38 p.m.

The Chancellor of the Exchequer (Mr. Derick Heathcoat Amory)

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

As hon. Members know, we have been enjoying a very satisfactory economic expansion during the past eighteen months, with price stability. The object of the fiscal measures which have been proposed in the Budget and of the monetary steps taken last week is to enable that expansion to continue at the highest rate which can be maintained with safety to price stability and to our balance of payments. Furthermore, we have always to bear in mind the need to leave room in our economy for a high level of productive investment in industry, on which our future prosperity so largely depends. I believe that the series of measures which I have introduced are best fitted to achieve the objectives which I have just described.

As my colleagues and I made clear during the Budget debate, the Government regard a combination of monetary and fiscal measures as likely to be more effective than reliance on one single type of measure only. During recent months the Bank Rate has been raised by 1 per cent. I have introduced a Budget designed to exercise a moderate restraint on demand and these earlier measures will now be reinforced by the restrictions on credit which I announced to the House last week. The initial call for special deposits was deliberately made a moderate one. It is of the essence of monetary measures that they should be applied in a flexible manner. We want smooth adjustments and not violent shock action.

I have, of course, noticed one or two criticisms which have been directed in some quarters at the hire-purchase controls, but criticisms have, in fact, been extremely few. I do not believe that it would have been right to have taken no action at all in that part of the credit field, especially in view of my concern to exert some restraint on current consumer demand in order to avoid the need to cut at the roots of our future earning capacity. The measures which I have just described will affect demand in the private sector of the economy. I can assure the House that the Government are not neglecting the importance of applying the same more rigorous standards to the public sector as well, especially when they are considering proposals for further new increases in Government expenditure.

We have before us a somewhat substantial Bill and, because of the complexity of the subjects covered, the phraseology may be in some places less than translucently clear at first glance to the layman. One or two Clauses I think may even seem slightly opaque at first sight. I want to deal particularly with certain points on which hon. Members have expressed interest and concern during the Budget debates. I hope that I shall be forgiven, therefore, if I make only the briefest reference to some of the simpler and less contentious Clauses.

I shall begin with the Clauses which relate to Customs and Excise. Clauses 1 and 2 together provide for the reduction in the wine duties. As I explained in my Budget Statement, this step was designed mainly to meet the Portuguese request in the negotiations for the European Free Trade Association for some help with their traditional exports of heavy wine to this country. It had the advantage of completing the reform of the duty structure which was begun in 1958.

Clause 4 provides for the abolition of the remainder of the Entertainments Duty charged on admissions to cinemas and public television shows. I think I can say that this change has been welcomed on both sides of the House. The increases in Tobacco Duty and drawback are contained in Clause 5. Hon. Members opposite have voiced some criticism of this provision. I shall only say that, although no tax increases are ever welcome, this one seems to involve less avoidable hardship than any other by which I could have raised a similar amount of revenue.

Clause 9 enables the Commissioners of Customs and Excise to make regulations introducing a more efficient system for detecting the misuse of duty from heavy oil used as fuel for road vehicles by adding a dye to it. This new system of control will in due course enable users of dutiable heavy oil to be relieved of their existing necessary but tiresome obligation to maintain record of mileage and of their fuel purchases. I think that that is a useful step.

I now come to the Clauses dealing with Inland Revenue matters. Clause 13 bears witness to the important constitutional point that Income Tax is an annual tax. Clause 15 gives effect to my proposal, which received a general welcome, to introduce a new relief for widows and widowers with a child or children eligible for child allowance, but with no resident housekeeper. The Clause is framed so as to make the allowances available also to certain classes of single taxpayers who are responsible for young children and who have no housekeeper, but would qualify for the housekeeper allowance if, in fact, they had a housekeeper.

Clause 16 carries out my other proposal in the personal allowance field by making an increase of £15 in the amount of housekeeper and dependent relative allowances. Clause 17 meets the situation which will be created when the graduated contributions begin to be payable under the National Insurance Scheme. These graduated contributions could not be handled under the pay-as-you-earn procedure without grave risk of the machine breaking down. As a practical matter it seems that a flat-rate allowance is inevitable. I should much have preferred to have avoided this, but there seems to be no practical alternative.

I now come to Clause 18. In my Budget statement I said that I proposed that relief in respect of farming losses, or, indeed, of any other trading losses, should be restricted to activities conducted on reasonably commercial lines and that I did not believe that this proposal would adversely affect genuine farming at all. The wording I have proposed, on consideration, to adopt in the Bill is that recommended by the Royal Commission, namely, that the activities should be carried out on a commercial basis and with a view to the realisation of profits. The Royal Commission intended that its wording should put out of court claims in respect of farming activities which can be seen clearly to lack commercial inspiration and to be nothing more than hobbies or private amenities. I have no desire to go one inch beyond that object.

Mr. Douglas Houghton (Sowerby)

Does the Chancellor also recall that the Royal Commission said that it did not think that its proposal would make much difference?

Mr. Amory

Yes, the Commission said that it did not consider that it would make a great deal of difference, but, as the hon. Member will remember, it went on to say that, even so, it thought that this was an instrument which should be used by the Revenue to prevent really excessive loss cases where there was no relation to commercial practice whatever. If the hon. Member read the whole of the statement, I think he would agree that that is what the Royal Commission said. The words we have chosen mean that the Clause does not affect in any way loss claims under Section 341 by occupiers of woodlands. They will remain exactly as they were before this Bill.

Farmers who incur temporary losses while establishing an enterprise, building up a herd, bringing back land into fertility or improving it, should be in no danger provided that the enterprise in which they are engaged is one that can be regarded as likely in due course to become an economic undertaking. This interpretation will provide reasonable scope for technical experiments and research in the course of such operations. We must remember that all the financial and other assistance provided under the auspices of the Ministry of Agriculture is designed to see that our limited area of land should be farmed productively, efficiently and economically.

As I said in my Budget statement, I share the view that many of those with other occupations who run farms and market gardens bring great benefit to agriculture with new ideas and new methods. I do not want to discourage such genuine efforts in any way whatever. The cases we are concerned with are of a kind where the alleged trading activities over a long period bear no relation whatever to any commercial criteria. There are cases, for instance, in which the annual losses consistently exceed the total sales of the undertaking.

I do not think that it can be right or fair to other taxpayers that in such extreme cases such losses should be allowable as a set-off against other income. I have also thought it reasonable that the new provisions should not apply to allowances on plant and machinery bought before this year or to capital allowances in respect of farm buildings under Section 314 of the Income Tax Act, because we do not want to discourage the provision of useful new buildings.

The next series of Clauses is designed to frustrate the stratagems by. which certain persons seek to avoid their proper liability to tax or to establish unjustified claims on the Revenue. I will deal only briefly with Clauses 19 to 22 and with Clause 29. These Clauses cover specific avoidance devices, which we must clearly seek to prevent, and the major question which arises is, therefore, whether they are so drawn as to cover the malpractices at which they are aimed, without interfering with any legitimate business. This we shall examine during the Committee stage.

Most of these Clauses are designed to ensure that trading profits are dealt with as trading profits for tax purposes and do not escape liability by being disguised as or turned into capital gains. Clauses 19 to 22 deal with the problem in relation to companies which construct or deal in buildings, land, investments or other major assets. In the simplest type of case here, a company is formed to engage in a trading venture like putting up a building, but the building is never sold. Instead, the company is sold to the ultimate owner of the building and so the profit on the construction of the building becomes, in effect, a capital gain on the sale of the shares.

There are quite a number of variants of this device, and the proposal is that those who sell the company in such a case shall be charged on an amount of income corresponding to the profit which would have arisen, judged by the price they received for their shares, had the trading assets and not the shares been sold.

Clauses 23 and 24 relate to devices which turn on the differences in treatment for tax purposes between a company which carries on a trade of dealing in investments and a company whose business is that of an investment holding company. They are designed to ensure that profits which would ordinarily have been liable to tax do not escape tax as a result of purely artificial manipulations within a group of dealing and investment companies. I think that the House will be satisfied with the proposal.

Clause 25 deals with a device of a rather different nature. Financial operators are able to make a profit out of pretending that they are entitled to a dividend on stock when they are not, by using the recognised Stock Exchange machinery for sales of stock. The result is that a voucher is created for a taxed dividend, tax on which is never, in fact, paid. The Stock Exchange is blameless in this matter and the purchasers, too, may not be to blame. The Clause provides that for the future the operators will have to pay over to the Revenue tax on the pretended dividend.

Clause 29 removes the six-year limitation in the 1955 anti-dividend stripping legislation. That has become necessary because it seems that prospective strippers, such is their enthusiasm, are prepared to wait for six years, if need be, to achieve their objective. This will apply only to transactions entered into after 5th April, 1960.

I will explain rather more fully the new power which I propose in Clauses 26 to 28, since those Clauses have given rise to a good deal of anxiety, for reasons which I fully respect. As I explained in the Budget debate, Clause 26 is designed to cover, and is limited to, two main classes of avoidance tricks where the operators are particularly persistent and the amounts involved are very large.

Mr. John Diamond (Gloucester)

How large?

Mr. Amory

I could give instances of how large individual cases have been, and I wish I knew how large the total was.

First, there are all the types of case based on the central idea of what has been called dividend stripping—in other words, getting profits or reserves or assets out of companies in such a way that in the end the Revenue will lose the tax which has been paid or fail to collect tax which ought to be paid. Secondly, there are the types of case known as bond washing. Let no one think that this is a small matter. We are dealing with devices by which the gains of the operators on individual schemes can run into many hundreds of thousands of pounds and the possible loss to the Exchequer into many tens of millions of pounds.

We have found that it is largely ineffective to legislate against new devices after they have been brought into operation. One series of operations is enough to bring huge gains, and when the legislation comes along it does not catch that particular series of operations. What we need is a provision which will make the contrivance of new schemes unprofitable. I should have liked to give some examples of what is involved here, but time does not allow. I will refer only to one of many forms of device, and that very briefly. This is called current dividend stripping and is on the increase. I will not go into the details of the schemes, although I should be glad to do so at a later stage if hon. Members are interested.

The effect is, first, that the shareholders can take the net profits of a company over a period of years completely free of Surtax, while the dealing concern associated in the transaction can claim back from the Inland Revenue much, if not all, of the Income Tax paid on those profits. This device could lead to enormous losses of tax revenue, and it is a device which seems rather to be gathering way at the present time.

The main criticism of Clause 26 is that these problems should be dealt with by specific legislation. I only wish that that were practicable. I must explain why it has not proved to be so. The dividend stripper, or bond washer, uses features of the tax code which are necessary in themselves, in the interest of the taxpayer, to create a great variety of contrived situations to milk the Exchequer. The tax code, for instance, must allow a dealer in securities, who is taxed on the profits of his trading in securities, to deduct any losses on realisation. It is accepted that charities and approved superannuation funds should have exemption from tax and that in certain circumstances there should be a right to set off tax losses against other income.

The strippers and bondwashers set out to distort for their own enrichment those kind of provisions intended for bona fide cases. The trouble is that the combinations and permutations are very numerous. Parliament thought in 1937 that it was putting bondwashers out of business. In 1955, it thought that it was administering the coup de grâce to dividend strippers. Parliament had another go at bondwashers in 1959 and two further goes at dividend strippers in 1958 and 1959. The Council of the Stock Exchange has done everything it can to co-operate in preventing devices which it deplores as much as we do.

Now we are faced with at least five further forms of dividend stripping, including ingenious variants where it is the company's trading stock that is stripped, with a vista of further ingenious schemes in the future. One more has come to light since my Budget speech. Reluctant as we have been to contemplate any general provisions, we have, in fact, used specific measures to the limits of what is practicable, but we have to admit that in many cases we have been operating well behind or badly behind events.

I will describe what I mean in a little more detail. A new device is discovered and put into operation. When specific legislation comes along, it is dropped and replaced by another or modified. This would be true almost to the same extent were the specific provisions to be effected by Order—the combinations and permutations are too many. As I have already stated, the tax at stake is large and is increasing.

The operation of Clause 26 has been as narrowly restricted as possible. First, it relates only to transactions in securities as defined in Clause 40, and then only when a tax advantage, as there defined, is or could be obtained. The operation of Clause 26 is still more closely defined even when these conditions are fulfilled, since it operates only in the circumstances set out in subsection (2). These circumstances restrict its application to cases where the benefits obtained are of the dividend stripping or bondwashing type.

The House will have noticed that there is a specific provision that the Clause is not to apply to cases where the transactions are carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, provided that none of them has as its main object, or as one of its main objects, to enable tax advantages to be obtained.

Next, the Clause defines in considerable detail the conditions in which directions may be made, and there are special provisions for appeal rights. A person aggrieved by a direction given by the Commissioners of Inland Revenue will be able to appeal to the Special Commissioners who are the normal appeal tribunal for this type of matter. We are also providing that there should be set up a special tribunal to rehear completely cases in which either the taxpayer or the Revenue is dissatisfied with the Special Commissioners' decision. That is on a question of fact.

This special tribunal will consist of the Chairman of the Board of Referees, who will in future be appointed by the Lord Chancellor and not by me, and two or more other members appointed by the Lord Chancellor as having special knowledge of and experience in financial or commercial matters. From these tribunals, both of which are independent of the Inland Revenue and of the Treasury, there will be the right of appeal to the courts as before on a point of law.

Sir Spencer Summers (Aylesbury)

Did I understand my right hon. Friend to say that the right to refer to the special tribunal is only on a question of fact?

Mr. Amory

No. It is on a question of fact or law to the tribunal, but the appeal to the courts can be only on a question of law. The appeal to the Special Commissioners and the special tribunal can be on either. I am sorry that I did not make that clear.

Mr. G. R. Mitchison (Kettering)

May I ask the Chancellor two questions? First, this tribunal was not mentioned in the right hon. Gentleman's Budget statement. He referred to the Special Commissioners and to an appeal to the court. Am I right in thinking that it has been added since then? Secondly, when did the right hon. Gentleman first hear of any of the devices to which he has referred, not only in connection with this Clause, but in connection with the other Clauses about which he was talking a short time ago?

Mr. Amory

I can answer the hon. and learned Gentleman's first question by very simply saying "Yes". The decision to propose a second appeal was taken after I made my Budget speech. I find it very difficult to answer the second question, because these devices come to light in many forms and overlap. I could not give the dates on which a particular form first came to our notice. We hear rumours and then very gradually the form takes shape.

Mr. Mitchison

May we take it that the light has been coming continuously through the fiscal year and not in a sudden flood during the Chancellor's period of purdah just before the Budget?

Mr. Amory

I think that the hon. and learned Gentleman is right, because during our discussions on the Finance Bill last year I expressed considerable anxiety about this. At that time I introduced proposals to deal with one or two cases which had only recently then come to light.

Mr. Glenvil Hall (Colne Valley)

I am sorry to interrupt the Chancellor again, because he has had to deal with a number of interjections. Can we learn a little more about the tribunal? It is obviously quite a new feature in our law to set up a body of this kind. Will judges serve on it, or will they be excluded because the matter may afterwards be taken to the courts? Will they be commercial people, such as well-known accountants, or will they have to concentrate on this work and not be in business on their own or in partnership?

Mr. Amory

There will be an opportunity to discuss this in greater detail later. My right hon. and learned Friend the Attorney-General may be answering quesions on this point at the end of the debate. I do not think that the intention is that there should be a judge. It will be a distinguished lawyer, such as has been occupying the post of Chairman of the Board of Referees up to now. The other two members will be men who are experienced in financial and commercial matters. That information is contained in Clause 26 (4).

The transactions at which the Clause are aimed are of a contrived character, but we recognise that there may sometimes be genuine transactions which might be thought to have some of the characteristics of the transactions we want to stop. To ensure that no avoidable uncertainty will arise in bona fide cases toy reason of the new power, there is a specific statutory provision enabling persons contemplating a transaction to approach the Inland Revenue and seek a clearance for it.

I emphasise that the proposal does not break new ground. The power we now propose is much more specific than the comparable Profits Tax provision to which the Royal Commission on the Taxation of Profits and Income saw no objection. I have become convinced that it is the minimum that is necessary. The machinery of appeal in relation to Profits Tax cases is less complete than is now proposed under Clause 26, and we have accordingly provided in Clause 62 that in Profits Tax cases there will be an appeal not only to the Special Commissioners as at present, but a further appeal thereafter to the new tribunal.

I hope that what I have said will convince hon. Members that what we are proposing is not a matter of the Inland Revenue making up the law as it goes along. It can make a direction in these cases if it believes that tax is due, but the effectiveness of the direction is subject to two appeals on fact and one on law. I sincerely believe that these provisions give full and ample safeguards to the taxpayer against any arbitrary action by the Commissioners of Inland Revenue, and I would not have put the proposal forward had I had any doubts whatever on that score.

I now turn to a series of Clauses dealing with terminal payments. First, post-cessation receipts are dealt with in Clauses 30, 31 and 32. Clause 30 says that the receipts of an uncertain or contingent character that come in after the end of a trade or profession will be taxed. It does not, however, operate to tax post-cessation receipts that arise merely because the "cash basis" of accounting—that is to say, receipts and payments—was adopted.

Clauses 35 and 36 impose tax on payments made in connection with the termination of an office or employment and, in particular, payments of the kind that have come to be known as "golden handshakes". In recent years, there have been a growing number of instances where retiring directors have received very large payments, indeed, on the occasion of take-over bids. I think that there will be general agreement that the complete freedom from tax which large payments of this kind can at present enjoy is anomalous, and unfair to other taxpayers.

Clauses 35 and 36 carry out a recommendation of the Royal Commission in regarding as proper subject for taxation payments designed to compensate a man for the loss of future emoluments of an office. I propose, however, that the first £5,000 of any payment should be exempt from tax. I feel that it is the very large payments that are open to criticism as being free of tax, and that it is justifiable to exempt fairly modest lump sums from charge. Though the new charge will also cover voluntary payments made at the termination of an employment, we are endeavouring to make as little change as possible in the existing tax position of sums that may be fairly regarded as superannuation payments for past service. Thus, the Clauses do not affect lump sums that are payable under statutory or approved superannuation schemes.

Moreover, where a voluntary payment is of a kind brought into charge by these Clauses, there will be an exemption either of the first £5,000, or of so much of the payment as may be regarded as the equivalent of a reasonable superannuation payment if that is bigger—and sums of that kind could be much bigger than £5,000 in appropriate cases.

Mr. J. T. Price (Westhoughton)

Where the superannuation payment due is commuted by a lump sum, either wholly or partly in place of the annual or monthly payment, what is the distinction in principle that confers a special favour on such payment when, in the normal course of business, super-annuitants who receive pension by way of monthly or other periodical payment are still taxable at the full rate on those payments? Surely, as a matter of equity, one has to distinguish between the right-ness or wrongness of the granting of special privilege to the lump-sum payment as against the more normal, periodic payment.

Mr. Amory

The hon. Member raises an extremely difficult, complicated, but, I agree, relevant point. He will forgive me if I do not deal with it now, but I would think it a very appropriate case to raise, and to be dealt with at a later stage in our deliberations.

I propose, also, that any payment which becomes liable to tax under this Clause should be treated, in calculating the amount of tax due, as though it were spread, in compensation cases, over the number of years for which the recipient was entitled to hold the office, and for which the recipient is being compensated and, in the case of voluntary payments, over six years. This will represent a very substantial relief.

That brings me to the Whitworth Park case. Clause 37 enables the Crown to deduct Income Tax from certain income payments in circumstances in which a taxpayer would be entitled or required to deduct tax, and validates past tax deductions made from such income. There still seems to be a certain amount of misunderstanding about this proposal, which I hope I can clear up.

I should like to emphasise two points in particular. First, the Crown won the case in the House of Lords; thus, the suggestions that we are in this Clause reversing a decision of that House that this tax ought to be paid are wide of the mark. Secondly, and even more important, we are not making liable to tax income that was not so liable before. What is in question is the machinery by which the tax was collected.

Under the Coal Industry Nationalisation Acts the Ministry of Fuel and Power was authorised to make payments of "interim income" to former colliery companies pending a settlement of the amount of compensation. These interim income payments were made under deduction of Income Tax in accordance with what was understood to be the law. The colliery companies acquiesced in these arrangements. If tax had not been deducted, and the colliery companies had received payment in full, the Inland Revenue would have collected tax from the companies then by direct assessment.

In 1955, a Surtax appeal—not on this Income Tax matter—on the part of the Whitworth Park Coal Company raised the contention that the payments fell under Case VI of Schedule D, not Case III as had been assumed. This case went ultimately to the House of Lords, which found in favour of the Crown and against the company on this Surtax issue. The House of Lords expressed the opinion, however, that Income Tax should have been collected from the companies by the Inland Revenue, and that the Crown had no power to deduct it in such cases at source.

A number of former colliery companies have now taken out writs against the Ministry of Power claiming that they should now be paid the sums deducted over the period 1948–57 on account of Income Tax. Had they, of course, taken that point when they received the payments, they would have gained no advantage from it. As I have described, the alternative method of collecting the tax by direct assessment upon the companies would have been promptly adopted.

As regards merits, if the companies won, they would gain an advantage only because, of course, they acquiesced in the deduction of Income Tax in the first instance; and put in their present claim when it was too late to make assessments for some of the years in question, and Income Tax rates have fallen. I have concluded that it is my duty to ask Parliament to bar such claims. The Clause covers various similar payments by the Crown where the same point could be taken equally without merits on a technicality.

There are, of course a number of precedents for action to validate things done with the clear consent of both parties when it later appears that the law was not what it was assumed to be. Some of these were for the benefit of taxpayers and not of the Revenue.

Mr. Mitchison

If the Clause were not passed, would the claim on 'the writs succeed, with the result that the companies could not be assessed and taxed by the Inland Revenue because of questions of time?

Mr. Amory

If the case succeeded, that would be the effect.

Mr. Douglas Jay (Battersea, North)

Did I understand the Chancellor to say at Question Time today that £40 million was at stake on this point?

Mr. Amory

If the right hon. Gentleman will read carefully the Answer I gave, he will see that I said that, if the principle were carried against the Revenue in every possible case where the Revenue can think it might be, then the amount of tax involved would be of that order.

There was an almost exact precedent in 1934, when a court decision showed that certain colliery companies had been wrongly deducting tax at source from royalty payments. The companies were faced with claims by the royalty owners in that case and for a refund of the tax deducted. Following representations from the Mining Association, the Government of the day validated what had been done, with retrospective effect, in the Finance Act, 1934. I find it difficult to reconcile the attitude taken by the colliery companies in 1934 with the present claim that tax deductions made in good faith between 1948 and 1957, and accepted, should not now be validated.

I do not propose to deal at length with Part III of the Bill, which deals with penalties, although I am glad to bring before the House a comprehensive reshaping of the penalty code. The detailed discussions would, I think, best be left to the Committee stage. My right hon. and learned Friend the Attorney-General, who will wind up the debate, will, I am sure, be ready to answer any questions which are raised. My aim, in Part III, has been to bring together the new provisions in a rational and coherent scheme which meets, I hope, the valid criticisms which have been made of the existing penalties.

The Bill proceeds on the principle that tax lost to the Exchequer through the taxpayer's fault should be recoverable, but should be recoverable by assessment and not in the form of penalties, that interest should be charged on such tax, and that the penalty for the offences which led to the loss of tax should be reasonable in amount and related to the amount of tax lost and not to the total tax chargeable on the whole of the income. All penalties will be open to mitigation by the High Court as well as by the General or Special Commissioners and the Board of Inland Revenue. The new scale of penalties is, I hope the House will agree, reasonable and, indeed, moderate.

To put the matter briefly, we propose a substantial reduction in the scale of penalties which may be imposed. At the same time, we propose a certain extension, subject to safeguards, of the time limit for reopening assessments when there has been repeated loss of tax because of the taxpayer's negligence.

Mr. Houghton

Do I understand that the amounts prescribed as penalties will be in addition to assessments for tax lost and not in substitution?

Mr. Amory

The hon. Gentleman understands quite rightly. They will be in addition to the recovery of the tax lost.

The remaining Inland Revenue Clauses call for little additional explanation. Clauses 59 and 60 enact the concessions I felt able to propose this year on Estate Duty. As regards gifts inter vivos, I believe the graduation principle to be sound and I think that it will make this duty operate more fairly. The changed basis of valuation of trading concerns is one which has been strongly urged on me, and, again, I believe that it will be welcomed.

Clause 61 raises the Profits Tax to the extent I indicated in my Budget statement. My reasons for recommending this were given by my hon. Friend the Financial Secretary and myself in the Budget debate. I will merely repeat now that I am satisfied that this increase will not, in present circumstances, interfere with the current upward trend in industrial investment, but should have some limited effect on consumer spending.

Clauses 63 and 65 introduce a small reform which has been urged on me on behalf of unit trusts and I am glad to propose it. Clause 66 provides for a small but merited extension of capital allowances.

I come now to Clause 72. During the Budget debate, doubts were expressed in various quarters about the three-year period for which I proposed that the Exchequer should be empowered to make advances to the seven nationalised undertakings. I hope that Clause 72 has allayed these doubts. In addition to limiting advances by reference to the borrowing powers given by Parliament to each undertaking, the Clause fixes an aggregate of £2,050 million for advances up to the end of August, 1961. The advances in each of the two succeeding years are to be subject to an aggregate amount for each year, which will be fixed by a Treasury Order which will require the affirmative approval of the House.

This all adds up to what I recognise to be a formidable Bill which is likely to keep us busy during the weeks to come. The reforms which it proposes are ones which, I am sure, ought to be made in the interests of justice and fairness between one taxpayer and another. I believe that this view is shared by most people in the country. I commend the Bill to the House.

4.28 p.m.

Mr. G. R. Mitchison (Kettering)

It was only about a year ago, but before the General Election, that the Chancellor introduced some tax concessions that were estimated to cost £295 million and, with them, an additional repayment of post-war credits estimated to cost £71 million. Speaking on the Second Reading of that Finance Bill, he described it as providing a stimulus which should be felt throughout the economy and having a significant effect in promoting stability of prices".—[OFFICIAL REPORT, 28th April, 1959; Vol. 604, c. 1221.] Since then, during 1959, share prices have risen by more than 50 per cent. and bank advances, taking April to April, have risen from £2,412 million to £3,328 million, including an extra £99 million last month. The right hon. Gentleman now proposes, in his own words, to put a …moderating influence on the rate of expansion…".—[OFFICIAL REPORT, 4th April, 1960; Vol. 621, c. 64.] the expansion which he himself helped a year ago.

These convolutions have been fairly described by the Sunday Times as "economic hiccups". This is a very small hiccup on this occasion, and I trust that the right hon. Gentleman's hiccup and those of his successors will grow progressively smaller. After all, the real remedy for hiccups is to keep off the economic drink. A year ago, the right hon. Gentleman was taking to the economic drink in a big way. I trust that he will moderate his economic potations and his advertisements of them before the next General Election. I believe that it will cause him less trouble afterwards if he does.

It is for that purpose that the right hon. Gentleman has introduced what he rightly calls one group of measures— partly of a fiscal character and partly of another character. The Bank Rate was raised in January and the right hon. Gentleman now proposes to call for special deposits of 1 per cent. of total deposits from the London clearing banks, a rather lower rate from the Scottish banks and to impose certain hire-purchase restrictions. He has brought in this Finance Bill which, by contrast with last year's tax concessions of £295 million, adds up, so far as direct charges go, to a net total of £14 million, obtained substantially out of an increase in the Tobacco Duty. This really is a very small measure, and, although it may be described as a formidable and substantial Budget, from that point of view, at any rate, the positive contribution that will be made by it will not be large.

I am not going back on what was said in the Budget debate about possible things that might have been done. I want to mention only one thing which seems to me perfectly obvious. Given the position described by the right hon. Gentleman and indicated by the measures that he proposes to introduce, a change in the Profits Tax and a higher rate on distributed profits would have been, I should have thought, a useful and material contribution to what is now sought to be done mainly by monetary measures.

Let me take the special deposits first. We on this side of the House agree with the right hon. Gentleman that if bank advances should be limited the special deposits are the best way to do it. We claim that originally this was suggested by my right hon. Friend the Member for Huyton (Mr. H. Wilson) and later by other hon. Members on this side. There are, however, points about them, and the question is whether they are quite sufficient in present circumstances. They do not touch anything but the banks. They do not touch other sources of credit, and to that extent they drive borrowers to borrow long-term or to finance their own resources from various other sources indicated in the Radcliffe Committee's Report.

It was for that reason that the Radcliffe Committee stated: … in any ordinary situation"— I do not think that the right hon. Gentleman would describe this as an extraordinary situation— we cannot find that there would be sufficient advantage to justify discriminatory action against the banks". The question is whether something more ought not to have been done with other sources of credit. I have not forgotten the hire-purchase restrictions, to which I shall come in a moment.

There is another point. If provision is made for special deposits, the banks can do one or tooth of two things. They can either limit their advances, or sell their short-term securities and raise more liquid money in that way. In the proceedings before the Radcliffe Committee, there were considerable differences of opinion and, indeed, changes of opinion as to what the banks were likely to do when something of this sort was introduced.

As I have said, the London clearing banks raised their advances by about £99 million in the last month. It is not without importance that during that month their investments decreased by £61 million. I agree that that is a short period to take, but the efficacy of this Measure for the purpose for which the Chancellor intends it must depend either on agreements with the 'banks or, at any rate, on a highly informal understanding with them that they will not merely sell their short-term securities and continue to advance on the same scale as before.

The Radcliffe Committee made one other comment that applies to this Measure as a whole. It stated: Although aimed at total demand"— as the Chancellor told us this Measure was aimed at— any monetary measures will have inescapable directional effects; It seems to me that that may well be the case here.

Let me take one instance. The Scottish banks are also to be restricted, although at a lower rate, it is true. They have no conventional 30 per cent. liquidity ratio, as I understand the Radcliffe Committee's Report. They have, in effect, largely a separate banking system, although they are closely inter-locked by ownership both of Scottish banks by English banks, and English banks by, at any rate, one Scottish bank. Any limitation of Scottish banks in their advances is bound pro tanto to hinder the advances they might well be able to make to promote employment in areas where unemployment is, and has been for some considerable time, very much above the national average. That applies particularly to Scotland because of the separate character of its banking system, but it also applies to areas of high unemployment.

What one says to oneself is what is to be done about it? I have pointed out that the efficacy of the special deposits must depend on an understanding with or promise by the banks. I suggest that in this case it would have been better if some understanding had been arrived at with the banks that instead of restricting their advances generally they would promote them in areas of exceptional unemployment.

In answer to a Question today, the right hon. Gentleman said that he would call the banks' attention to the position in the development areas. Here, the Government reply steadily, as the right hon. Gentleman has replied, "We have attended to this by the Local Employment Act." But this Measure is little more than a re-enactment, with quite minor additions, of distribution of industry Measures which were already on the Statute Book. It all depends on how those Measures are operated. It seems to me that here the Government have missed an opportunity of directing the national resources to a larger extent to these special areas or, at any rate, to put it in a more negative form, of ensuring that the measures taken with regard to the economy in general should not operate unfairly in areas of exceptionally high unemployment.

I now want to say one or two words about hire purchase. I see the point of restricting hire purchase at the moment, but the restrictions which the right hon. Gentleman has proposed seem unlikely to have much effect. To put it generally, I believe that they do little more than a prudent trader or financier in these matters would do. I go further. I agree with the comment of the Leader of the Liberal Party when these restrictions were first mentioned. Some of the distinctions are extraordinarily difficult to follow. For instance, why should kitchen furniture, bath units and the like be subject to half the restrictions on small refrigerators?

I do not propose to go into detail now, because it would be wasting the time of the House, but it is one of the curiosities of our legislation that these hire-purchase restrictions have been introduced in statutory Orders labelled in large letters "Emergency" and under legislation which allows us to pray against them and to raise points on them. However, I would describe them shortly as a bit of patchwork.

I turn from these two measures to some of the Clauses in the Bill. I do not propose to say anything, so far as I can spare the House the time, about the Clauses which will come up in Committee and can be discussed then.

I should like to say this about the first two Clauses in the Bill. These affect the concessions in respect of port and other wines. With great respect to the right hon. Gentleman, I cannot accept the proposition that the object of these Clauses is to make a timely concession to Portugal, connected, perhaps, with the European Free Trade Association. The fact is that port does not account for even the largest of the items, let alone for a very large proportion of the total. In fact, Portugal had to be admitted on special terms to the Stockholm Convention.

What is really happening—and the right hon. Gentleman must face it—is that instead of making any concession to pensioners, or for housing subsidies, or in the amount of the rate of interest paid by local authorities for their borrowings, the concession is being made to the wine trade and to those who, like myself, buy from it. This concession which is being made—I do not want to repeat this, but the frown on the face of the hon. Member for Eastleigh (Mr. D. Price) compels me to do so—would have been enough to provide housing subsidies for the number of houses being built before the Government cut down the housing programme. It would have been enough to reduce by 1 per cent. the rate at which local authorities are borrowing.

Mr. David Price (Eastleigh)

Is the hon. and learned Gentleman really say- ing that this concession in Clause 1 of the Bill has nothing to do with the Stockholm Treaty? Is he not aware that a concession cannot be given to the Portuguese alone without breaking the rules of G.A.T.T.? It had to be done over that range of revenual goods. Surely he knows that.

Mr. Mitchison

On the second point, I think that the hon. Member will find a concession to Portugal alone at the end of the Stockholm Convention. I would sooner that this money had been spent for the purposes I have indicated than used for this purpose. I do not believe that it would have made, or should have made, that material difference to the attitude of this country to Portugal. If it is suggested that it had to be done, I would simply say: if that can be done, surely other things can be done, too.

Mr. Amory

Following the intervention of my hon. Friend the Member for Eastleigh (Mr. D. Price), I should like to express the hope that the hon. and learned Gentleman will, in fact, accept my assurance 'that that was the main reason for this action.

Mr. Mitchison

Of course, I accept the right hon. Gentleman's assurance as to his own reasons. I only indicated that the concession to Portugal was less than half of the total amount. For instance, the value of champagne imports to this country—and I have never tasted Portuguese champagne—was considerably larger than the volume of imports of wine from Portugal. I do not want to deal further with this matter, because it has already been discussed.

As to the abolition of the Entertainments Duty, I think that it is sufficient to say that we on this side of the House all welcome it. We have been pressing for it for years and we are very glad indeed that it has happened at last. As to tobacco, comments have already been made during the Budget debate and I will not repeat them. The rest of Part I deals with what I think I may fairly call minor administrative matters.

When we come to Part II of the Bill, all of it except the first five Clauses—one is rather a marginal one—deals with highly technical tax avoidance and similar questions. It raises the question of machinery from two points of view. One is our own proceedings in the House. There are some people who have taken the view that parts of the Finance Bill should be taken from the Floor of the House and dealt with by a Committee specially interested in questions of that kind. While I doubt whether I share that view personally, there is another aspect of the matter which seems to me to provide a much more hopeful solution.

Year after year from this side of the House two suggestions have been made that overlap. One is that from time to time there should be tax management Bills, as I think that my hon. Friend the Member for Sowerby (Mr. Houghton) has from time to time described them, and another and a similar one is that there should be arrangements for dealing rapidly with the tax avoidance question which at present we only consider Budget by Budget at the end of each fiscal year.

We shall go away when we have got through this Bill, and the right hon. Gentleman, if he remains in office until then, will go away, too, and there will gradually begin to dawn on him yet again, in spite of the Clause that he has put in because he has himself said it is very restricted in its application, the annual light of the bondwashers, the dividend strippers and the rest of the City and other gentlemen who contrive to pay less taxes than they should and who sometimes actually mulct the Exchequer. That goes on year after year. Yet although the light begins to shine at once, no steps are taken to deal with the matter until a year later, at the end of the Financial Bill.

When a Bill of this kind is introduced, which in substantial fiscal respects does a little, but not very much, but is padded out, if I may use the words, with very necessary avoidance measures and the like, we ask ourselves what has happened during the past year. The right hon. Gentleman has known about these things. He has known about individual cases in which, as he has told us, very large sums indeed have been collected, or avoided, by these methods. We get an Exchequer loss, amounting to many millions of pounds, not perhaps quite as much as the Blue Streak on one series of transactions, but, taking the whole lot together, something of that order.

Yet so rigid is our system that we go on year after year trying to deal with what might be called day-to-day ingenuity by annual Budgets. It really is ridiculous. I suggest to the House that we should consider at least one of the three possibilities. One is a tax management Bill of the kind that my hon. Friend indicated. Another, and a different one, is that there should be arrangements for dealing with these matters either by Orders or, perhaps better, by short ad hoc legislation as they arise from time to time.

I do not regard Clause 26, the motive Clause, as I call it, as sufficient protection. I would have these other things added to it. Indeed, in this Bill it is necessary not only to have a motive Clause, but to have another collection of extremely complicated provisions, although the motive Clause itself is in the Bill. There is not the least doubt that with a restricted Clause like that ingenuity will again be exercised to no good purpose and that, again, the Revenue will lose what it ought to collect. So, in fact, other taxpayers and, perhaps, in particular, the rather humble Schedule E taxpayers will have to pay more than they otherwise ought for the same fiscal expenditure. We go on saying this, but nothing is done. We cannot find better evidence for it than in the contents of the Bill.

About the reliefs at the beginning of Part II, I say no more than this. Although we welcome them, they are in one or two respects, which we can discuss in Committee, a little close still and there are possible additions. That, however, we shall consider at a later stage.

I come next to the "hobby farmers'" Clause, Clause 18. One appreciates the reason for it and it will have to be considered in the light of all the Royal Commission's observations. I make only the comment that it involves, again, a question of motive and one must face this. When, however, we get to questions of motive, we are putting a rather difficult task on the Inland Revenue and its officers.

I should like to say something on my own behalf. I have been dealing with Income Tax officers for many years, and so have all of us. I do not go to accountants. I have never felt at any time that I have been treated otherwise than perfectly fairly and most helpfully. I have never had any feeling that the Inland Revenue was trying to do a sharp one on me, or to get more tax than it ought to collect. Quite the opposite. I have always felt that the Income Tax officers would give gladly any amount of help, which people do not always realise. They are prepared to give it in the same spirit as those who function in quite another capacity, the National Assistance officers.

I feel, therefore, that if they take that attitude, as they do—and I hope they will keep it—it is sometimes a little difficult for them when questions of motive are put up to them for decision. I am not saying that the matter can be avoided, except in so far as it could be avoided by prompt and particular action on the lines I have indicated.

Sir S. Summers

The hon. and learned Member has suggested that there should be additional opportunities for bringing in precise changes in the law. Are we to understand from what he has said that he advocates them instead of the broader powers in Clause 26, or in addition to them?

Mr. Mitchison

I am obliged to the hon. Member. I would have said it later, but will say it now. Certainly not. I welcome the provisions in Clause 26.

I was trying to point out, however, that it is, as the Chancellor of the Exchequer indicated, a restricted Clause, that it is not sufficient even to cover the other points which have to be met, especially in this same Bill, that there are sure to be other exercises of misplaced ingenuity directly after the passing of the Bill—in fact, they are apparently going on already—and that, therefore, I want both things, both some such Clause as Clause 26 and day-to-day provision for dealing quickly with these things before large sums are lost.

I shall not say more about Clauses 19 to 22 than this. It is difficult for the Opposition to deal with Clauses which put a new restraint upon the taxpayer if we think that the restraint falls short of what is required, because for obvious technical reasons—Money Resolutions and the like—we cannot put any additional burden on the taxpayer by means of an Amendment. It is, therefore, difficult for the Opposition to tighten up these Clauses, although, sometimes, we would wish to do so. I do not think that these particular ones, so far as I can judge, could be tightened up much in their incidence, although, possibly, they could be in their scope.

I turn to another type of Clause, Clauses 30 to 34, which deal with discontinuance. I believe that these Clauses have an avoidance content. That is to say, discontinuance has been used by people who carried on some sort of trade or business and then wound it up, transferred it to a company or whatever it could be, made an arrangement between themselves—one can think of all sorts of possibilities—and thereby profited by the discontinuance arrangements. Nobody would wish to interfere with any steps that are taken to avoid that practice. Although this type of Clause deals with people who trade on an earnings basis, however, it does not deal effectually with those who carry on a profession and, therefore, work on a cash basis. It does not, therefore, cover the lawyer. Although I am not allergic to lawyers, my party is and I rather think that the House is, too.

People will view it amiss if a Clause dealing with discontinuance is introduced and it is discovered that it does not apply to lawyers. There are, of course, plenty of others to whom it does not apply. It does not apply to any professional man unless, rather exceptionally, he is assessed on an earnings basis. As I see it, the difference between these two bases is not a matter of principle. Indeed, to some extent it is in the option of the taxpayer in practice. Therefore, I find it difficult to understand why some provisions, at least, have not been made for discontinuance in cases where there is a cash basis: that is to say, among other professional cases.

If it is said that the difference is between tax avoidance in relation to trades and businesses and the inevitable discontinuance that happens when anyone retires from a profession, I should have thought that that could have been met by suitable language and that there was enough risk, at least, of avoidance, even in professional cases, to make it advisable to put in something of the sort.

I go one further stage about it. It is most expedient in financial matters that we should not only do what we think to be right, but should appear to do it. It will not be popular if we rest our distinction purely on the technical difference between the two bases of assessment. That is what these Clauses do. I am aware that there is another minor point, depending upon whether lawyers are ever entitled to their fees. The Government would not, however, wish to rest on that point, although it may be useful as a device of language and no more.

I turn now to say a word or two about the motive Clause. I have already indicated that I regard it as restricted and that it seems to me to have difficulties from the point of view of those who will have to administer it. I do not, however, wish to be taken to disapprove of it in any way. On the contrary, it is not only necessary, but long overdue, and I rather wish that it was less restricted. Perhaps, however, like the Chancellor's financial measures, having found that it works, as we hope it will, he or his successor in office will extend it.

The "golden handshake" Clauses, Clauses 34 and 35, are, again, something that we on this side welcome. It should, however, be said that the £5,000 limit is rather high. That is a matter that can be considered in Committee. In addition, we will have to see that cases in which damages for an accident have been assessed having regard to tax do not get taxed twice in any way. The Gourley case is what I have in mind, and there are others.

The Attorney-General (Sir Reginald Manningham-Buller) indicated assent.

Mr. Mitchison

I am glad to know from the Attorney-General that that has been borne in mind and that, no doubt, he or somebody else will explain in due course how effectually the matter has been dealt with.

Turning for a moment more to the Whitworth Park case, that is, of course, retrospective legislation. It is not only retrospective in form—retrospective, I agree, to a less extent than one might think at first sight—but definitely retrospective. It puzzles me why retrospective legislation can be introduced in that case and not introduced in some of these dividend stripping and bondwashing transactions of which we have heard so eloquently from the Chancellor. It really is rather absurd.

No doubt a considerable sum of money is involved in this case, but at least as large an amount is involved in the others. If we are not to have day-to-day provision for dealing with them, then no Chancellor of the Exchequer ought to hesitate the moment the light dawns on him to warn the people concerned and to bring in retrospective legislation in the next Budget. I cannot understand how the Treasury, sitting there and watching this sort of thing going on month by month, never warns anybody, then brings in a provision in the next Budget and expresses itself as contented with it.

Turning to Part III of the Bill, as regards penalties I will say no more than this. I do not think that there is enough difference in these oases between penalties for negligence, of which in fiscal matters I am constantly and incorrigibly guilty myself, and penalties for fraud, on which, so far, I have not embarked and do not propose to embark.

As to the next part of the Bill, I would say that an Estate Duty concession as regards gifts inter vivos, whatever its moderation and whether or not it avoids an inconvenient shock and a rather improper feeling as to whether so-and-so will survive the necessary five years, is, in spite of that, viewed with considerable suspicion on this side of the House. We take the view that Estate Duty ought to be tightened up, that gifts inter vivos particularly are not matters for concessions.

I say no more. I have not touched on all the Bill. I have spoken quite long enough, if not too long, and it is the first time that I have ever had to do so on a Finance Bill at this stage. It is not too easy, but I would say to the right hon. Gentleman that though I am not an expert economist, and I think that this is a very difficult Bill, I cannot feel that the Bill, taken with the monetary measures, really amounts to quite enough. I think that the use of the Budget financial measures, in the strict sense of the term, is generally preferable to the type of general monetary restriction indicated by the special deposits and the reintroduction of hire-purchase restrictions.

I wish that the right hon. Gentleman had put rather more into the Finance Bill and done rather less in other ways and that in doing so he had paid regard to the social conditions of the country. I do not think that the extra tobacco tax is right from that point of view. The social conditions which ought to have been borne in mind are not merely those of the pensioners, but the social conditions of unemployment in some parts of the country and the social conditions arising out of expenditure by local authorities.

I earnestly hope that, whatever is said from the other side of the House about this matter, the right hon. Gentleman will not come down financially on local authorities and restrict the services which they are already finding it very difficult to carry out fully and properly. I am trusting, therefore, that one or two remarks which the right hon. Gentleman made at the beginning of his speech were more concessions to his hon. Friends than intimations of anything very dreadful to come. I trust that we stop here so far as the public sector and local authorities are concerned.

5.5 p.m.

Mr. Michael Shaw (Brighouse and Spenborough)

I should like at the outset to crave the indulgence of the House on this the first occasion on which I address it. I come from my constituency of Brighouse and Spenborough, an industrious and hard-working part of the West Riding of Yorkshire and a constituency where the old-fashioned principles of neighbourliness, friendliness and an interest in local affairs still grow strongly.

It is my one regret that the chain of circumstances which led to my being here this afternoon started by the tragic and sudden death of John Edwards. He was a man much beloved by everyone in our constituency, and it is a matter of regret that it was because of his death that I was eventually elected to this House. I came here on one pledge and on one pledge only. That pledge was to support the present Government, in the firm and sincere belief that they were the team that we needed to carry on the affairs of the country.

I take this early opportunity of supporting this Bill. I believe it is a Bill that is necessary in the present circumstances of the country and that it meets the needs with which we are faced. I have asked many people in my constituency what their views are on the Bill and, by and large, the reaction has been, "Well, I do not see what else we could have done." In other words, it has been considered as reasonable and necessary.

In our district textiles are one of the predominating industries and one of the first industries to reflect depression and the lack of well-being in our economy. We fully realise how necessary it is that any adjustments made to our economy should be made gently and should be made early because, otherwise, the people who feel it most are those in our textile industries. Therefore, it is good that at this time the Finance Bill is moderate and is, in a sense, a standstill Measure striking a note of caution.

I do not propose to talk at any great length on this occasion, and, I trust, not on any future occasion either. I will not, therefore, go through the Clauses in detail. However, I should like to refer to one part of the Bill. It is, perhaps, the only part which I feel that I have completely mastered as yet, a feeling, perhaps, which is shared by many other hon. Members on both sides of the House. It is Part III of the Bill which deals with penalties.

I feel that it is high time that there was an alteration in the penalty provisions. For too long, in my opinion, the taxpayer and his professional advisers have been at a disadvantage in dealing with the Inland Revenue on back-duty cases, cases of omission, and such-like things.

The irritating part about the negotiations has always been that even though the Inland Revenue people, as they nearly always are, have been most courteous, the more trivial and less culpable the case the more disproportionate has always been in the past the maximum penalty which the Inland Revenue has had at its disposal. Therefore, I hope that in future we—and I must disclose an interest in this matter as an accountant—shall sit round the table more in a feeling of equality one with the other, without the uncertainty of the awful weight of the maximum penalties that are never mentioned but that one knows are hanging around just outside.

I am also pleased that these penalty provisions do nothing to disturb the settlement by agreement that is nearly always made in back-duty cases. The relationship and customs that have been built up over the years between the three parties—the Inland Revenue, the taxpayer's advisers and the taxpayer; and perhaps once it gets to that stage, that is the correct sequence in which to list them—have been for the good of the country as a whole, because they have worked.

What we need in back-duty cases is a swift and complete inquiry, a satisfactory settlement, and a deterrent against the recurrence of the faults that have been disclosed. Nine times out of ten all those factors are dealt with in the best manner by agreement between the parties concerned. Nothing that I can see in the new penalty provisions goes against these customs that have been built up throughout the years.

In short, the path of a Chancellor is like a pilgrim's progress. It lies straight and narrow up the hill of difficulty. Danger and destruction lie on either hand. This Bill cannot be considered on its own. It is one of a series—those that have gone before and those that lie ahead—but when we are able to see it in perspective I believe that it will have its true and proper place as a necessary Measure in the continuance of the country's pursuit of additional and higher prosperity in the years ahead.

5.13 p.m.

Mr. J. Grimond (Orkney and Shetland)

It is a great honour for me to be able to express on behalf of the whole House our congratulations to the hon. Member for Brighouse and Spenborough (Mr. Shaw) on his maiden speech. We listened to it with great interest and with great enjoyment for its content, its length and its final simile. I feel that the Chancellor of the Exchequer must have been fortified by this vision of himself climbing the narrow path, with destruction on one side and no doubt promotion on the other. I should like to say sincerely to the hon. Member that I know that the whole House will look forward very much to hearing him again. No doubt the people who are represented, as he says, so ably by their lawyers and accountants will also take note of what he said about the penalty Clauses of the Bill.

But, if I may say so, I slightly differ from the hon. Member, and this is really the theme of my speech, when he says that this Finance Bill is one of a series. I wish it were. I think it ought to be, but I cannot see it in that way. The Chancellor has certainly earned a good deal of praise from orthodox economists. This is always a doubtful compliment of which to be the recipient, but still on the whole it is worth having. I think that most of them feel and felt that there was some case this year for some reduction in demand. Indeed, most of them would have said that the Chancellor should have taken more account of demand than he has done.

It is always strange that these nice adjustments of £25 million or more of demand this year are made when at the end of the year we find that the Estimates are out by several hundred million pounds. I also find in strange when we consider what happened last year. We then had a little off beer, and this year we have a little on cigarettes. This I would describe as electoral tiddly-winks. I cannot help feeling that if the Chartists had accomplished their aims of annual Parliaments taxpayers would have seen considerable tax benefits. The truth of the matter is that these adjustments to the Budget, as the Chancellor has said, are as much signals to the economy as definite instruments for achieving set purposes.

It is curious that while we debate some parts of our financial machinery at great length we do not debate others at all. For instance, to alter the tariff on toothpicks would need an Order before the House of Commons, but to alter the Bank Rate or to bring in special deposits one merely has to make an announcement after Questions, although the effect of these is far greater. This is a point which we should look at.

This is a moment for looking at these sorts of points. This Budget may be justified on orthodox lines looked at short-term, but I would remind the Chancellor of Stephen Leacock's advice to young gardeners: Take a garden two years ago". I think that this is good advice for Chancellors. We are two years away from 1962. We are at the beginning of a new Parliament. We are at a period of prosperity and a time when the Chancellor does not think it necessary to make very large financial changes. But, we are not, as the hon. Member for Brighouse and Spenborough suggested, setting out in the Finance Bill to deal with some of the long-term matters as well as the fiscal provisions for this year.

When we look back to the 1930s everyone is struck toy the fact that, although the knowledge to deal with unemployment was there, Governments appear to have been so short-sighted that they did not apply that knowledge. They never had time to think. This country has gone on ever since the war between the twin dangers of inflation and stagnation and we do not seem to be making progress out of this dilemma. The Chancellor this year and lately has taken certain steps to curb too rapid an increase in demand. I must remind him again that the increase in production in this country has been very small over the last four to five years compared with Chat in other European countries—about 4 per cent. against 13 per cent.

It must cause concern that even though it has risen quite a bit in the last few months we are back again in the era of threats and controls. What are the controls? There are hire-purchase controls designed to stop or check an increase in hire-purchase debt of about £300 million. I am not saying that these are not justified, but is the Chancellor satisfied that what will happen will not be a great increase in rentals of one form or another? Is he satisfied that the checks are sufficient to prevent a mere transfer of debt from one kind to the other?

Then there are the special deposits. There has already been an increase in bank advances of over £1,000 million. Is the Chancellor satisfied that this device will not hamper new enterprise while not making a great deal of difference to those firms which are established? I take it that in all these measures the right hon. Gentleman is looking to the future and giving warning signals. He does not expect a great deal from them at present, but if our economy does not respond I take it that he may ask for further deposits or will take further steps at the Treasury.

I cannot believe these controls are suitable. If they are not, should we not begin to consider the whole question of Government debt, of Treasury bills, of bank ratios, and, indeed, follow up the findings of the Radcliffe Commission? I ask here whether any work is being done in the Treasury on the subject of whether we can get out of the dilemma of having either stagnation or inflation by reforming the system of monetary control and Government borrowing.

The Chancellor has come out fairly well from under the attacks from behind him. Those attacks have never really got down to the question of what is to be cut. I do not think that any back bencher can say exactly what can be cut, but my hon. Friend the Member for Bolton, West (Mr. Holt) did point to certain things in his Budget speech. I will deal only with one matter, and that is the financing of the nationalised industries.

This is a long-term problem which has been with us for some years and with which we are making no progress. Take the railways. Are we awaiting until the Stedeford Committee has reported, apart from moving the deficit above the line, or are any other steps being taken about their finance? Are we considering the possibility of raising some money for the more viable of nationalised industries, smaller amounts, on the market?

I now turn to the tax structure. The is surely another matter to which long-term thought should be given. As has been said, this Bill is very largely taken up with incredibly complicated provisions for the administration of taxation. We were delighted to hear that the hon. and learned Member for Kettering (Mr. Mitchison) has so far avoided prosecution for fraud and is on perfectly good terms with the Tax Commissioners. So am I. I hope, like him, to be on equally good terms with the National Assistance Board if that should become necessary. But if we got rid of all the bond-washers and tax-strippers in the world, he and I would still be far from mastering the tax law. The complications are growing every year and are nothing but "Brock's benefit" for lawyers and accountants.

Can nothing be done about that? I do not accept that we should be so completely defeatist. If we keep such a very heavy tax on earnings, and especially higher earnings, we shall get avoidance. My fear is that, however astute the Chancellor may be, however many general Clauses he brings in to allow the Commissioners to look at motives, however many orders are passed to stop this or that evasion, evaders will still always be slightly in front and will remain so, so long as it is worth while.

One of the easiest ways of checking earnings is on transactions carried out by cheques. Should the Chancellor not remove the Stamp Duty on cheques, and indeed on other forms of transactions as well? Then, when he comes to the question of looking at the methods, before the Committee stage he should read A. P. Herbert's article in Punch in which he tells the story of the man who went out of business and found that he was assessed with very large sums which he should have earned but did not. We are getting on to very dangerous ground.

Mr. Amory

I should be grateful if the hon. Gentleman would give me the date of the issue.

Mr. Grimond

I will send the right hon. Gentleman a copy and when he is next having tea in Lyons, I hope that he will read it. We are in a very dangerous sphere here in interpreting motives, especially as part of the tax system is designed to stop people doing things which are heavily taxed. I do not object to this particular provision but the House should scrutinise very carefully any further departures in this way.

Most of us approve what he has done with post-war credits, but it is slightly curious that a straightforward Government obligation is discharged to some people on the ground that they are deserving people, and not to other people. I do not object to that in itself, but it is a practice which should now be stopped. I was glad that the Financial Secretary said that this was not going very much further and that in future post-war credits would be regarded as a straightforward obligation of the Government.

When this Bill comes to be passed, apart from tidying up some of the administration of taxation—if one can call it tidying up—or making it more difficult, will it assist our economic advance? That is what we have to judge it by. Will it assist the country to raise production and maintain stability? I doubt if it will do so in the long run though it may do so in the short run.

The extra taxation is described as skimming off some demand which the Chancellor thinks to be excessive in the general economy. He has also indicated that that may help us to export more and to encourage goods to be pushed into foreign markets. In the Budget debate the market in Europe was raised and I make no apology for raising it again. Since then—and even since I referred to it before Easter—the situation in Europe has become even more serious than it was.

I do not ask the Chancellor for an answer today, but I was not convinced by the answer given in the Budget debate, nor by the later answer of the Economic Secretary. There is obviously an agonising reappraisal going on within the Seven. We have to accept now that the acceleration by the Six will happen. Has not the time come when the Seven should make an approach to the Six of a rather different sort from that in the Vienna proposals?

Should we not make an approach to say that we are willing to enter the Common Market with certain assurances? I am not at all sure that the Six would accept. They might or they might not. But even if they did not accept, should we not then be in a position to get negotiations going? If we did that, we should press for the 20 per cent. reduction of tariffs in the Common Market to be made permanent and not subject to abolition on the vote of one member. We in the Seven should then accelerate, too, and reduce our tariffs and try to get together on that basis. The Chancellor referred to acceleration in the Budget debate and at that time was inclined to say that he hoped that it would not take place. He is bound to admit now that the strong likelihood is that it will take place and that the recent message by Mr. Dillon shows that Washington will not be helpful to us, and will indeed encourage the growth of the Common Market and acceleration.

We still do not know exactly what the Prime Minister said in Washington. It may be unfortunate that he was reported at all, but the substance has not been denied and it made an unfortunate impression not only in Europe but in the United States.

Should we not do something to encourage production in this country by taking some taxation off companies which encourage profit sharing, or, what we Liberals want, co-ownership? I hope that this prods the Chancellor in a very soft spot, because he is one of the leading exponents of co-ownership between Budgets but as each Budget season comes along he goes into double purdah on this subject and year after year nothing appears.

We have put forward proposals which would encourage companies to make shares available to their workers, and would encourage savings to be set aside out of earnings, to be used for investment. I cannot understand why we have seen nothing in this Budget to bring about what we are always told the Conservative Party believes in—a property-owning democracy.

What of Schedule A? Between Budgets, great pleas are made by hon. Members opposite for the abolition of Schedule A, but provisions to that end are singularly lacking in this Finance Bill.

Finally, although there may be objections to discrimination in taxation in different parts of the country, I welcome the unorthodox steps which the Chancellor has taken in treating Scottish banks differently from English banks in the matter of special deposits. I believe that he should study the suggestions in the Economist for some sort of tax on employers who want to go to areas of very high employment, or, alternatively, helping local authorities in areas of heavy under-employment or unemployment so that they may reduce the rates. In many ways, that seems to be a fairer method of helping those areas to attract industry than that of singling out particular firms and giving them subsidies.

It is with those matters that this Finance Bill should have been concerned. It would not have been possible to have dealt with them all, but, with no great pressure to make big fiscal changes, this was the time to have started the process of a thorough overhaul of the tax system to see whether we could not stop penalising earnings so heavily, to reform the methods by which the Government raise money, the methods of financing nationalised industries, and to make progress with the general question of how we can get out of this unpleasant dilemma of being continually poised between inflation and stagnation.

5.31 p.m.

Mr. Nigel Birch (Flint, West)

I should like to associate myself with the tribute paid by the hon. Member for Orkney and Shetland (Mr. Grimond) to my hon. Friend the Member for Brighouse and Spenborough (Mr. Shaw) on an entirely admirable maiden speech—short, clear and to the point.

The hon. Member for Orkney and Shetland complained that there was no theme in the series of my right hon. Friend's Budgets, but I am bound to say that I could not find any theme in the hon. Gentleman's speech. The only theme at all was the recurring phrase, "Should we not start thinking about" this, that and the other. When he said "We" I presume that he meant the Liberal Party, because they were all things with which the rest of us have been wrestling and about which we have been thinking for many years.

Mr. Grimond

If all the results we have seen are the results of wrestling for many years, I suggest that the right hon. Gentleman should give it up.

Mr. Birch

Perhaps we shall get the answers from the Liberal Party.

At any rate, I congratulate the hon. Gentleman on making a speech on some general points. It has been the tradition of the House that the Second Reading of the Finance Bill was a sort of miniature Budget debate. There seems to be a conspiracy on the Front Bench opposite to turn it into a sort of bloodsucker's bean feast. I understand that the hon. Member for Sowerby (Mr. Houghton) is to wind up for the Opposition, and so hon. Gentlemen opposite are putting up an exhibit of a real live specimen of the tribe of bloodsuckers. They intend to enjoy themselves very much. I do not doubt that the lemonade will flow like water. Fancy cakes will be almost loaded down by margarine cream. For myself, I have no great fancy for such orgies and I should like to return to the general economic theme.

In his economic White Paper and more urgently in his Budget speech, my right hon. Friend the Chancellor of the Exchequer put forward the view that our economy was beginning to suffer from some overstrain, from some overheating. If he believed his own figures, he was bound to take that view. If he believed his own figures in the balance of payments White Paper, he was more or less bound to do something about it.

It is worth thinking for a moment why this present overstrain has come about. One of the reasons is that my right hon. Friend took too gloomy a view of the state of the British economy at the time of the last Budget. After all, a strong recovery was then taking place in America and Western Germany. Unemployment was only 2½ per cent. in this country and the collective wisdom of the markets was indicating fairly clearly that a strong revival was about to take place.

I do not suppose that my right hon. Friend was in any way influenced by the Opposition. They, as usual, were shouting for reflation at all costs, more expenditure, less taxation and so on. I do not suppose that he paid much attention to them, but he probably paid a good deal of attention to the opinions of practically all the professional economists.

At the time of the last Budget, practically all professional economists were of the opinion that a strongly reflationary Budget was necessary. It is worth noting that a great many of them persisted in that view until very recently, many of them long after we had won the last election. Some of those economists were no doubt well placed to make their views heard. I suspect that an attentive observer in Downing Street might often have seen the manly figure of Sir Roy Harrod striding up the steps of No. 10 in order to pour into willing ears his well-known views.

One of the points we have to understand is that many of the things which were done last year are only now beginning to work. For example, I should be rather surprised if the investment allowances granted last year had had very much effect in the last financial year. My guess is that they are just beginning to have effect now. The encouragement given to local authorities to increase their capital expenditure is also only now beginning to have a major effect.

Possibly because of last year's misjudgment the Chancellor's main difficulty has come about—the very large increase in expenditure this year, a general loosening of the purse strings. I am sure that it is true of the Treasury that once it gives way on one sector of the front, it is bound to give way all along the line.

However it came about, there was, in the Chancellor's judgment, a certain amount of overstrain in the economy and his problem was what could he do about it. He had a choice between putting up taxes or employing the monetary weapon—the Bank Rate, compulsory deposits, hire-purchase controls, and so on. Although he made a few alterations in taxation, my right hon. Friend did not do enough to make a serious impact by that means on the economy. Clearly, he did not intend to do so. I think that he was right, because if there is very high taxation, as we now have, and if there is an overstrained economy, it is not very much good trying to get out of that position by increasing taxation.

Some very wise words have been written about this matter in the current issue of Lloyds Bank Review by Mr. F. A. Cockfield, who at one time was in the Inland Revenue. He wrote: I do not for a moment deny that changes in the level of taxation have important and often immediate effects on the national economy. But unfortunately the effects are often very different from what their sponsors expect or hope. This is particularly true of increases in taxation designed to reduce consumer expenditure, for such increases lead to pressure for higher wages and higher profits, thus merely reinforcing the inflation the tax measures were designed to avoid. We have seen that happen many times under both parties since the war. I therefore think that my right hon. Friend was almost certainly right not to try to get out of his difficulties by a sharp increase in taxation.

That left us with only the monetary weapon and it meant that, once again, that wretched beast of burden, the holder of gilt-edged securities, had to be punished.

I have several times had the honour of addressing this House about the gilt-edged market. I believe that a healthy gilt-edged market is of vital importance to this country. I have always believed it and I become more convinced about it every day. If the Government have not power to sell stocks to the public no civilised type of economy is possible, nor can we carry on the great banking business that we do, and which is so profitable to us.

After the measures which were taken at the time of the crisis in 1957 there was a considerable revival of confidence in the gilt-edged market. In the first three quarters of 1958 net sales of marketable Government securities to the public amounted to £267 million—quite a reasonable sum. But then confidence started slipping, and in the next four quarters, namely, the last quarter of 1958 and the first three quarters of last year, there were no net sales at all. In fact, the authorities had to buy £291 million of stock. We have no figures for the last six months, but from what the Chancellor said in his Budget speech I judge that the authorities had to buy pretty heavily again.

We are in the position that we are starting to operate the monetary weapon at a time when the state of the market in Government securities is far from healthy. What is the size of the problem which we have to face? How much stock will the Chancellor, or the authorities, have to sell in this financial year to avoid having to finance themselves by Bills? First, there is a total overall deficit of £318 million. There is £41 million for doctors, and £20 million for the rest of the Guillebaud recommendations, and there is one other item which, though technically not part of the Budget, ought to be counted in.

I understand it is estimated that £45 million will have to be raised by the sale of securities from the reserve of the National Insurance Fund. I am a little surprised that my right hon. Friend did not mention this in his Budget speech. I can see that it was a good way of sweeping a little local difficulty under the carpet, but it should be counted in, and if one counts all those items together the total comes to £424 million.

On top of that there is the borrowing by local authorities. In the first quarter of this year my right hon. Friend the Minister of Housing and Local Government sanctioned a record amount of borrowing. He sanctioned the borrowing of £160 million, £23 million more than in the first quarter of last year. The structure of the local government debt in this country gives rise to a good deal of anxiety. Unfortunately, there are no up-to-date figures. Over the past year I have asked several Parliamentary Questions with a view to persuading the Chancellor to publish detailed figures of the structure of the debt, particularly the amounts borrowed at short term. I have always had Answers of the most eager sympathy, but no figures.

The last figures which we have are those for about the beginning of 1958 which were published in the Radcliffe Report. Those figures show that the amount of money borrowed for one year or less by local authorities then amounted to £630 million, £399 million more than three years before. Of that £630 million, no less than £275 million was seven-day money, no doubt used to build schools, houses, sewers, or whatever it is that local authorities like to do.

We do not know what the figures are but it is certain that there is still a vast quantity of seven-day local authority money about, and that a great deal of that is in the hands of foreign holders. I do not think that it requires a great deal of imagination to guess that if we once again run into serious balance of payments difficulties the great mass of that very short money might prove extremely awkward. So much for the size of the problem.

What means has the Chancellor for meeting and solving this problem? First, there are small savings. I should like to add my tribute to the work done by the National Savings movement. It has done a great deal of voluntary work. It has been very successful, and I am sure that we were all gratified when Lord Mackintosh was raised from a barony to a viscounty. But, having said that, we want to fee a bit careful about this.

The theory behind small savings, and the tax concessions that go with many forms of them, was that they would be held by small men liable either to no Income Tax or to Income Tax at the reduced rates. But with the fantastically high level that direct taxation has now reached, one sometimes gets rather odd results. The Chancellor has increased the amount that can be held in three forms of national savings. First, savings certificates. A savings certificate held to maturity yields 4.2 per cent. tax free, but if one grosses it up, that is to say, if one looks at it from the point of view of a man who pays Income Tax at the standard rate, it pays a grossed-up yield of 6.85 per cent. if held to maturity. If one takes the case of a taxpayer who pays Surtax at the maximum rate, the grossed-up yield means a return of 37.3 per cent.

The same applies to Premium Bonds. Suppose that one is neither lucky nor unlucky, but that one's drawings are of the proportion which they should be in proportion with the rate of interest paid on them. In that case the holder who pays tax at the standard rate would get a return of 7.3 per cent. and the surtax payer, at the maximum rate, would get a return of 40 per cent.

We ought to be careful about this. We may be paying pretty high for a good deal of money, and not all of this money will be new money coming into the market. Much of it may come from the sales of other Government securities. I have no doubt that as a result of my right hon. Friend's decision we shall see a big increase in the totals of National Savings. I am sure that we shall all be gratified if Lord Mackintosh moves up another step in the peerage, but we should keep this matter in proportion. Having said that, I do not want in any way to minimise the importance of National Savings. They are vital, and they contribute largely towards solving my right hon. Friend's problems.

The next point, and this is the real point in his favour and one which may easily save his bacon, is that the relative yields have changed. Now the average yield on ordinary shares is lower than the yield on gilt-edged securities. That is likely to encourage pension funds to put money into gilt-edged markets if only as a yield sweetener. It will also discourage trustees from switching from gilt-edged to ordinary shares because, in these circumstances, they will reduce the income of their beneficiaries. We cannot foresee what will happen, but it may well be that that will be a tremendous help and of great importance to my right hon. Friend.

There is another point that can be of some assistance—although in a rather backhanded way. I suspect that sales of securities by the banks will be less this year, if only for the reason that they have not so much left to sell. But they still have a lot they can sell, and I do not think that compulsory deposits would deter them from selling stock if that was the only means they had of fulfilling obligations and promises to their customers.

That leads me to say that nothing shows the incapacity of the Opposition so much as the fact that when, in 1958, it was announced that compulsory deposits would be introduced in certain circumstances, no debate was asked for, no discussion was held and no demand was made for legislation. It may be that those responsible were lecturing abroad on some subject on which they are acknowledged masters, such as, "How to stay in Opposition", but the House should look carefully at this question because compulsory deposits are simply forced loans—and forced loans can be used as an instrument of tyranny.

I should like to read a short extract from the evidence given by the Governor of the Bank of England to the Radcliffe Committee on this matter. I suspect that he must have given this evidence before my right hon. Friend announced the scheme, and I enter that caveat. The Governor said: My own view is that it would be a mistake to make Government borrowing from the banks easier than it now is. I am therefore opposed in principle to variable liquidity ratios, Treasury Deposit Receipts, or similar devices which, though they might be intended to set a maximum to lending to the private sector, would have the effect of forcing the banking system to lend a minimum to the Government. The effect would be obvious: and the variable nature of the device will enable the Government to extend the floating debt, and borrowing from the banking system, to an unlimited extent with even less checks than at present. That is quite a tough thing to say.

I would not go as far as the Governor of the Bank of England. On the instructions of my right hon. Friend the Member for Monmouth (Mr. Thorneycroft), I gave a good deal of study to this subject when I was at the Treasury. Compulsory bank deposits are a power which a Government should have, but that power should be sanctioned by legislation, and subject to a back-stop, or sanction, of some sort. Compulsory deposits in peace-time are something new, and I presume they rest on the tenuous foundation of the Bank of England Act, 1946. Certainly legislation should be introduced. As for the back-stop, every time a Government impose or increase compulsory deposits they should have to present an affirmative Resolution to the House and explain how it is that they have got into this mess—because if this power is used unchecked it can be an instrument of tyranny, and the House should not pass it by as lightly as it has done. I therefore hope that my right hon. Friend will consider legislation and the incorporation within it of some kind of back-stop.

That is all I want to say on the main theme of the Budget. It may be that my right hon. Friend's actions will be all that are necessary and will succeed. I would not say that they will not, and I certainly pray that they will Having said that, however, I find it very distressing that we should live all the time so near to the edge of the precipice. Conditions are favourable at the moment. The terms of trade could hardly be more favourable, and all the main factors which have made inflation so difficult to prevent no longer operate. There are no war-time shortages; no shortages of raw materials—of coal, oil, gas or electricity.

In this situation, if only we can control expenditure it should not be difficult to run ahead more easily and get our taxation down. I was very depressed by the speech made by my right hon. Friend the President of the Board of Trade in the Budget debate. If I read correctly between the lines, he was really saying, "I know that we are spending too much. I know that it is unfair to the holders of securities bearing a fixed interest. I know that high taxation is involved and that it damps down our economy. But we are all politicians; we all vote to spend more money. After all, what can we do?" I do not think that that argument is a good one, and I doubt whether it is wise politically.

Let us consider some of the things that are happening now. In the Budget, £40 million is provided for loans to building societies—nearly double the net increase in taxation that my right hon. Friend has imposed. Is there a vote in that? Is it economically necessary or right that we should do that? Then there are all the loans on secret terms to Fords, Vauxhalls, B.M.C. and so on. Those companies will expand any way. Surely we could have got what we wanted by negative powers alone. Then there is the big subsidy that was needed to persuade Colvilles to put half a strip mill down in an uneconomic place. Was that really necessary?

Is it utterly impossible for us ever to pay for our roads and bridges? In America every motorway is called a turnpike, for the simple reason that motorists pay to drive on them. They do the same to cross the great bridges, and the capital expenditure is very quickly paid off, so that they can start again on more roads and bridges. I cannot see that it is any hardship to anybody to have to pay a toll if the routes they used before are still open to him to use freely. If we had some motorway tolls, and tolls on our great bridges, like those over the Forth and the Severn, we should be able to pay off some debts, and what a sensation that would be.

Lastly, there is that awful millstone round our neck—the financing of the capital expenditure by nationalised industries. Just before the Budget Mr. Manning Dacey said in a speech: Collectively, the public corporations do not earn enough to cover the cost of replacing capital used up during the year's operations. After providing for capital consumption, they have had a combined deficit of the order of £200 million a year, and part of the Government's lendings below the line go to finance, not capital formation, but this current deficit. As I understand it, most if not all the nationalised industries depreciate on the historical cost basis. They do not put aside enough to replace the assets that they are using up, as private companies have to do. If the screw were put upon them I believe that they could do more internal financing by effecting economies. Even if they could not, is it sensible to tax ourselves in order to buy electricity below the true cost of producing it?

Those are a few suggestions of what might be done. The fatal thing is just to sit back, let the tide roll over us, and say, "We are spending much too much, but we cannot do anything about it. It is all so difficult." The younger Pitt introduced seventeen separate Budgets, and I hope that my right hon. Friend will introduce the same number. The theme of all those Budgets was, "Let us look our difficulties in the face." Can we not look our difficulties in the face?

6.0 p.m.

Mr. John Diamond (Gloucester)

The right hon. Member for Flint, West (Mr. Birch) started his speech by complaining of the lack of theme in the speech of the hon. Member for Orkney and Shetland (Mr. Grimond). There can be no complaint about a lack of theme in the speech of the right hon. Gentleman. His theme was a slightly veiled attack on his right hon. Friend, an attack on the nationalised industries, an attack on Government spending and an attack—which I regret extremely—on the encouragement of private saving.

It is perfectly true that, having said all these things, the right hon. Gentleman said, in a rather inconclusive manner, that, of course, we all support private saving. I thought it very odd of one who has only recently come from the Treasury Bench that he should be rather supercilious in his remarks about the distinguished people who have charge of organising private saving, knowing as he does that the essence of making things balance in our economy and in the Budget is reliance on private savings.

Let me say this further to the right hon. Gentleman. I could have wished that he had not kept all his remarks for this occasion, but had joined in our debate on the advances to the steel industry and made his remarks about Colvilles then. He would have found great sympathy from this side of the House with the remarks, which, so far, he alone on the benches opposite has been prepared to make, to the effect that this represented what he called a subsidy—what we call bribery—to Colvilles to get that firm to do what, quite obviously, it would have been prepared to do without being subsidised and without any bribery at all. That is our view of the situation.

The right hon. Gentleman complained somewhat that hon. Members who have spoken from both sides of the House had directed their attention to the provisions of the Finance Bill, and he said that we ought to have had a further discussion on the Budget. I had the good fortune to be called during the Budget debate—[HON. MEMBERS: "Many of us did not."] I am aware that many hon. Members did not have that good fortune, but that is something about which I can do nothing. I dare say that many of those hon. Members will remedy that lack of opportunity on this occasion by making their speeches this evening, as did the right hon. Member for Flint, West. But they have no right to complain if the rest of us direct our attention to what, after all, is more obviously before us today, the provisions of the current Finance Bill.

I wish to address a few remarks to that subject, because to my mind this Finance Bill is a special one in that it deals substantially with the problem of tax avoidance in a comparatively new way. I wish to use that as my theme and to discuss four questions. The first is why we are compelled to look at the present position and particularly that part of the Bill which proposes to change history, in the sense of the Income Tax Acts, and to give the right of decision to the Executive and take it away from Parliament. I wish to discuss the genesis of that Clause and the arguments for and against this kind of anti-tax avoidance provision. I wish to discuss what we can do which would be better and, finally, to suggest what we could do which would be best.

Let us, first, deal with the genesis of Clause 26, which is a new departure in the Finance Bill so far as tax avoidance is concerned. There are several reasons which compel us to consider the position. The first is the enormous loss of revenue, with which I wish to deal at a little length. No one likes doing sums of arithmetic, but I hope that hon. Members will bear with me for a moment while we examine a particular method of avoiding taxation which I will put in its simplest terms so that the House may realise the extent to which the Revenue is being defrauded.

Let us take the simple case of a businessman who makes a trading profit of £1,000. He has another business of which he sells the shares at a profit of £900, forgoing the trading profit which he would have made. The person who buys the shares buys a company which is worthless at the price of £900 and takes over the trading profit of £1,000. It is as simple as that. It would take too long for me to go into the details involved, but those are the essential figures. What happens is that the businessman has secured—instead of £1,000 trading profit on which he would have paid, say, £500 tax and Profits Tax in round figures—a tax-free sum of £900 for his shares. Accordingly, he has £900 tax-free instead of £1,000 less the £500 which would have been paid in tax, leaving him with £500. He has made a profit in money of £400.

The buyer has bought something which is worthless for £900. He has paid out £900 and made a trading profit of £1,000 and as he is allowed to set one against the other he has made a profit of £100 on which he pays tax. We will assume that the tax is again 50 per cent. and so he would pay £50. Put quite simply, there was a trading company making a profit of £1,000 as a result of which the Revenue would anticipate receiving £500 in tax and Profits Tax. At the end of the day the trader concerned has made a tax-free profit of £400, the buyer has made a profit, less tax, of £50, and the Revenue has lost £450. That is how the sum balances. Out of £1,000 profit the Revenue should have received £500, but it actually receives £50, or 10 per cent.

If one realises that there is no limit to the extent to which this can be done under the present law, if people wish to operate in this way, one realises the extent to which the Revenue must have been "cheated"—to use the word of the Chancellor of the Exchequer—during, at all events, the past two years when we have been pleading for something different to be done. So I do not think that anyone can complain that we are compelled to look carefully at the situation when there is this loss to the Revenue involved.

The second reason why we are compelled to examine a Clause of this kind on its merits is that no detailed legislation can ever be adequate to foresee and forestall all attempts at tax avoidance. I repeat that, as a general proposition, no legislation can be adequate to forestall it, including this Clause with which we are now dealing. It cannot be adequate to forestall all attempts at tax avoidance, because it is beyond the wit of a few men to think out all the schemes open to the community as a whole in which to devise ways of avoiding legislation. The more detail which is given in the legislation to show what things cannot be done, the more is illustrated those things which can be done. Therefore, it is absolutely inevitable that we are forced to something other than specific, detailed legislation in order to achieve the will of Parliament.

The third reason why we are compelled to look at this Clause on its merits is the time lag involved; the fact that the Revenue, in the nature of things, cannot be aware of the inroads being made until they come to its attention long after the transactions have been carried through. That is the only possible explanation of why at the time we were told that the cost of these devices—these dividend stripping and bondwashing devices—was about £4 million, as we were once told, or about £10 million as we were once told, and why today the Chancellor says that he cannot say how much it is. In individual cases it is very considerable and the right hon. Gentleman is no longer prepared to give an estimate of the total. Of course he is not, because even at this moment he is not aware of the total inroads on the Revenue which have been made as a result of these devices.

Finally, we are compelled to consider a Clause of this kind because of the Conservative pressure which was exerted two years ago and resulted in the reversion of the Chancellor's wish for retrospection. We would have had retrospection which would have been the most useful deterrent that one could have thought of, but the Chancellor wavered. There was some sort of Conservative streak in his character which made him go back after he had decided to take the plunge and to do something to support the general body of taxpayers. One might almost say that it was some sort of "Blue Streak" which prevented him from doing that and made him withdraw this deterrent until so much money had been lost.

The comparison is not without point. I am quite sure that the £60 million lost on Blue Streak is small in relation to the amount which has been lost through the refusal of the Government to listen to the advice that was tendered to them from this side of the House two years ago, because of their obstinacy in carrying on with an attempt which they now recognise to be an impossible attempt to deal with this type of tax avoidance by specific legislation.

Now, therefore, we are compelled to look at this Clause to see whether it is one of the best methods of dealing with the problem which faces us. The one thing to be said for the Clause—I have made it clear that I do not like it very much—is that the method the Government have adopted saves the Revenue through acting as a deterrent. There is no question of that, but there are a number of arguments against it. As presumably drawn, it is far too limited. The Revenue got far too nervous about it and have limited the application of the Clause. Obviously, those limitations provide for future loopholes.

Secondly, it brings what I can only describe as vagueness into this legislation which, so far as I am aware, we have tried to eliminate, apart from the comparable E.P.T. and Profits Tax Clauses. It is not sufficient to say, "You can rely on the courts ". It is all very well for those who are lawyers, and look at the thing from their own legal experience, to talk about the safeguard of the courts, but that is of very little practical application when working in this field. If every tax argument had to be settled by reference to the court the Revenue would never collect its money; but the enormous majority of cases are settled by correspondence, discussion, meetings and the avoidance of appealing to courts in one way and another.

Every practitioner knows that the last thing one does is to risk the uncertainty of going to the court. If you win in a lower court and the Revenue does not like it, the Revenue can take you to a higher court. It has unlimited funds to force the issue in the higher courts. We know that the last thing to do is to seek the assistance of the courts, however much one may think one is right. Young practitioners go to the Commissioners and rub their hands when they win a case, but they little realise that the Revenue will take it to higher and higher courts until, in the end, the young practitioner will wish that he had never started on it. I hope that hon. Members opposite do not think that this would be a satisfactory protection for the public.

That leads on to two major arguments against the Clause which I do not think can be disputed. First, it attempts to prove the impossible. It attempts to prove what a man's motives are. It may be possible to infer what his motives are, but to my mind to prove what they are is utterly impossible. Yet this Clause rests on that. The other argument against the Clause is that it appears to surrender the will of Parliament to the Executive. Everyone who supports the Clause ought to realise that he is resigning from his job as a Member of Parliament, walking out of his responsibilities, and saying, "This is a matter which is so difficult that we had better leave it to the Executive. The man in Whitehall will know better than I do." That I regard as an abdication of our duties, and we should not abdicate from them if we can avoid doing so.

Those who spoke so strongly against retrospection two years ago are not entitled to complain now, because this was the alternative forced on the Government by the refusal of back benchers opposite to do the right thing although the Chancellor was in favour of it. Those who complain about the extent of Government expenditure have no right to complain about what the Government are proposing to do in this Clause, because this Clause is intended to increase revenue very substantially. If they do complain about it, they must suggest an alternative.

There are two alternatives. One was suggested by my own Front Bench. I think that it meets the case up to a point, but, I regret to say, only up to a point. That is the method of a Statutory Instrument followed by a Clause in the later Finance Bill. That does not meet the real difficulty adequately. It meets the problem of the time lag, but only to a small extent and only in two years, not in six months or so, would that method help to meet the problem. It would also require a Statutory Instrument of great complexity and it would have to be enacted precisely during the course of the next Finance Bill. That method would mean that the provision could not be changed in any way at all. Discussion in Parliament would be completely limited up to the time of the Finance Bill. Then it would have to be re-enacted exactly, for otherwise the law would not be the law during that period.

Altogether I do not regard that as an adequate method of dealing with the problem, unless we are to hand in our resignations as incompetent Members who were unable to carry out our responsibilities of making the laws. Of course we can say, "Leave it to the Executive", but that, is not our job. Our job is, as far as possible, to make the laws.

Sir John Barlow (Middleton and Prestwich)

The hon. Member leaves me in some confusion. As I understand, he has criticised this Clause yet applauded it. Will he make clear exactly where he stands on the matter?

Mr. Diamond

Perhaps the hon. Member was not in the Chamber when I started my speech. I made it perfectly clear that I was going to draw attention to the reasons why we have to consider this Clause. We have been forced into this situation mainly by the actions of hon. Members opposite, two years ago, in refusing retrospection, but it is not a satisfactory Clause and there are better ways of meeting the problem. I said that I should consider what is better, and what, finally, is the best method. If the hon. Member will be patient, I shall come to what I regard as a better method. This Clause is a possible course and, unless we have a better method of dealing with the problem, hon. Members opposite must support it.

There are better methods of dealing with this problem than that suggested in the Bill. One is brought forward by the Labour Party Front Bench, and it goes some way, but not all the way, to deal with the problem. The only method which goes the full way to meet this situation—and I hope that it will again be considered by the Revenue, the Chancellor and the Government—is a clear and precise warning, given at the time of the introduction of the legislation, that a particular piece of legislation is aimed at a particular evil and that if loopholes are found in that legislation they will be stopped retrospectively to the date on which the warning was given. I can see nothing against that procedure. It is precise and clear and it leaves the decision to Parliament, when the enactment is made.

Sir Kenneth Pickthorn (Carlton)

If it is precise and clear, why cannot that which is precise and clear in the mind of the person presenting it be included in the Bill which is before the House?

Mr. Diamond

It is precise and clear in the object at which it is aimed. The reason why the legislation fails is that it aims not at the object, but at the method.

It deals with the method, and there are hundreds of methods of arriving at the same object. In giving the warning, what Parliament and the Government should do is to say, "This is the object which we have in mind". For example, the object could be the avoidance of future devices for dividend stripping.

Sir K. Pickthorn

Define that.

Mr. Diamond

The warning could make it plain that any dividend stripping device—which is a clear and well-known term—which manages to get through the present legislation will be legislated against in future in a Finance Bill, subject to debate and approval in the House of Commons but retrospectively to the date of this warning, provided that it is clearly within this warning. I am grateful to the hon. Member for Carlton (Sir K. Pickthorn) for his intervention, because that is a point which I wanted to make absolutely clear.

The defect in the use of a Statutory Instrument is that it does not deal with the object, which is a tax avoidance device, but deals with a method, or two or three methods, of arriving at it. I therefore suggest that the only satisfactory method is to give a clear and precise warning. No one can say that any hardship is involved. All that will happen as a result of retrospection when the time comes is that those who did not expect to get away with their Profits Tax free will find that they do not get away with them tax free, just as they were advised that they would not get away with them tax free; because they will have been advised on the law, and the warning will have made it clear that the law is directing its attention to a particular objective and that if they try to reach that objective by other methods they will be caught retrospectively. No hardship of any kind is involved. It is merely that the Revenue will get the tax to which it would have been entitled had the law been more specifically drafted against this method.

It is time that we stopped thinking of tax avoidance in terms of cricket and of all the correspondence which I have seen in The Times recently headed, "Chancellor v. Taxpayer". It is time we realised that the Chancellor has a duty, and the House has a duty in supporting him, to see that every member of the community makes a fair contribution towards tax, and, in fairness to one member, that another member of the community does not escape his fair burden of taxation. It is only when we are prepared to accept that view of the liability of the taxpayer that we shall help the Revenue and establish an attitude of mind which is not so largely directed to tax avoidance. The method which I have suggested retains control by Parliament in the fullest way, because when we come to legislate against that on which the warning has been given, Parliament will have a full opportunity to debate the legislation.

I am saying all this because I am satisfied that Clause 26 and the other Clauses which hinge on it, which will be subject to a great deal of criticism in Committee by hon. Members opposite, will not prove adequate—

Mr. W. R. Rees-Davies (Isle of Thanet)


Mr. Diamond

It is no good the hon. Member saying "Bosh". He is, of course, in good company, because two years ago the Chancellor of the Exchequer said "Bosh" when I made the very same remarks on the subject on which he is now legislating. We do not mind hon. Members say "Bosh" as long as we do our duty in trying to see that every member of the community pays his fair share of taxation and that the Chancellor is supported in carrying out that function.

The Chancellor has not refused to consider retrospection of this kind within the warning. When he withdrew retrospection two years ago he made it clear that he was not turning it down as a proposition for all time. On that occasion he said that, having regard specifically to the fact that what was proposed in the legislation went a bit wide of the warning, it ought not to be made retrospective. He was right in that part of it went wide of the warning, and it is important that the Chancellor should realise that he was extremely badly advised on that occasion by advisers who sought to include in the Clause more than had been warned about at the time of the previous legislation. But for that, there would not have been a single argument at the time against restrospection.

All the other methods which are open to us are in varying degrees unsatisfac- tory. The method which I am suggesting is the most satisfactory of those which are available, as long as we continue to make tax avoidance schemes desirable.

Mr. Raymond Gower (Barry)

Is not the hon. Member going too far in suggesting that the are no objections to that method? If it is accepted, does it not mean that the taxpayer's adviser will have to say, "This is the statute law in this country. At present, what you propose is perfectly legal, but a politician has given a warning, and if he does not die before next year, that may become the statute law of the country"? Is not that an objectionable procedure.

Mr. Diamond

I was advocating that the Government should give a warning in precise term so that the will of Parliament shall have effect.

This is the best method as long as we are in a situation which makes it attractive to have tax avoidance devices, but the most sensible thing to do is to remove the attraction of tax avoidance schemes. They are attractive for two reasons: first, and the main reason, that the rate of tax is so high; and, secondly, because there is a large area which is tax free, and all one has to do, as the Chancellor made clear in his opening speech, is to arrange to divert the activities of an individual from tax-paying sources to non-tax-paying sources.

The two objectives which I suggest can both be achieved quite simply by broadening the base of taxation so that we include capital gains as well as revenue gains for all taxable purposes. If the situation were that one became just as liable to be taxed on capital profits as on revenue profits, then it would no longer be profitable to seek to change from one to the other. If at the same time, as a result of broadening the taxation base, the standard rate of Income Tax is reduced, there will be a further encouragement to people to stop thinking about tax avoidance schemes. All of us who are aware of this problem must regret very much the activities and the amount of energy, brain power and thought which is given to these schemes—I cannot call them non-productive—instead of to the more useful social activities of the community.

I hope, therefore, that the Chancellor will consider a method whereby a threat can be introduced at the time of legislation and also consider once more the possibility of a capital gains tax. The last time we spoke about this the Chancellor said that, whenever he had invested, he had always made a loss. He must be one of the miracle men of the age. We are told on the Stock Exchange that during the last year equities rose by 51 per cent.—that is, 51 per cent. tax-free. In view of that history, the Chancellor should tell us how he manages to buy equities of a kind which always make a loss.

The reason why I mention the figure is that I think it is deplorable—it is felt especially by all hon. Members on this side—that the only people who pay their full effective rate of taxation are wage earners, salary earners and the small rentiers. They are the only people who pay the effective rate of tax as Parliament intended. All the rest—'the large salary earner, the large Schedule E man, the businessman, and particularly the in-vestment and merchant banker—can so arrange their affairs as to escape taxation to the tune of millions of pounds, as the Chancellor of the Exchequer himself said. It is an absurd state of affairs that Parliament should allow that to continue.

6.31 p.m.

Sir Alexander Spearman (Scarborough and Whitby)

The hon. Member for Gloucester (Mr. Diamond) started his speech by referring to the number of hon. Members who had been kept out of the Budget debate. There was a moment when I thought that he had set himself the formidable task of keeping every other hon. Member out of this debate.

The hon. Member spoke at considerable length about tax avoidance. I support entirely the measures to prevent those abuses. The hon. Member spoke about the enormous losses to the Revenue, but the losses from these abuses, which certainly should be remedied, are very small compared to the loss to the Revenue caused by those doing a cash business and those receiving payments for part-time work in the evenings and at weekends not returning them.

Mr. A. C. Manuel (Central Ayrshire)

The hon. Member for Scarborough and Whitby (Sir A. Spearman) seems to be referring to charladies.

Sir A. Spearman

The only way of avoiding that is to lower the general rate of taxation. As long as it is at the present level, tax avoidance of some sort is quite inevitable.

I believe that the measures of my right hon. Friend are exactly right for the conditions facing him today. If the Government had spent less we could be having a different Finance Bill today. We all know that almost the sole responsibility for controlling expenditure rests on the Treasury. Perhaps that is out of date today. One hundred years ago Members of the House of Commons did not urge the Government to spend more. The Opposition were continually critical of any expenditure. The job of the Treasury was to save candle ends, minor waste, not to deal with major policy.

Today the Opposition continually urge the Government to spend more. It is inherent in their social policy. We have had the present Opposition for a long time and look like having them for a long time to come, so that state of affairs will go on. Most hon. Members on this side also urge the Government to spend more money on the particular project which they happen to know is far more important than anything else. Even my hon. Friend the Member for Dorset, South (Viscount Hinchingbrooke), who so often attacks Government expenditure, has been known to urge increased expenditure on his particular projects, such as roads. So we now have an Opposition not criticising but urging Government expenditure. Most Members of Parliament, and I rather think most members of the Government, do the same.

I do not claim to know much of what goes on at Cabinet meetings, and I am open to correction by right hon. Gentlemen on either side. I rather think that when a Minister puts forward a spending project he will find that his colleagues will quite often support him, hoping when their time comes to get their backs scratched in return. If the Government were able to fix the total amount which was to be spent so that every Minister knew that the more one Minister spent the less there would be for him, there might be rather less enthusiasm to support spending projects.

1 should like to see a clearer estimate of the automatic increases of the cost of existing projects and a clearer set-up of the resources likely to be available over the years ahead. I remind my right hon. Friends in the spending Departments of the wise and brave words of Lord Attlee. He said, speaking as Prime Minister, on one of the more serious balance of payments crises of the Labour Government: It may be we have tried to do too much in a short time".—(OFFICIAL REPORT, 6th August, 1947; Vol. 441, c. 1489.] It is not really a question of settling what is good and what is bad on which to spend money. It is a question of priorities, which is far more difficult—how far to put off spending on something that is good in order to make room for something that is still better. If we are to have a more agreeable Finance Bill next year and at the same time are to continue to expand benefits to those in need, perhaps we must move more to the principle of those who can afford it paying for their own benefits, and perhaps, as my right hon. Friend the Member for Flint, West (Mr. Birch) said, those who use particular roads paying a toll for them.

The Bill must be considered in conjunction with the monetary measures which the Chancellor has announced, because without those I do not believe that the Government would retain sufficient control of the economy to prevent inflation. We have had two years of absolutely stable prices with enormous expansion in industry, which I think is unprecedented in our history.

That has not happened by chance. It has happened because my right hon. Friend the Chancellor of the Exchequer gave the economy a push on in 1958 and 1959 when it was going too slowly and a pull back this year when it was going too fast. It is generally agreed—certainly the Leader of the Opposition has repeatedly said this—that we can have stable prices only if the increase in spending does not exceed the increase in resources and we can have full employment or a very high level of employment only if the increase in resources does not exceed the increase in spending. Therefore, the Chancellor must be continually expanding or curbing general expenditure so as to get that balance.

I say this in face of the joint wisdom of the hon. and learned Member for Kettering (Mr. Mitchison) and the hon. Member for Orkney and Shetland (Mr. Grimond), who both seemed to criticise the Chancellor of the Exchequer for varying the pace of the economy according to the circumstances of the day.

Last year, largely as a result of the Chancellor's action in the Budget, demand for goods went up by about £1,000 million and, as the Chancellor had clearly foreseen, output went up by just about the same amount, so we had stable prices. The reasons for that increase in production were two. First of all, there was the capacity to produce more as a result of previous investment—which amounts fairly regularly to 3 per cent. a year—and, secondly, there was the taking up of the slack in the economy resulting, partly, from a falling off in world trade.

That slack has now been almost entirely taken up. I know that there is spare capacity in some industries, particularly in Scotland, but I think that it will be found to be mainly in industries that are either making things that people do not want to buy or industries that cannot get more labour. Until we get more mobility of either work or workers I do not think that that can be improved upon.

This year the increase in production will certainly be up, but it will be less than last year's. Therefore, demand can be up this year, but the increase must be up less than it was last year. According to the Survey, it is quite clear that this year Government expenditure will go up, investment will go up, and exports are expected to go up.

It therefore cannot be safe for personal consumption to rise as much this year as it did last. In 1959, consumption, which takes just over half total demand, went up by 4 per cent., which is rather over £500 million, and it looks as though this year it ought not to go up by more than about 2½ per cent. Had the Chancellor not taken his measures, I am quite certain that this year consumption would have gone up by far more than that.

I believe that the danger of inflation is particularly acute after the slack in our economy has been taken up because, unless action is taken, the rise in incomes that has gone on while the slack was being taken up will continue, but the rise in output cannot continue, so one gets an imbalance.

When incomes rise more than output, two things happen. In the first place, prices rise, because there is no effective competition. Here I should like to quote one sentence from an article by Professor Paish in last February's Westminster Review which, I think, is the clearest exposition of our economic position that I have ever read.

In that article, Professor Paish said: If all firms are employed to the limits of their capacities and new orders can be placed only at the end of long waiting-lists there can be no effective competition. I am quite sure that if there is no effective competition price rises are inevitable.

In the second place, we get balance of payments trouble. Last year, our surplus was down by £200 million. That did not mean any alarming inroads into our reserves because the other countries in the sterling area built up their sterling balances, but we cannot depend on that happening again. Today we are importing just a little too much and exporting just a little too little. But if demand at home goes up we shall import more. If prices go up we shall probably export less.

A balance of payments crisis is a very serious matter for any country, but for this country, as banker for the sterling area, it would be a disaster. I believe that if my right hon. Friend had presented us with a "soft" Budget this year it would have been a clear warning at home and abroad that we were in for inflation. The difficulty about that is that the more inflation is expected the quicker it grows, because the extent to which people try to protect themselves from the consequences of inflation must accelerate it.

My right hon. Friend had two choices. One was to act now—not to stop the expansion but slightly to moderate its pace and, by doing so, risk the opposition of my hon. Friend the Member for Kidderminster (Mr. Nabarro). Or he could have waited, as we have so often done before, until the crisis arrived. He would then have had not to slow down the expansion but stop it altogether by drastic measures. No doubt he would then have had the full approval of my hon. Friend the Member for Kidderminster, because it would have been quite obvious that those measures had to be taken to avoid a balance of payments crisis. If I may say so, my hon. Friend the Member for Kidderminster is always very quick to see the obvious, and tends to declaim it to us in no unclear voice.

I believe that high taxation is bad. It is harsh, particularly on those with fixed incomes. It means a lot of waste, and it is a discouragement to hard work and enterprise. I would remind hon. Members opposite that it not only discourages the comparatively few very rich but also discourages the very many who have every intention of becoming rich.

The Treasury's Bulletin for Industry tells us that now, for every £ of revenue that is raised, 10s. 7d. comes from income and 8s. l0d. from spending. I hope that in future Budgets it will be possible for the Government to alter that proportion so that at least no more is taxed on earnings than is taxed on spending.

Mr. John Rankin (Glasgow, Govan)

Does the hon. Gentleman realise that the present yield from taxation of capital is £213 million, and does he think that that bears an unfair relation to the taxation on expenditure and the taxation on income?

Sir A. Spearman

I was not really going into that. I was merely saying that I would rather see the proportion between taxation on spending and taxation on earnings as it was in 1948.

I am sure that high taxation is bad, but I am also sure that there is something worse—low taxation and high expenditure, because that must mean inflation. If we get into a really inflationary situation there is just no painless solution. No matter what controls are imposed, whether Conservative or Socialist, whether fiscal or physical, if demand is sharply cut back then, inevitably, workers will lose jobs, employers will lose profits and the economy will run into stagnation. I am convinced that only by taking measures in time, as my right hon. Friend is doing, can we hope to have a continual rate of expansion in our economy, and it is for that reason that I warmly support the Bill.

6.59 p.m.

Mr. Eric Fletcher (Islington, East)

As I am conscious that a very large number of hon. Members wish to take part in the debate, I propose to confine myself to a few observations on Clause 26. I do so chiefly because I want to take the opportunity of congratulating the Chancellor of the Exchequer on his courage in introducing this Clause. In our Budget debates of 1958 I had occasion to criticise the right hon. Gentleman's change of mind in dealing with bondwashing and dividend stripping.

I do not take quite the same view as does my hon. Friend the Member for Gloucester (Mr. Diamond), but I am sure that it is important to have quite clearly in mind what are the real justifications for the Chancellor's bold proposal in introducing this new feature into our jurisprudence. We must face squarely the objections which have been raised in the Press and elsewhere, largely by hon. Members on the back benches opposite, and their supporters. It is said that Clause 26, aimed at stopping tax avoidance by giving much greater and, it is said, arbitrary powers to the Executive, is, in the first place, unconstitutional. It is said that it is unethical, that it is contrary to established fundamental principles of our jurisprudence.

It is said, somewhat facetiously, although this is believed by many people, that it is contrary to the rules of cricket. There has been a great deal of correspondence in The Times on the subject. The hon. Member for Carlton (Sir K. Pickthorn), who has just left, and other pundits, claim it to be objectionable because it offends the principle that legislation passed by Parliament should be in clear and precise language.

I admit that these seem to be formidable objections to Clause 26, but I believe that they are all fallacious. In the first place, it is obviously not unconstitutional. One thing we all agree upon in this land is that Parliament is sovereign. Parliament may enact whatever it likes, as a matter of constitutional theory, because there is no fundamental, constitution, as there is in the United States, for instance, to limit the powers of the legislature.

Next, it will be agreed by all, I think, that the paramount objective of Parliament in legislating is to secure justice. I therefore turn to an aspect of the matter which was well put in a letter to The Times of 7th April: It is an accepted principle that the taxpayer is entitled to be as astute as he honestly can be to prevent the depletion of his means by the Inland Revenue, and eminent judges have held that this is neither legally nor morally reprehensible. I quite agree. There is a difference between the activities at which Clause 26 is aimed and the kind of tax evasion practised by the tradesman who puts his hand in the till, or by the person who does not make a proper return of his income. Those people are committing crimes for which they can be punished. The person who resorts to methods of tax avoidance in the nature of bondwashing or dividend stripping is not committing a crime. He is doing something which eminent judges over and over again have said he is entitled to do. They have said that there is nothing morally wrong or legally wrong about it.

If a taxpayer is astute enough, and has sufficient skilled advice so to arrange his affairs and manipulate transactions between one company and another that he can make a vast tax-free fortune running into hundreds of thousands of pounds, he is perfectly entitled to do that, as the law now stands. He is not even doing anything which is morally culpable.

Because that is the situation, Parliament must deal with it. I accept what has been said by the eminent judges about the right of the taxpayer so to arrange his affairs that he can, if he is within the law, resort to bondwashing and other avoidance devices. During the last twenty years, Parliament has taken steps to block up one loophole after another, but those steps have failed precisely because the law as it stands encourages people to find loophole after loophole. Therefore, we in this House must now face the corollary of that situation, which is that means must be found to stop these activities because, if we do not, Parliament will not fulfil its fundamental duty of securing justice among the citizens.

Again, when considering what Parliament may or may not properly do, it is pertinent to observe that, in certain spheres of legislation, it would be morally impossible to contemplate certain things which Parliament might constitutionally do. For example, it would be unthinkable to go back on the doctrine of religious toleration, or to repeal the Catholic Toleration Acts. Equally, I think that it would be very difficult for Parliament to defy public opinion to such an extent as to produce legislation which offended the Declaration of Human Rights of the United Nations.

But Parliament must observe the distinction between matters of that kind and fiscal legislation directed at bond-washing and dividend stripping. The distinction is that in this matter of bond-washing and dividend stripping we are dealing with something artificial, with something which can take place only through the manipulation of companies. A company, by definition, is an artificial person. It has a great many of the rights and privileges of an individual, but it is essentially the artificial creation of Statute. It is a conception to which the doctrine of human rights can have no application.

Human beings have certain fundamental human rights, but one cannot enunciate a parallel proposition that a limited liability company has any fundamental rights. Nor has any individual a fundamental, a priori, right to form as many companies as he likes and do what he likes with them, because companies depend for their existence upon creation under Statute. There are limitations upon the way in which companies can be created, and can operate. They exist to facilitate commerce, not to frustrate justice.

It so happens that we live in a society which is so complex that, for the proper functioning of the manifold economic activities of our civilisation, the limited liability company, with its special structure, is recognised as a necessity. But it does not follow from that that the ingenious manipulator, the unscrupulous person who indulges in and delights in resorting to every possible device on the Stock Exchange, has any fundamental right so to manipulate dealings between one company he controls and another he controls that he is able to derive tax advantages which run into millions of pounds.

A further reason why it is essential that Parliament should stop these devices is that the opportunity which is open to people, as the law stands, to deprive the Revenue, as the Chancellor said, of tens of millions of pounds is an opportunity which presents itself only to a very limited class of people. They must be people with considerable means, rich people. The ordinary miner or railwayman does not indulge in bondwashing or dividend stripping. It is not the ordinary citizen who does it. Only a very limited class of persons are able, through the operation of company law and the possession of wealth, to have this particular tax advantage.

I have no hesitation, therefore, in saying that Parliament would be abdicating its fundamental duty to the body of citizens if we do not take this opportunity of stopping these activities once and for all as an act of justice to taxpayers generally.

I do not entirely agree with what my hon. Friend the Member for Gloucester said. I admit that we have to face the objection that the law should be clear and specific. I should like to quote from a recent article in The Times written by Professor Wheatcroft, Professor of English Law at the University of London and editor of the British Tax Review. He said: The existence of high taxpayers side by side with tax exempt bodies, with dealers and tax loss companies near at hand, enables innumerable favourable tax situations to be created which are indistinguishable by legislation from genuine business transactions. That is the difficulty.

Professor Wheatcroft goes on: Financial transactions form a large part of City business and any tax legislation in the field must necessarily include substantial safeguards for genuine transactions which have no tax avoidance intent. I have not always been of the opinion which I am about to express, but I am now convinced that the best and most effective way in which we can deal with this problem, which is causing such a swelling sore of discontent in the body politic, is by the provisions proposed by the Chancellor.

I have no objection to retrospective legislation after a clear and express warning has been given. That would have been a valuable deterrent and it would have been effective. I have no objection if it is thought necessary to give the Chancellor powers supplemental to what he is asking for in Clause 26 to enable him to bring in Statutory Instruments between one Budget and another, subject to confirmation in the next Finance Bill, but I regard those as supplementary to the provisions which I think the Chancellor has wisely adopted in Clause 26.

Mr. Diamond

If, as my hon. Friend rightly says, bona fide transactions and tax avoidance transactions are almost indistinguishable, why is it better that that distinction, difficult though it may be to draw, should be drawn by the Executive rather than by the House of Commons? While I am on my feet, may I apologise to my hon. Friend for not having said that a good deal of what I had to say on retrospection was drawn from a most excellent pamphlet on retrospective fiscal legislation by one Eric Fletcher, LI.D.

Mr. Fletcher

I thank my hon. Friend for what he has said, and I should like to try to answer his point about why it is better that the judiciary should deal with this matter rather than Parliament.

Mr. Diamond

The Executive.

Mr. Fletcher

No, not the Executive, but the judiciary. Obviously, there is a limit to the detail in which Parliament can legislate. It is the function of Parliament to lay down general principles, and it is the function of the judiciary to apply those principles. It used to be said that all that Parliament should do is write laws and frame them in such clear and precise words that any judge could interpret them and give effect to them. But that is no longer wholly true.

I have noticed that in recent years, in other contexts, we have found it necessary to depart from that maxim. There has been various legislation in which Parliament has had to define purposes in language which has been recognised on both sides of the House to be somewhat vague and rather general and has left it to specialised courts to interpret it. A very good illustration of that was the Restrictive Practices Act. I am not sure whether my hon. Friend the Member for Gloucester was a Member when that Measure was enacted, but we had a good deal of discussion because we were leaving the law in a somewhat imprecise form to be dealt with by a new tribunal set up for the purpose, namely, the Re- strictive Practices Court. Many hon. Members on both sides who were concerned about the preservation of the principles of our common law had some scruples because they felt that we might be imposing on the judiciary tasks with which it was not familiar.

I think that it is relevant to say that experience has shown that that Act is working very well. It laid down, for example, provisions about what was in the public interest and what was for the general good, using words which could not be clearly defined. It was designed to fulfil in this country the part which is played in the United States by the antitrust laws, which are necessarily somewhat imprecise. I think that that is a parallel example of what we are doing here.

Mr. Diamond

The point which my hon. Friend is raising is most helpful, and I am sure that all of us would like to have our minds cleared on this difficult topic. Surely he is introducing a case which is not a true parallel, namely, a case which can be settled only by the judiciary. My complaint about Clause 26 is that, in practice, 90 per cent. or more of the cases will be settled by the Executive, and that only in the unfortunate event of a settlement not being reached with the Executive will recourse be had to the judiciary. It is not realistic to believe that the matter will be settled by the judiciary.

Mr. Fletcher

I do not take that view. When we come to Clause 26 in Committee we may have to examine its content a little more closely. My own impression of Clause 26 is that it does not give the Commissioners any greater power in this class of taxation than it does in miscellaneous cases of taxation with which they are dealing every day in relation to individual taxpayers.

I think that the Chancellor of the Exchequer has hit upon a very reasonable formula for ensuring that there is, first, the determination by the Commissioners, then there is provision for a special tribunal, and then for a review of points of law by the judiciary. There may well be differences of opinion as to whether this permits of too many appeals. I am prepared to appreciate that there may be room for argument about the mechanics of the Clause. But as to the desirability and utility of this Clause as an instrument for giving effect to what I think everyone in the Committee must now regard as something of prime importance, I wholeheartedly approve of the courageous steps which the Chancellor has taken.

7.8 p.m.

Sir Spencer Summers (Aylesbury)

The speeches of the hon. Members for Gloucester (Mr. Diamond) and Islington, East (Mr. Fletcher), lasting between them close on one hour, have dealt with one aspect of the Bill alone, namely, the subject of tax avoidance. If the Opposition are not able to put forward any constructive suggestions about broad policy in this debate, perhaps we on this side of the House might try to do so.

Before I come to the one or two Clauses on which I want to comment, I should like to share the view expressed by my hon. Friend the Member for Scarborough (Sir A. Spearman), who said that, given the facts of the situation as they are, the Chancellor had very little option but to bring in a Budget and Finance Bill very much on these lines. That does not necessarily imply concurrence in the Government expenditure which brought about the conditions with which we are here dealing.

If conditions change, we must consider whether we should make changes in some of the hitherto acceptable forms of expenditure, even in the Welfare State. Just as was the case in defence, if conditions alter and the Government come forward with a good case for a change in public expenditure under that head, so, I suggest, if conditions alter in the social field it is equally proper to bring forward other suggestions.

The hon. Gentleman the Member for Orkney and Shetland (Mr. Grimond) said that he had not detected any Member who alluded to Government expenditure suggesting where cuts could be made. I should like to suggest one important change in that field which I hope that one day the hon. Gentleman may think worth while supporting. I refer to family allowances. I do not want to develop this at great length, but it is seldom realised that the cost of providing 8s. a week for a second child in every family is about £70 million annually. That is a very large sum of money It used to be argued, when family allowances were introduced—and I support the principle on which they rest—that it was not reasonable to ask parents to bring up more than one child without help and that they should have help for the second and subsequent children.

I believe that the time has come, and that such changes have occurred in our society, that it should now be regarded as reasonable to say that parents should be expected to bring up two children without help from anywhere else. If we were to do that and use part of the saving accruing to the Treasury from that decision to spend on the third, fourth and subsequent children we could raise the amounts paid to them by as much as 40 per cent., 4s. a week, and still have £50 million annually to spend or not to spend, as the case might be, as the result of that transaction.

So, when we are told that it is because policies approved by Parliament or by this party are merely being implemented or given effect to in the Chancellor's Budget, I do not think that he should use that fire escape, so to speak, because there are ways in which he can modify former policy in the light of changing circumstances.

Sir A. Spearman

Not him only.

Sir S. Summers

My hon. Friend says that it is not him only. I do not seek to distinguish between the Chancellor of the Exchequer as such and the Government. It is certainly open to them to come forward with modification of policies designed to save public expenditure.

I turn to Clause 18, which deals with so-called hobby farming. I do not know what size the farm should be before an hon. Member discloses an interest in this matter but I am sure that my farm is large enough for me to disclose my interest. I accept that if we can, without doing harm to the genuine farmer or market gardener, eliminate abuse, we certainly should do so. I am, however, a little concerned at the way in which the Clause is drafted, because it says, in effect, that relief against other income shall not be allowed for losses so incurred unless it is shown that the trade was being carried on for that year of assessment on a commercial basis.

in other words, the proof is on the applicant. I do not know what the nature of the proof will require to be. I would have thought that if it was perfectly right prima facie for tax allowance to be made it would have been much fairer to say that the proof shall rest upon the Executive. If there were good reasons to withhold the tax hitherto thought properly allowable, the onus of proof should rest upon them.

I notice that in Clause 18 (5) reference is made to the fact that if reasonable expectation of profit was once the case it shall continue to be so regarded. At any rate, that is what one understands the meaning of the words to be. I hope that my right hon. and learned Friend may give a clue as to what is the purpose of this subsection, and if it is to deal with an enterprise which was very profitable in the early stages and which appeared satisfactory at that time.

The Attorney-General

I would point out that in Clause 18 (5) the wording is different. There, it is … a reasonable expectation of profit …". The wording in Clause 18 (1) is with a view to the realisation of profit. This is merely to cover the possible gap that if it is established that there was a reasonable expectation of profit that will suffice. My hon. Friend will remember that the Chancellor used the words, "expectation of profit" in his Budget speech.

Sir S. Summers

I am much obliged to my right hon. and learned Friend for eliminating one possible worry under that heading.

I turn to Clause 26, about which we have heard so much already, and I will try not to be too wearying on that account. I am in somewhat of a difficulty, because any suggestion that it could be improved or that it causes concern could imply that I was satisfied to see a continuance of the evasion which it is designed to stop. I hope that it is not necessary to elaborate that point.

Moreover, both here and in Clause 18 there may be borderline cases and we must be very careful, in passing Clauses of this kind, to make quite certain that the genuine bona fide case does not get caught up when it ought not to be caught up. After the Budget speeches I expected to find much more fault with this part of the Finance Bill than I am able to find in the form in which it is presented to us. If, in fact, it really is impossible—and I am prepared to accept the assurance of my right hon. Friend on that point—to catch up with those who devise ingenious methods to circumvent the law, I am prepared to see a power of this kind included in the Bill.

It is very important to satisfy ourselves that the safeguards are adequate to deal with the genuine bona fide case. I welcome very much the inclusion of the right to get a notification that the applicant's plans are in order and that that will hold good for all time.

That is one of my objections to the proposal of the hon. Member for Gloucester (Mr. Diamond). He would have preferred to deal with that by retrospective legislation associated with a warning instead of powers such as this, because it would be impossible to go to anybody for a clearance alongside the warning, because no one can say what a future Chancellor may do in regard to retrospective legislation. The ability to get a clearance would be quite impossible if there were any attempt to deal with this type of abuse by warning and retrospective legislation. I am not very happy about the effect of the tribunal which has been introduced in this Clause. I interrupted my right hon. Friend in his speech and I understood from him that the effect of that tribunal is merely to get a check on facts—

Mr. Harold Lever (Manchester, Cheetham)

And on law.

The Attorney-General

I should like to deal with this point straight away. The position will be this. A person can appeal to the Special Commissioners on fact and law. If he is dissatisfied with the result he has an appeal entailing a rehearing of the whole case before the special tribunal where again questions of fact and law can be debated. If he is not satisfied with that on a point of law, although the questions of fact as then decided will be final, he can appeal to the High Court as one ordinarily can by way of case stated, as at quarter sessions and as with the ordinary appeal from the Special Commissioners or Board of Referees.

Sir S. Summers

Like a number of other hon. Members, I am not a lawyer and never have been. Therefore, I am at a considerable disadvantage in assessing the description of the effect of the Clause. I can only interpret what my right hon and learned Friend has said as meaning that, provided that the facts are not altered by further investigation, the judgment of the first of the commissioners who issued a direction cannot be challenged.

The Attorney-General

That is wrong.

Sir S. Summers

Perhaps there may be an opportunity to deal with it later.

I am suspicious of the use of the word "inappropriate" when it is stated that matters may be brought before further courts if the first verdict is inappropriate. If that verdict was unjustified, the layman would feel much more comfortable about the nature of the safeguard that is being introduced.

My right hon. and learned Friend said that I am worrying unnecessarily. I hope that he will elaborate the point in winding up, because I am certain that many people who are not lawyers are anxious fully to understand the effect of the Clause. What I hope my right hon. and learned Friend will be able to say is that an aggrieved citizen who believes that the direction which is issued against his action ought not to have been so issued can take it through the various stages ultimately to the tribunal and that the tribunal will have power to say that the direction ought not to have been issued, even when there is no dispute on the facts as such.

The Attorney-General

I can answer quickly. The Special Commissioners are the commissioners who sit in a judicial capacity. They could say, in the first place, "You are not within the scope of the Clause. No direction should be given to you." If the Special Commissioners do not say that, the taxpayer has a second opportunity, because he can go to the new tribunal and ask it to say that. He therefore has the twofold protection, the chance of going to a second court in the event of his being unsuccessful in one in getting the direction quashed.

Sir S. Summers

That is encouraging and I hope that that will prove to be so when the time comes. In these matters, however, a non-lawyer is at a grave disadvantage.

I should like to say a word about Clause 37 and the colliery business. My right hon. Friend the Chancellor of the Exchequer has constantly declared—that he has shown it was made clear by the reference by the hon. Member for Gloucester—his reluctance to introduce retrospective legislation. This time, however, my right hon. Friend's reluctance has been overcome, for reasons which he has advanced. I feel that there is a perfectly simple way of achieving virtually the same object without incurring the objectionable feature of retrospective legislation.

As I understand, tax was withheld for reasons which, at the time, were considered perfectly legitimate, both by the Inland Revenue and by the colliery company, but subsequent study has shown that it ought not to have been withheld. If the tax is paid over, as it then ought to have been, the passing of more than six years since it was withheld precludes the Inland Revenue from recovering it by an assessment in the ordinary way.

In Clause 29, for entirely different purposes, the six-year rule is waived. If I am not mistaken, the reason is to make it possible to catch up with dividend strippers, even though six years have elapsed. It would be a much less objectionable feature to introduce a specific waiving of the six-year rule in favour of the Inland Revenue in a case like this than to introduce yet another example of retrospective legislation. I shall be interested to know whether there is any technical reason why this should not have been done.

Clause 54 makes welcome changes on the subject of penalties and assessments. I am glad that these changes are being made, for they were much overdue, as was clear from a recent case on the subject. I query, however, the justification for charging interest on tax liabilities which are shown subsequently to be liable on account of neglect or other reasons. I do not know of any instance when tax due to the subject is ever increased by a rate of interest. Therefore, one is dealing here only with the question of motive. If for any reason tax is withheld from the Inland Revenue, it is only in these cases that the question of interest arises.

Mr. H. Lever

Arrears of tax which are fully established bear interest. The Clause merely attempts to put that principle into force. It was not necesary as long as the Inland Revenue was in a position to enforce a savage penalty against the taxpayer. When the Inland Revenue rightly gives up the power to impose a savage penalty, it naturally wants at least the same rights as it enjoys against every other taxpayer, so that the taxpayer should pay interest on tax which has been owing for a long time.

Sir S. Summers

The hon. Member has the advantage of experience of the legal profession. If, in this instance, there is a case for including interest on tax liabilities as well as on the other liabilities to which the hon. Member referred, I see no reason Why, when the boot is on the other foot, interest should not be allowed to the citizen by increasing sums due to him which are withheld for any reason by the Inland Revenue. I hope that this matter will be taken into account in Committee.

I should like to add my voice to those who are concerned with the complexity of the language with which we are concerned. Part of it may be due to the extreme difficulty of attempting to plug loopholes in the law as a result of which tax evaders have been able to benefit. If, however, for legal reasons, this complexity is unavoidable, the time has come when an elaborate explanatory memorandum must be issued to Members to give them a much clearer picture of the intention of the various Clauses than we can possibly decide upon for ourselves. I hope that when my right hon. and learned Friend the Attorney-General replies he will divorce his mind for a while from his legal experience and realise what complete double-Dutch half of this business is to a large number of hon. Members. If it is necessary, please may we have some clear explanations for the benefit of the uninitiated?

7.27 p.m.

Mr. John Rankin (Glasgow, Govan)

Although he is absent from the Chamber, I should like to say how fascinated I always am when I listen to the right hon. Member for Flint, West (Mr. Birch). He gives us so many figures and puts them forward so engagingly that one feels that his argument is almost beyond dispute.

The total effect on me, however, is to lead me to the belief that the right hon. Gentleman does not yet realise that he is living in a world of paper, a world that is totally unrelated to the world of the ordinary man and woman, the people to whom my hon. Friend the Member for Gloucester (Mr. Diamond) referred when he said that they were the great mass who could not, by the methods that are so well known to others, escape their obligations for tax.

The right hon. Member for Flint, West seemed to me to forget that the world in which he is largely immersed is a world that has collapsed Partially it collapsed in this country at one time, and not so long ago it collapsed in America and brought with it to the Western world, and to this nation of ours in particular, distress and sorrow of the most widespread character.

I thought that the right hon. Member was seeking to base the pyramid on its apex. That is the sort of unstable society in which we are living, the type of society in which the apex has always to be propped. Today we listen to continual appeals from shipowners, shipbuilders and all manner of industrialists to do something to prop up the pyramid. Very recently the new chairman of the United Shipping Chamber of Commerce had to remind us in the House that the shipping industry could no longer go it alone. It, too, had to be propped up.

These things are forced upon us, despite all that the right hon. Member for Flint, West said about the Chancellor. It is to the Government that these people turn for aid in their hour of need. It was to the Government that American industry and commerce turned in order that the people of America could be saved from even greater trouble than the collapse which that form of society brought to them in America.

The Bill reminds us of some of the problems that are inherent in that type of society. Last year the Finance Bill contained 37 pages. This year there are 80 pages and by far the greater proportion of that increase is due to the laudable attempt by the Chancellor to get a grip on the dodgers, the strippers and the tax avoiders. That is the great purpose of most of the extra pages which have been incorporated in the Bill. It is a recognition that widespread in this society there are anti-social types who seek to avoid their obligations. The Tory Government, recognising that fact, are devoting a great part of the Bill to seeking to restrict these people.

I am reminded tonight of the speech of the hon. and learned Gentleman the Solicitor-General, then Financial Secretary, who introduced the Finance Bill a year ago. Those of us who remember that speech will agree that he introduced it in lyrical and classical terms. Such elation seemed to be strangely absent today.

Dealing with the Bill then, the hon. and learned Gentleman said: … there are the measures for reduction of taxation which are particularly striking and widespread. …. Today they are singularly absent. He outlined them: Income Tax, beer duty, Purchase Tax, bus licences and Stamp Duty all reduced, and Corporation Duty abolished."—[OFFICIAL REPORT, 28th April, 1960; Vol. 604, c. 1106.] By a strange omission at that stage he said nothing about the cinema tax, but once the back benchers behind him got busy and joined with us in Opposition, in due course there was a significant reduction in the cinema tax. Then there were the measures which the hon. and learned Gentleman told us were taken to encourage investment. There were the investment allowances in particular.

I was interested to hear from the right hon. Member for Flint, West that these investment allowances were beginning to make themselves felt. I am glad to learn that, because as one who represents one of the great shipbuilding areas in the United Kingdom, I know that those engaged in the shipbuilding and shipping industries are not yet beginning to feel that effect. My recent meetings with them and my own knowledge of what is going on do not allow me to accept the view expressed by the right hon. Member. Naturally, I hope that in due course I shall be proved wrong and that these investment allowances will begin to give the encouragement to the shipbuilding industry, on which depends so much for all of us, which the right hon. Member for Flint, West foresees.

Then the then Financial Secretary had something to say last year about the shady stratagems of bond washers and dividend strippers and this year again we have been listening to what the Government hope to do and we have been discussing some of the proposals in the Bill with which we shall deal much more widely in Committee. As with the cinema tax, so with the Government's proposals on tax dodging and dividend stripping and all these other malpractices, the outcome of the Government's resolution will depend on the weight of the attack that is launched on these proposals from the Government back benches. It will require all the support that the Opposition can give the Government to ensure that this part of the Bill becomes law.

Therefore, tonight we are in the position that instead of the twopences coming off they are now going on, and I would not suggest that it was the election that primarily directed that part of Government policy. Allowing for savings, we can take it that about £260 million were pumped into the purchasing power as a result of last year's Budget and this year, instead of pumping in, the Chancellor on balance has taken out about £12 million altogether.

I should like to voice my own regret that the Chancellor is still in such desperate straits that he must keep a tax on culture. Books are still taxed and so are musical instruments and gramophone records, though we know that the records which are taxed are the smash hits and not the opera type. It is unfortunate that culture should still be taxed at a time when, in the words of the Prime Minister, we have been having it ever so much better than we have ever had it before.

Clause 61 deals with Profits Tax. It may interest the Financial Secretary to know that as a result of this tax, the Co-operative movement will now have to find £1¾ million every year, or at least for this year, because we hope that the time will come when the Chancellor and his hon. Friends will take a different view of Profits Tax as it is applied to the Co-operative movement.

The Chancellor said today that the increase from 10 per cent. to 12½ per cent. would not have any adverse effect on the current trend in industrial investment, but that is not something that affects the Co-operative movement. It is not interested directly in industrial investment; it has no shares in the industrial sense; it has no share appreciation; it has no capital gains such as we have in industry. Because of that we have always claimed, still claim and will go on claiming, that there is a case for special treatment in taxation for the co-operatives.

I take an example of one thing in which the Chancellor is particularly interested—savings. He wants to encourage savings. It will be accepted as generally true, by all those interested in the Co-operative movement, that the 10 per cent. decrease on the co-operative surplus has had a very depressing effect on the societies and that the increase from 10 per cent. to 12½ per cent. will have a still greater effect. That has to be remembered against the background that a few years ago the tax on the cooperative surplus was 3 per cent. In these few years it has risen to 12½ per cent., which is a startlingly large increase.

I know that the Chancellor has said that he allowed the co-operatives to deduct that part of their profit paid as interest on shares as an expense against the Profits Tax; but that was no gift from the Chancellor. It was merely a piece of belated judgment, because it has been accepted by the Royal Commission on the Taxation of Profits and Income that co-operative shares are in much the same position as loan capital in an ordinary company, and, because of the fact that an ordinary company can put its loan capital as an expense against profits, it seems merely a recognition of an existing fact that the Chancellor should give the same benefits, as he has done, to co-operative societies.

We must also remember that while he treats co-operative societies in much the same way as other trading societies, they are still limited by law to £500 of shares, and the methods which are open to ordinary companies to finance themselves are completely closed to the cooperative societies. Despite that, the Chancellor still regards them as ordinary trading companies. Once again, we want to impress on the Government that the Co-operative movement is not a trading movement in the ordinarily accepted sense. It is a great social institution, in addition, and we claim that because of that there should be, and I hope will be, before this Bill passes from our control, some toleration granted to the societies in regard to taxation.

No doubt the increase from 10 per cent. to 12½ per cent. in Profits Tax will tend to raise prices. That may well cause a diminution in the savings which the Chancellor wants to encourage. Cooperative savings are small savings, and if there is to be, as is possible, an increase in prices because of the increase in taxation, then the tendency will be for the co-operative member to go to his savings to make up the difference. I hope that before we leave this matter the Government will have another look at the position of this great movement in their taxation policy.

The Chancellor told us that as one of his steps in restricting demand he would introduce more intensive hire-purchase controls in order not to allow the economy to be overstrained. It should be noted that the restrictions which he proposes to introduce affect goods which are largely used more by the women, in certain respects, than by anyone else. These are the goods that ease housework—the electrical equipment such as refrigerators and vacuum cleaners, and all these new aids to make housework easier than it was. That is the type of commodity which will now bear these more intensive restrictions, and it includes, in addition, goods such as furnishing and furnishings which help to make a home prettier and more comfortable. I feel that the only person who could risk offending the ladies of the country would be a bachelor Chancellor. He will hear more, during the Committee stage, about the effect which these taxes will have on this type of commodity.

An hon. Member has already mentioned unemployment and I now return to that subject to deal with it particularly in its Scottish aspects and also with particular reference to the Chancellor's statement last Thursday. In Scotland today, as the House has often heard, unemployment still stands at 85,000. That is not a very happy figure, especially when we see what has been happening in other parts of the world. While the number of our unemployed has been rising, in Germany output has gone up over the last five years by 55 per cent.; in France by 45 per cent.; in Sweden by 25 per cent.; in Denmark by 16 per cent., and in Britain by only 15 per cent.; and in Scotland the position is worse than that of any other country in Europe.

I ask the hon. Member to try to make a little clearer the Chancellor's statement about the special deposit scheme and to say how it will help to relieve unemployment in Scotland as he seemed to think it would. I gather that £80 million will be diverted from the domestic banks to the central institution and that that will mean £80 million less to be lent to those who might require it, or feel that they require it.

I suggest that the Chancellor's reason for this step is not a policy but a technical reason. I am sure he knows that only the Bank of Scotland out of the five banks in Scotland is free from an affiliation with English banks. Although the rest might be tied up in their affiliations, they are still free in day-to-day management. However, I fail to see how they can be free to decide policy.

In other ways, there are different circumstances. The rule of 8 per cent. cash which is applied to English banks is not required from the Scottish banks and the ratio of liquid assets to total deposits, which for the English banks is 30 per cent., is 26 per cent. for the Scottish banks. As the Chancellor said, circumstances in the Scottish domestic banks are different from those in the English banks. It was because of that, a technical reason, that the Chancellor made the adjustment from 1 per cent. to ½ per cent. special deposit in favour of the Scottish banks.

He will remember that the Radcliffe Report said that the Scottish banks acted as a tight cartel to a greater degree than did the English banks. That does not suggest that £80 million being subtracted from all the banks and put into the central institution will result in an easement in the lending of money. Nevertheless, the Chancellor has told us that he relies on Scottish banks to give high priority to genuine requests for advances for development.

If that is his intention, he can do it in a more direct way than the indirect manner which he suggested last Thursday. Why should he not compile a list of all the areas of unemployment in Scotland and ensure that domestic banks in Scotland get that list, so that with it they know from Government sources exactly what parts of Scotland most need aid to deal with the problem of unemployment, as the Chancellor seemed to in- tend? Can the Financial Secretary say whether such a list has been compiled and, if it has, whether it has been given to the Scottish banks? If not, I hope that he will show that he means business, because this is a direct way of bringing to the attention of every Scottish bank the area of unemployment nearest to it and ensuring that, with the Chancellor's blessing, something is done to relieve Scotland's unemployment. It should be one of the main aims of any Finance Bill to try to create work where no work exists.

I am glad to see the Government's continued confidence in the nationalised industries. Last year, £650 million was given to them. This year, they are to be given £2,500 million for three years. We on this side of the House welcome that continued and increased confidence, and we hope that it will encourage the Government to go forward with further schemes of public ownership.

I said that one of the main purposes of the Finance Bill and the Budget should be to try to ensure work where work was not provided at the moment. It should be the Government's business to increase production and not to increase bits of paper, because from increased production will come the increased consumption which we all want and the increased investment which is absolutely necessary for the country's future economic health.

In that respect, I feel that the Chancellor has been over-cautious in his Budget. In shipbuilding, there is the prospect of serious unemployment and the same threat now faces aviation in view of the collapse of a certain project. Those are two of our great exporting industries and at the moment they stand—I hope not on the threshold—in danger of increased unemployment. I trust that the Chancellor will keep those things in mind and that, before we part with the Bill, he will have loosened the strings a little and returned more to the spirit of adventure which dominated last year's Budget and which is so strangely lacking in this Bill.

7.58 p.m.

Mr. Norman Pannell (Liverpool, Kirkdale)

The hon. Member for Glasgow, Govan (Mr. Rankin) has ranged very widely and I cannot answer all of the many points which he raised. Nor shall I deal with his special pleading for cooperative societies. He alluded to the evasion of taxation, as did the hon. Member for Islington, East (Mr. Fletcher) at greater length and the hon. Member for Gloucester (Mr. Diamond) at much greater length still. I wish to give the other side of the medal and to demonstrate that in many cases my right hon. Friend the Chancellor of the Exchequer is collecting much more than he should and much more than it was ever intended that he should.

I want to refer to Estate Duty. The Bill makes a concession about gifts inter vivos and therefore goes some way to removing what many hon. Members had considered to be an anomaly. However, a far greater anomaly has arisen with Estate Duty through the failure of successive Chancellors of the Exchequer to adjust the sliding scale of rates to account for the reduced value of money.

The Chancellor continues to work on a sliding scale that was fixed many years ago when the £ was worth much more than it is today, with the result that he is collecting higher rates of duty than were intended when the rates were first fixed. For estates up to £17,500 the rates were last fixed in 1946. For estates over that value the rates were last fixed in 1949. Today the £ has a value of just over 11s. in terms of 1946 values, and just over 13s. in terms of 1949 values. The Chancellor is therefore continuing to collect on estates valued in depreciated £s at the same rates as were fixed for the much higher real values of 1946 and 1949.

I will not weary the House with many examples of this, but I have worked it out carefully and I am certain of my facts. The most glaring example is on an estate of £17,500 on which duty is paid at 10 per cent., a rate that was fixed in 1946, and which gives the Treasury a return of £1,750. However, that estate, in 1946 values, is worth only £9,870 and, on that value, the rate should be 4 per cent. and not 10 per cent. If the Chancellor were to tax this estate of £17,500 at the rate of 4 per cent. instead of 10 per cent. he would receive exactly the same in real terms as was intended in 1946, because in 1946 that estate was valued at £9,870 and 4 per cent. of £9,870 is £395. If one inflates that to 1960 values, one arrives at a figure of £700—

Mr. Cyril Bence (Dunbartonshire, East)

Is the hon. Gentleman suggesting that on an estate which on current values is reduced from £17,500 to £9,870 the Chancellor, in levying death duties, should take only that sum of money which compares in real terms with 1946 values?

Mr. Pannell

The hon. Gentleman has not followed my argument. Perhaps I did not make it clear. I am not suggesting that the lower rate should be levied on the lower value, but the lower rate should be levied on the present value, and the present value of £17,500, in terms of 1946 values, is £9,870. It was the intention of the Socialist Chancellor of the Exchequer that such an estate should bear duty at 4 per cent. and not 10 per cent. If the Chancellor levies a duty of 10 per cent. on £17,500, he gets a return of £1,750 which is not the same in real terms as he would have got in 1946.

Mr. J. T. Price

That is a fallacious argument. If the hon. Gentleman is complaining that the estate that was worth £17,500 in 1946 is now worth very much less, that simple mathematical equation is also true of the tax which the Treasury is getting. In the duty levied today at £1,750, pari passu it is worth only £950. It is, therefore, fallacious to suggest that one should upset the balance between the two things.

Mr. Pannell

The hon. Gentleman has not understood my argument. The rate is going up from 4 per cent. to 10 per cent. on the same real value as existed in 1946. On a sliding scale, the rate goes to 10 per cent. on £17,500, and that has a real value of £9,870 in 1946 values when the rate was fixed. It should, therefore, be 4 per cent. and not 10 per cent.

On the same formula, an estate of £15,000 today was valued at £8,460 in 1946. It should, therefore, bear duty of 4 per cent. instead of 8 per cent. Similarly, an estate of £12,500, had a value of £7,050 in 1946, and should bear duty at 3 per cent. today instead of 6 per cent.

Mr. Bence

There should be Income Tax on the same principle.

Mr. Pannell

That is a valid point, except that successive Chancellors of the Exchequer have recognised this anomaly in regard to Income Tax and have made progressive reductions over the years, but there have been no changes in Estate Duty since 1949.

Let me take my argument further. I have given the most glaring example and obviously for estates in regard to which the duty was last revised in 1949 the disparity is less, but it is still significant. The £ today is worth 13s. in terms of 1949 values. An estate of £45,000 bears duty at the rate of 28per cent. but on 1949 values that estate is worth only £29,000 and should therefore attract a rate of only 18 per cent. Consequently, the Chancellor is collecting 55per cent. more in real terms than was collected in 1949. I have gone through the whole range of this and it shows, that on estates between £20,000 and £60,000 the Treasury is collecting roughly 50 per cent. more than was intended.

Mr. Harold Wilson (Huyton)

However valid this argument may or may not be—and I myself used it in connection with Income Tax last year—would the hon. Gentleman not agree that this whole argument is vitiated by the steady growth in capital values over the period to which he is referring? If he looks at the figures of equities published by leading stockbrokers he will find that the rise in capital values over the period to which he referred is very much greater than the erosion due to the factors he has described.

Mr. Pannell

I do not think it can be argued generally that that is the case. I admit that an estate of £9,870 may have risen by inflation to £17,500, but my argument is not vitiated on that account, because on that value of £9,870 the duty would be 4 per cent. instead of 10 per cent.

I am now going back to the dates when the rates were last revised.

Mr. Wilson

The hon. Gentleman has not dealt with the point I made. Let me take him back two years. As I said in the Budget debate, if a man invested £10,000 in equity property shares two years ago, that sum would now be worth £27,000 by sheer capital accumulation, and for no other reason. Does the hon. Gentleman feel that it is unfair to tax it at the higher rate for Estate Duty purposes?

Mr. Pannell

The right hon. Gentleman's argument is that these estates consist largely of shares. I am dealing with people who have smaller estates. Houses make up a very big component of the smaller estates and values have not risen to the extent mentioned by the right hon. Gentleman. Money is money, and the intention of the Chancellor of the Exchequer in 1946 was to collect a certain amount, but very much more is being collected in real terms today on the same estates. That is the point I was trying to make.

The higher one goes the less is the disadvantage suffered. When one gets to an estate of £75,000, one finds that, on the same formula, the overcharge by the Treasury is only 29 per cent. On an estate of £100,000, on the same formula, it is only 12½ per cent. Thereafter it falls steadily, until on an estate of £1 million the overcharge is only 7 per cent., and on estate of £2 million and over there is no overcharge, for the simple reason that if an estate of £2 million is revalued to 1949 terms it is still worth over £1 million and attracts the highest rate of 80 per cent. So we have the strange situation in which estates of a value up to £60,000 are overcharged by the Treasury from 150 per cent. down to 50 per cent., and in which the overcharging steadily falls, until, on the biggest estates of all, there is no overcharging at all.

I think that I have demonstrated—although perhaps not to the entire satisfaction of all hon. Members—that all the rates in equity should be adjusted. If my right hon. Friend the Chancellor finds that too great a loss will be incurred if he revises the whole range of rates, I earnestly hope that he will consider revising the rates on the smaller estates of value up to £17,500, where the anomaly is greatest and the burden is the least easily borne.

8.10 p.m.

Mr. Harold Lever (Manchester, Cheetham)

I hope that the hon. Member for Liverpool, Kirkdale (Mr. N. Pannell) will forgive me if I am unable to follow him in detail at this late hour, but I confess that I admire the courage and ingenuity with which he propounded the somewhat intoxicating novelty that what is sauce for the taxpayer should also be sauce for the Inland Revenue inspector and collector. Whatever may be the merits of the individual examples which he gave—in respect of which he did not persuade me to accept his argument—I am persuaded that the Inland Revenue gets a great deal of tax which Parliament never intended it should get. That only exposes the difficulty of dealing with these matters. The only safe guide as to the intention of the legislature is the interpretation of legislation in the courts and not in the minds of the officials appointed to administer the revenue laws.

I shall not weary the House with much matter that can be safely relegated to the Committee stage, but I have certain views, which have not yet been met by anything said by hon. Members on either side of the House, on the question of the tax-avoidance Clauses of the Bill. Having fasted and prayed for the whole day in order to release certain bees which are buzzing a little disconsolately in my bonnet, I shall not waste time with Committee points.

Like all Budget debates in the last few years, this one has revolved round the question of inflation, and I must enter my annual puritanical protest about this. Nobody has defined his use of that word in the context of the debate, but there are at least three meanings of the word "inflation" in the economic sense. It can relate to the ratio of effective monetary demand to the range of goods and services at a given price level—too much money chasing too few goods; it can mean the fall in the buying power of the unit of currency, extreme or gradual—extreme as in the case of the German mark in 1920 and gradual as in the case of most other countries ever since; and it has also been thought to mean such an imbalance of the economy as brings pressure upon the rate at which our currency can be exchanged with foreign units of currency—which amounts to balance of payments difficulties.

Those are three related but entirely separate meanings of the word and I wish that people would not add to the difficulties of the subject by failing to define which meaning they have in mind and using the word in all three capacities. If we use a word that has three distinct meanings and apply to that word some difficult and obscure theories, confusion is bound to arise.

But the word has a further meaning as used by psychologists. When anyone gets an exaggerated notion of his own power and importance in the scheme of things he is said to be suffering from inflation. One of the great virtues of the Chancellor was the extreme modesty with which he behaved in the high office to which he has been elevated. I am glad to say that his personal modesty and charm are in no way diminished, but they are not so much at issue in a debate of this kind; it is his intellectual modesty that I am worried about, and I am sorry to have to record that the Chancellor and some of his assistants have been suffering from a little inflation in the psychologist's sense of the word when dealing with inflation in the economist's sense of the word.

Lately they have given evidence that Government financial policy is being conducted, at any rate in part, by gesticulation rather than by firm action—by gesture rather than by pragmatic deed. The Chancellor will find that when he takes concrete actions which lead to concrete results he will have a chance of achieving success, but I must warn him that, as he has now started to suffer from the occupational folie de grandeur which seems to beset Chancellors of the Exchequer and their advisers after a time, mere gestures are unlikely to produce many results, even if they are sanctified by the approval of most of the City editors. The Radcliffe Committee has rightly held the changes in the Bank Rate to be a mere gesture in matters of inflation and balance of payments.

Watching some of the Chancellor's efforts to deal with the problems of inflation recently, I was put in mind of a concert that I witnessed during the war, when some of the most distinguished musicians in the Forces were giving a symphonic rendering, on an occasion so auspicious that it was deemed desirable that a very senior Service officer should conduct the orchestra. The result was that while the conductor was gesticulating with his baton, and passionately and patriotically indicating the rhythm of the National Anthem, the orchestra was busy delivering a particularly beautiful version of Bruckner's Violin Concerto.

The Financial Secretary to the Treasury (Sir Edward Boyle)

Bruckner did not write a violin concerto; the hon. Member must be thinking of Max Bruch, who wrote two.

Mr. Lever

I am grateful to the Financial Secretary. I must confess that he has won a very deserved victory in correcting me on that point. It was Bruch's Violin Concerto.

The main point is that the Chancellor has recently been looking like the conductor whom I have described. The movements of his baton only now and again coincide with the actions of the economic orchestra that he is supposed to be conducting, and that will be bound to happen if he gesticulates rather than takes concrete practical measures as required by our economic situation.

I include among these unsatisfactory measures even the most passionate sermons of the Chancellor and his helpmeets in various wars of nerves and threats which he and his assistants conduct upon the business population and the population at large in attempting to guide our economies. What we really want is some evidence—which is entirely missing on this occasion—that the Government are grappling with the central economic and financial problems besetting us.

I shall try to deal with the most important ones. First, there is the question of taxation. I say that it is still at levels which are too nearly reminiscent of war-time levels to be regarded as satisfactory and as conducive to the optimum working of the economic system. I hope that my hon. Friends will realise that I am referring to taxation and not to Government expenditure, which is a totally different matter, as I shall shortly show. The reason why taxation is so high is not due to any profligacy on the part of Chancellors; it is due to their being wedded, over the last few years and perhaps even longer, to the fatuous notion that the Budget surplus—that is to say, a surplus over and above the current fiscal requirements—should be used in order to deal with the sinister menace of inflation, in which of the three senses of the word I do not know. I cannot make out whether the menace is thought to exist in respect of one or all three of the meanings of the word, but I believe that the surplus is supposed to do something valuable in respect of all three.

Year in and year out the mysterious nonsense implied in this theory is exposed and never better than this year. Last year the Chancellor said, "Of course, one must not take these things too accurately, one must have a feeling of judgment. But I think we can get along nicely with an overall deficit of £700 million." The hon. Member for Wolverhampton, South-West (Mr. Powell), the right hon. Member for Monmouth (Mr. Thorneycroft) and the right hon. Member for Flint, West (Mr. Birch) warned him that it was an intolerable situation to budget for a £700 million overall deficit, including the capital expenditure of the Government, and all the horrors of the night were held before us by these hon. Gentlemen during the last Budget debate.

The Chancellor repudiated them and said, "No, £700 million is about right as the overall deficit." It turned out that at the end of the year the overall deficit was £300 million. It seems, therefore, that even the gloomiest, the most savage of retrogressive legislation referred to by those three hon. Members last year did not envisage levying taxes which would produce a figure calculated at more than a deficit of £400 million better than the Chancellor's figure. Does the Chancellor come to us now and say that this Budget surplus theory is all nonsense? Is he contrite because, having budgeted for a £700 million deficit and got £300 million, the whole of his economic arguments do not make sense? Not a bit of it. He says, "There was a little error, but it is all to the good so far as the Revenue is concerned." He admits that he overtaxed us by £400 million when he brought in his Budget on the last occasion.

The paradox of all the arguments about Budget surpluses can easily be seen. Last year the Chancellor said, "I am budgeting for, and I am expecting, an overall deficit, including Government capital expenditure, of £700 million." He says that would combat inflation. The curious thing is that if he really combatted a tendency to inflation with his budgeting, which is the job of a Budget surplus, he would not get a Budget surplus. As a matter of fact, no Chancellor would get the Budget surplus he expects if he prevents inflation. The only time he gets a really whacking Budget surplus is when the policy of budgeting for a surplus to defeat inflation is itself completely defeated. In other words, the Budget surplus, the remedy for inflation, becomes bigger the more inflation there is, and the more the policy of using a Budget surplus as a remedy for inflation fails, the bigger the Budget surplus. It is an extraordinary thing until we come to realise that the whole argument has no logical basis at all.

It is external reality outside the Budget which determines the inflationary equation, as it were, the ratio or the balance between goods and services on the one hand and effective monetary demand on the other. It is only people like the right hon. Member for Flint, West and his friends, who insist on remaining embedded in nineteenth century classical Liberal thought on this and other subjects, who can possibly believe anything else. It does not make a scrap of difference to the inflationary equation whether we take the citizens' money by taxing it or confiscating it or borrowing it from him. It does not make the smallest difference to the actual inflationary equation. The Economic Secretary to the Treasury is looking as horrified as when I spoke of Bruckner's Violin Concerto, but that is a fact.

If other factors came into play it is another matter, but in general it can be stated, and it is plainly evident, that a Budget surplus does not have any impact at all in normal circumstances, or no decisive impact, on the real inflationary equation, the balance between real goods and services and effective monetary demand. In fact, the Budget surplus is the indicator of the extent of the inflationary unbalance, as it were, rather than the cure. What is used as a cure is merely a register of the extent of the inflation.

Sir E. Boyle

Surely the doctrine of a Budget surplus is not a nineteenth century classical doctrine, but a twentieth century Keynesian doctrine. I remember my right hon. Friend the Member for Flint, West (Mr. Birch) referring to the present Leader of the Opposition, when he was Chancellor of the Exchequer, as the industrious acolyte performing the Keynesian mysteries, and I think the House thought that a fair description.

Mr. Lever

I was not saying that the doctrine of a Budget surplus was a nineteenth century doctrine. It is the doctrine of the right hon. Member for Flint, West which is that if the Government have to borrow money, it is necessarily inflationary. I believe the doctrine of the hon. Member for Wolverhampton, South-West is similar. I read his speech with care and I believe him to be passionately sincere but totally wrong-headed on this matter. He said that the right way to conduct our finances to avoid inflation is to pay our way honestly as we go and obtain by taxation all we need in respect of Government expenditure. Anything less would lead to the equivalent of the pit in the economic rather than the theological meaning.

Mr. J. Enoch Powell (Wolverhampton, South-West)

What the hon. Member so far seems to be omitting from his considerations is where the Government, having calculated on borrowing from the public, fail to do so.

Mr. Lever

Of course, if the Government fail to borrow from the public to a satisfactory amount, they will have trouble.

Mr. Powell

That is the point.

Mr. Lever

But if the Government attempted to do what the hon. Member wants, they would have even bigger trouble, unless they did what he also wants—which is, as it were, the secret conditioning factor in his theory—and threw overboard a great deal of Government expenditure. If by current taxation they attempted to obtain the whole of Government expenditure, they would get into far more trouble. It is quite impossible in present conditions to cover the whole of Government expenditure by current taxation. Of course, there is no reason whatever why we should. There is no reason why we should not incur Government debt to cover the capital expenditure of the Government.

I do not want to raise this tantalising prospect at such a late hour, but, in theory, we could run the country entirely without raising any taxation at all. But the effect of doing that would be to pledge the future earnings of the coming generations in interest payments in respect of the debt incurred. Oddly enough, the realities of the situation keep bursting through. There is always enough money for the Government to borrow unless the political system goes to pot. The naive belief of the hon. Member that there is a danger that the British Government will not be able to cover their borrowings is not founded on any sort of logic, financial or economic.

Where he goes wrong is that he keeps thinking of those symbols, all reflecting the accountancy of the financial situation as embodied in the Budget, as representing the real circumstances outside. Of course symbols and book entries do sometimes represent external realities. For example, if we take a figure which represents the copper stocks or gold stocks in this country and the figure goes down, unless there is fraudulent bookkeeping that is a reflection of reality—the copper stocks or gold stocks have gone down. In the case of borrowing, these are symbols of a particular form of accountancy and it does not make a difference to external reality whether the Government borrow the citizens' money for building or takes it from them by way of tax.

The trouble is that the Government use this Budget surplus like a man who supposes that if he forces the barometer finger round to fine weather he is thereby producing fine weather. Of course, if he has the misfortune to do that when the weather is fine he is liable to suffer from the delusion rather longer than the man who forces the barometer finger round when the weather is wet. That is what happened to the right hon. Gentleman who now leads the House, the Home Secretary. He had the good fortune to force the barometer finger round to indicate fine weather and got it for a period. He was the hero of the Tory Party for about six months or nine months, but then he found that, although he firmly held the finger in the right direction, the weather changed. Then he ceased to be the hero and ceased to be the Chancellor of the Exchequer. I fear that this will happen to the present Chancellor unless he comes to realise that the Budget surplus is not in fact the means of obtaining balance in our inflationary problems, but rather the registering of the actual condition.

The second point is that nothing has been done to solve the problems of our balance of payments which governs the whole of our economic life. Sixteen years after the war when we are still bedevilled with this chronic problem and are having, quite irrelevantly, to tamper at regular intervals and interfere with the flow of production on account of our balance of payments position, one might think that the British people had failed somewhere in their endeavours to pay their way in the world. That is completely false. The fact is that we have more than paid our way in the sixteen years since the war.

The reason why we are bedevilled by the balance of payments problem and the chronic uncertainty with which it conditions all the policy of the Chancellor is that the Chancellor has not been able to think of some realistic means of insulating us from the dangers of temporary waves of attack upon our currency. There is nothing wrong with our fundamental situation, as I think the Chancellor will agree, nor with our balance of payments, and there has not been for some years. The Chancellor is always worried, especially if he upsets some of his back benchers whose words are heard in some parts of the world, that there might be a temporary upset in the balance of payments position.

May I press on him a remedy which I suggested some years ago and to which I hope he will give some attention? He finds that his whole policy is still being conditioned by the need to take precautions against temporary bad economic weather affecting the balance of payments. Almost all these runs on sterling which have occurred since the war and have caused these constant destructive and very negative interferences with our economy have come from the sterling area. I am not moralising about this. This is a case of the sterling area trader trying to hedge against the currency difficulties which have beset him in the postwar world. Why should the Bank of England not give him a hedge by opening in London an internal forward market enabling the buying of dollars or Deutsche-marks and to sell those currencies at prices fixed by the Bank of England? The risk would then go from the trader and the Chancellor would not have the leads and lags which are half the trouble of the exchange problem and which make him interfere with the domestic economy because of necessities of the balance of payments.

If the British trader who wanted to hedge his liability for imports from the Deutschemark area were allowed to buy forward in the Bank of England, the Bank of England would take the risk of the currency exchange and the leads and lags problem would disappear. Of course, the Chancellor might say that if he took the risk one day it might come unstuck. Even in the worst devaluation which took place in the Crippsian period, if the Government had run such a scheme throughout the whole period since the war they would have more than covered by fees—as it were, insurance premiums—the losses suffered from the devaluation by Cripps.

It is time the Government thought up a plan and did not dismiss as crackpot every idea put up in this direction, whereby we would not be subjected to this illogical and nonsensical position where sterling area people who want to hedge their position can do so only by what is called a speculative run on sterling. It is open to the Chancellor not to sit back and rest on a year's success—which may not be repeated—but to think up some means of insulating our economy from the seasonal dangers and seasonal moves.

The third major economic problem which the Government have neither tackled nor solved is that we are still subjected to the chronic idiocy of having to retard the whole of our economy if one part of it goes out of balance and comes under strain. We might think that this is a novel problem and that the most obvious solution is that which the Government have found—to pull back the whole economy just because in the Midlands, for example, or in half the economy there is overstrain. A little logic should show that it is as stupid for the Chancellor to argue that he must retard the whole economy because some of it is under strain as it would be for me to say that the Chancellor should give the whole British economy at present an expansionist fillip because some of it is under-employed. The latter would please my hon. Friends from Scotland, because it would be good for Scotland, but it would be very bad for the economy as a whole.

It is just as bad for the Chancellor to take a decision in which he knocks the whole of the economy on the head for the sake of the overstrained part of it. The Chancellor shakes his head, but he suffers from an illusion if he thinks that the general measures he has taken will not affect the whole of the economy. They will either be ineffective or they will not leave unscathed those areas which have not got into their stride.

In the same way, when one cuts out expenditure which one does not particularly want, it does not follow that automatically—if it is done by financial means alone—it will be replaced by very desirable expenditure. One may think that one can improve the charm of a party by cutting out Aunt Maude, but it does not follow that Marilyn Monroe will automatically make up the party.

This equally applies to the Chancellor's problem, because if he cuts out the undesirable consumer "gimmick" demand, it does not follow necessarily that the same funds will find their way into the capital goods industries. I urge upon him, therefore, that he should find something better than the general measures which he has adopted, which necessarily retard and advance the whole economy when only part of it ought to be retarded or advanced.

I wish that he would not rely entirely on blind forces, because only people who lack good vision are always as anxious to use indiscriminate forces as the Chancellor seems to be. I am here using the word oracularly rather than ocularly. I wish he would not use devious measures. If he does not like the size of the lending by the joint stock banks, why not tell them so? Why does he have to go through the courtly minuet of passing a little billet-doux in the form of a somewhat undesirable measure on special deposits whereby a trifling sum is taken from the banks?

The Chancellor has a doctrinaire objection—or, alternatively, his hon. Friends have, and they enforce their objection upon him—to direct control and to measures which smack of direct control, for everybody knows that they come from the Socialist Party. He does not, therefore, take direct control and telephone the five bank chiefs to say, "Please do not lend so much money. Our idea of what is desirable is so-and-so." Instead of that we have a complicated charade. I noticed that the Radcliffe Committee felt as I feel about this, as well as about the whole discount market. It felt, however, that it was not all that expensive and it was such a pleasant old tradition that we might as well keep it on. The Chancellor has therefore fitted in an extra gavotte to the minuet which is being danced so pleasantly and regularly.

In fact, all this complicated apparatus has about as much relevance in the twentieth century to the provision of Government borrowing, which is supposed to be its function, as the safety of Her Majesty is dependent upon the Household Cavalry. One can say that these institutions of the City are several times more costly than the Household Cavalry and only a fraction as decorative. Whereas I do not begrudge them this elaborate ceremonial, I wish that in emergency the Chancellor of the Exchequer would be ready for direct, simple, non-devious action to curb credit when he wants it curbed. There he is not gesturing. This is not like the Bank Rate when the Chancellor cracks down on the banks or on the hire-purchase companies with the avowed object of restricting hire purchase. He is doing something effective to curb the money supply. He is affecting the inflationary equation, not like in his fantasies on the Budget surplus or when relying upon the power of his sermonising, however sincerely it is intended.

The other matter relating to the question of more effective and realistic action is capital investment. The long tradition of this country has been not to invest adequately in capital equipment. It was part of the cost of being a rentier country, the Chancellor might think part of the advantage of being a rentier country.

Curiously enough—I shall not go into it to night, but I intend to do so on another occasion—Britain does not have to be a rentier country in the twentieth century. It pays one much better to get rid of one's foreign income and earn one's own living in the world. It is not only safer, but produces a much happier society. One does not have derelict heavy industry and the like, which is one of the inevitable consequences of being a rentier nation in the twentieth century. We ceased to be a rentier nation by reason of our sacrifices in the war.

We have not quite ceased some of the habits of mind of a rentier nation. We are not devoting as much as we should to capital investment. One of the reasons for that is that the Chancellor is under pressure. I suspect that he does not like it very much. As I mentioned on the last occasion, the right hon. Gentleman's theme song is the old popular number: I try to be good, but the boys won't let me. The boys are very much in evidence in today's debate. The right hon. Gentleman is getting some acidulous treatment, in the face of which it is surprising that he maintains that urbane good humour to which we have become accustomed. I do not think that the Chancellor thinks it is a good thing to keep on interfering with our home production and economy on the ground of the balance of payments while we are over-investing overseas.

Our first priority is this. If we have not enough for adequate home investment and overseas investment, apart from the obligations to the backward peoples where the Government have commitments which we respect and agree with, we can do without some of the investments in the less satisfactory Canadian oil wells and the like where British money has gone in the last few years. Half our problem in not getting adequate home investment is that the kind of investment funds that would be present in the home market and would tend to gravitate to home investment have, by long tradition, gone overseas where they are not as satisfactorily employed from our point of view. In the twentieth century it is not even a paying proposition. I hope that the Chancellor will look into that.

I also think that we need more direct action such as when the Government got the steel mill going in Scotland. I know that some of my hon. Friends did not like my strong support for that Bill, including my hon. Friend the Member for Gloucester (Mr. Diamond), but my hon. Friend will notice that he is in the excellent company of the right hon. Member for Flint, West, who is heartily in agreement with every word my hon. Friend spoke on that Bill.

The real truth is that that is the kind of capital investment we want. It is not subsidised Government investment because, as I pointed out then, the Government will not lose a penny on the massive capital investment in steel which took place in Scotland as a result of their intervention. It is a splendid thing, and it is absolutely in line with Labour Party policy. I can understand that it does not appeal to hon. Gentlemen opposite, but I cannot understand why, just because the Tories do it, so many of my hon. Friends do not like it. When the Tory Party steal our clothes, it is quite in order to question their integrity, but one is very ill advised to question their sartorial taste. That is the position on this occasion. I should like to see not less but more Government practical, real, non-symbolic, active intervention to secure better capital investment.

The same applies to exports and the like. The Government should not just talk of encouraging exports. They should abandon some of their Victorian inhibitions against taking concrete and practical steps to encourage exports and put a premium on them. Countries like Germany and France that boast these enormous increases in their exports have not been slow to give direct subsidy incentives and financial incentives to people to export.

At the present time in this country, if I can make £1,000 as a night club proprietor—or, better still, as a nude-review proprietor—I have no inducement to go into the export trade to make that £1,000. In fact, I do not even stand a better chance of attracting the attention of the Patronage Secretary if I go into export to earn it. The Chancellor should do something about that, and abandon the Victorian delicacy that unless you leave it to the business folk themselves, free of any inducements, you are doing something wrong and immoral.

The right hon. Gentleman must do something practical on the three main things. On taxation, he must abandon the antiquated notion of a Budget surplus. On balance of payments, he must institute some measures to remove the unnecessary chronic uncertainty which is irrelevantly dominating all our economic prospects at home because of the danger of temporary movements against us on balance of payments.

He must protect us from the use of blunt instruments to retard or advance the whole of the economy when what is wanted is a more selective and more accurately directed series of measures towards stimulating part of the country and, perhaps, holding back another part; stimulating capital investment where we need it at home—on basic industries and the like—and stimulating exports; selective work like that.

Above all, in achieving these practical and desirable ends, he must not overestimate his power, other than in the actual concrete intervention that he makes. He must not over-estimate his power of conducting wars of nerves upon our economy—not altogether a desirable thing. In fact, as was rather wittily put by Nicholas Davenport in the Spectator, the Chancellor's frequent efforts to achieve stability are one of the great causes of the instability in our economy.

I wish that the right hon. Gentleman would now come to the conclusion that he should leave the economy alone a little. The Chancellor, who started, as I said—he was not present when I said it—with immense intellectual modesty, has gradually lost it over the period of his great office. The other day he practically said—and I must paraphrase, I am afraid, because I have not the actual words before me—that "Modern industry is so complex, so difficult and so beset with problems that I can hardly take my fingers off the controls for a moment"—

Mr. Amory

I think that the hon. Member is paraphrasing quite a lot. I find it quite difficult to recognise the speech.

Mr. Lever

I hope that I am not being unfair to the right hon. Gentleman, but he did say that one has to have one's hands on the controls all the time. I see that his assistant the Economic Secretary has caught the contagion—in the psychological sense, of course. Addressing a cosy coterie of bankers in Newcastle—I did not know that there were any there, but I suppose that they do exist—he said that at last we had inflation by the throat. That sort of attitude of over-confidence—and, incidentally, the metaphor chosen—shows the part that inflation has in the demonology of the Tory Party.

I urge on the Chancellor that he must not expect changes favourable to our economy to arrive by exhortation, by gesture, by sermon or by the use of antiquated methods like Bank Rate. I urge him to take concrete steps such as he has taken in the past with success, and grapple with the three central economic problems of our country on some such lines as I have indicated.

8.49 p.m.

Mr. David Price (Eastleigh)

Like the hon. Member for Manchester, Cheetham (Mr. H. Lever) I have a good deal bottled up inside me, but, unlike him, I am now in my twenty-fifth hour of sitting out these Budget and Second Reading debates. The hon. Gentleman will, therefore, forgive me if I do not attempt to argue with him what are, I believe, some errors in his economic discourse. I hope to be able to make my points in about half the time taken by him. I believe that our proceedings would be very much improved if back bench speeches were considerably shorter than several from the benches opposite to which I have listened during the last four sittings of the House. A reference to some of the times for which some hon. Members have spoken will make clear what I mean.

Our support for or opposition to this Bill will, plainly, depend upon what view we took of my right hon. Friend's Budget statement. It is against the background of that statement that we should examine the Bill. Given the figures about the progress of and the prospects for the British economy and the figures for Government revenue and Government expenditure, I had no hesitation in supporting the Budget and I shall have no hesitation tonight in giving my right hon. Friend my vote in the Lobby.

My right hon. Friend gave the House an excellent progress report of what happened during the last year. It was a report of an economy expanding dramatically. Last year, production went up 10 per cent., exports 14 per cent., investment 4½ per cent., and personal savings 15 per cent.—all within the context of stable prices. What a wonderful report for any Chancellor of the Exchequer to be able to give to the nation. I am quite certain that the aspirant Chancellors of the Exchequer that one sees around one on these benches during such debates—

Mr. H. Lever

On the Government benches.

Mr. Price

I grant that the opportunity would be greater for my hon. Friends on this side of the House. I am sure that any one of those aspirants to my right hon. Friend's office would be happy to be able to deliver such a report in his Budget statement to the nation.

As for future prospects, they are good. I would say that conditioned optimism should be the view, although there are certain features of our economy which give cause for concern. The first feature which gives me concern is export prospects. During the Budget debate last year, I wearied the House with an analysis of why I thought that some of our markets, particularly in North America, were far more precarious than people realised. I said then: For the reasons I have given, I am worried about our export prospects for the next eighteen months."—[OFFICIAL REPORT, 8th April, 1959; Vol. 603, c. 274.] Twelve of those months have passed. I am worried about the next six months, and I am worried particularly about developments which are taking place in Europe in which we have no part, namely, the implementation of the Rome Treaty. This is not the time to discuss the errors which I think we made in not taking part in the Messina talks, but what I say—I think that this is a proper occasion to say it—is that we must now make the very best success we can of the European Free Trade Association.

I ask my right hon. Friends please to stop whining about the fact that the Six will not come together with us in a free trade area. It is not getting us anywhere, and it is really rather undignified. I believe, nevertheless, that we should consider whether we can, within the European Free Trade Association, make tariff outs on our individual external tariffs at the same time as the Common Market countries make their tariff cuts, if Hallstein's proposals are carried out.

I am worried, also, as are most of my hon. Friends, about a possible return of inflation. Therefore, I welcome heartily the Chancellor's recent measures to put a modest restriction on credit. We must realise, however, that we have not yet really discovered what are the best instruments for putting a small check on the expansion of credit leading to an expansion of demand, when there are signs that demand may run ahead of supply. We have not found the answer. We have some untried ideas, and we should be willing to experiment with them.

Let us remember that special deposits by the banks are being carried out in their present form now for the first time. We do not know how effective this measure will be. Several hon. Members opposite have criticised special deposits, saying that they will have only a marginal effect. As I understand it, that is precisely the purpose. It is to have a marginal effect before a possible inflationary situation gets to the stage where sterner measures would have to be used. Hon. Members can shake their heads, but in so doing what they are indicating, in effect, is that it is not proper to act on the margin. But rather that one should wait until a situation gets out of hand, when only blunt intruments can be used.

Mr. H. Lever rose

Mr. Price

I am not giving way to anyone, because I want to be brief.

Hire-purchase restrictions are absolutely legitimate. Here, one is operating not only on the volume of current credit, but also introducing the element of time. Conceived mathematically, credit control is not a three-dimensional conception, but also a space time "continuum". The difficulty is how to operate on that "continuum". The demand for a 20 per cent. deposit rather than 10 per cent. on certain goods is an effort to restrain credit, not only in the present but also in the future.

Our aim must be to have an expanding economy, with our economic resources of men, plant and machinery fully employed without so over-taxing our resources that either we run into balance of payments difficulties or into further inflation. That is the ideal, and I am sure that most hon. Members would agree that that should be our aim. The difficulty is how any Chancellor of the Exchequer can execute that aim. The trouble is that there is no ideal rate of expansion which will ensure that we have steady expansion without running into inflation, on the one hand, or a degree of under-employment of resources, on the other.

Managing the economy is not an exact science, in spite of improvements in statistical forecasting. It is at best an art. If human beings behaved like the mythical economic man invented by economic theorists who acts so rationally, with mathematical precision, it would be much easier; but the fine balance of management needed to guide the economy along the road of steady expansion, without inflation or balance of payments difficulties, depends upon the accurate forecasting of marginal economic decisions that are being made by millions of people, many of whom do not reside in this country. Frequently in our marginal decisions cold calculation is least effective and we human beings act far more by inspiration and by the mood of the moment rather than by arithmetical logic.

Therefore, any Chancellor of the Exchequer has to take a risk. In my view, in taking the risk the Chancellor has to look at the matter in this way. If the arguments in any one year between expansion and restraint are equally balanced, I would always support the Chancellor who erred on the side of expansion. There are many reasons for this, but I will not weary the House with them. I believe that a policy of expansion is the only right one for this country, and I think that my right hon. Friend agrees with me. This year, however, the risk of inflation outweighs the risk of deflation. I am, therefore, sure that my right hon. Friend is right to err on the side of caution and not to introduce into the Bill the reductions in taxation which many of us would like to see.

One should ask whether my right hon. Friend has gone far enough. Should he not have followed the advice of the Economist and increased taxation by £100 million to £150 million, in which case we would have had a Second Reading debate which would have attracted a little more attention than the debate that we have had today? I would merely say this about the Economist's argument. If ordinary men and women behaved like the men and women in economic theory, there would be a respectable argument for following the course advocated by the Economist.

The fact is that we do not act entirely on the motivations that exist in economic theory. Any attempt to have raised taxes substantially in this Bill would have been a disaster to the morale of industry and commerce, quite apart from being a grievous imposition upon the ordinary taxpayer. It may conversely be argued that my right hon. Friend should have remitted taxes. He should have fortified success by giving greater incentive to people in industry to earn more and to work harder—a sort of dash for freedom school. I believe that that would have been a fatal policy for my right hon. Friend to have pursued because, although emotionally it is very attractive, unfortunately, in life, one cannot cheat the rules of simple arithmetic because one thinks that it would be rather fun to do so.

Mr. J. T. Price

That was said before the election.

Mr. Price

The intervention of the hon. Gentleman is very revealing. Would he and his party have advocated this time last year a contrary policy to that of my right hon. Friend—a policy of restraint? My right hon. Friend's policy was expansion. Would they have said—and they certainly did not, though in hindsight they may think it ought to have been done—that the economy should have been held back merely so that the Labour Party could have won the General Election?

Mr. J. T. Price rose

Mr. Price

I am trying to keep my speech short. The hon. Gentleman can make his speech afterwards.

Mr. J. T. Price

The hon. Member asked a question. I want to be perfectly fair and not offensive to the hon. Member whose opinions I respect in many things. Surely when he asks a rhetorical question like this, after making his speech in his own way, I must remind him of the facts of recent history. After the election of 1955, the election policy pursued by the Government was diametrically altered a few months after being returned to power. They switched their whole economic policy against the sort of forecasts which they gave at the time of the election. The hon. Member knows perfectly well what has happened.

Mr. Price

The hon. Gentleman, who I also respect, is in great error. He is trying to make a political point and he knows as well as I do that balancing the economy is immensely complicated; it is not a simple thing. It is rather like a see-saw—a per cent. or two one way and we have inflation and a per cent. or two the other way and we have deflation.

What hon. Members are saying in their jeers is that my right hon. Friend was wrong last year to have a large overall Budget deficit. He should have had a much tighter Budget and put up taxes, and so forth, and not made tax remissions. I did not notice at the time that hon. Gentlemen opposite voted against the Budget on those grounds. The main ground on which they voted against the Budget was because we did not put up the old-age pension. It is no good going back to the argument of how they would like to have voted last year; the fact is that they did not.

I believe that the sort of figure which my right hon. Friend has given of an overall deficit of £318 million was about the amount that he could safely rely on financing by Government borrowing. The hon. Member for Cheetham seemed to think that it is easy to raise money by Government borrowing as it is by taxation. The difference is that to raise money by taxation, once we have passed the Finance Bill, is a matter of compulsion—we have no alternative but to pay. The raising of money by borrowing in a free society means that the rates have to be sufficiently attractive and the prospect of retaining the real value of our investment sufficiently good that people are prepared to lend money to the Government. There is no certainty about this. If they do not, the Government have the short-term device of pumping out Treasury bills, which are inflationary.

Mr. H. Lever

They need not be.

Mr. Price

We will argue that outside and not detain the House with it. The hon. Member is in error if he thinks that to pump out Treasury bills is not inflationary.

One asks why there have been so many long faces and so many disappointed people who have been growling away in their beards about the things that my right hon. Friend has failed to do. Those people suffer from the error that they regard each year's Budget as a sort of annual distribution of largesse—[An HON. MEMBER: "It was last year."]—or a sort of prizegiving. They remind me of the little incident in "Alice in Wonderland". when there had been a race and the Dodo screamed, "Everybody has won and all must have prizes". The chorus of voices—all good sound Tories, obviously—said, "But who is to give the prizes?" The Dodo, pointing to Alice, replied, "Why, she, of course".

The only difference in this case is that the Alice of the Treasury has no money of her own and the only money which she has to give in prizes is money that she takes out of the pockets of the people in taxation, or by borrowing. If we do not balance Government expenditure by taxation and borrowing, the result is bound to be inflation.

In modern times, a Budget deals not only with Government revenue and expenditure, but with trying to direct the course of the economy over the next year or two. Fiscal policy must support the Government's monetary and economic policy. I make the proviso, however, that the counter-argument sometimes used by the Treasury, that taxation on consumption can always mop up surplus purchasing power, is marginally fallacious. In general terms, taxation on consumption can have that result to a marked extent, but not marginally. There are too many ways of getting round it, such as wage increases and specific rises in prices and hence in incomes.

Nor am I very happy about the increase in the tax on tobacco, because it fails for the reason which I have just indicated. My right hon. Friend tries to follow the advice of the famous French Finance Minister, Colbert, when he said that the art of taxation consisted in so plucking the goose as to obtain the largest quantity of feathers with the least amount of hissing.

There are those who have pointed out during our debates the problem of rising Government expenditure, but we all have split personalities on this matter. On many of our favourite interests we want more Government expenditure, whether it is on roads, the Army, better pay, or pensions, or whatever else appeals to us personally. On the other hand, we ask for lower taxes. The more we contemplate this problem, the more one agrees that Oscar Wilde was right when he observed: When I was young, I used to think that money was the most important thing in life. Now that I am old, I know that it is. There we are. All our favourite pet schemes are frustrated. Where is the money to come from?

Let my hon. Friends be under no illusions, however, that the programme for which the Tory Party stood at the last election involved increased Government expenditure on a substantial scale. I remind the House of just one or two of the items: reducing the gap between the industrialised and the underdeveloped nations, involving the export of capital, of which at least a part must come from Government resources; the Local Employment Act; assistance to the aircraft and cotton industries; railway modernisation; doubling the road programme; improved grants to agriculture and horticulture; a massive educational programme; development of the Health Service. That inevitably means increased Government expenditure. What one hopes is that such is the expansion in the economy that this increased Government expenditure can be contained within the current percentage of the gross national product which is taken by the Government. That must be our aim.

Certainly, on the figures given by my right hon. Friend the Minister of Education, it is very questionable whether the educational programme will be containable within the current proportion of the gross national product going on Government expenditure. But I would make my own addition to that formidable list of increases. I should like to see far greater encouragement given to research. Government participation must be far more active and we must accept, as a nation, devoting more of our financial resources to the future in the form of research and development. I will go as far as to say that I believe that in the long run a comfortable retirement, certainly for the younger of us in the House, can be better secured by a greater contribution to space research than by inflationary tax reductions.

Are we, however, using the right methods to raise the money for these desirable ends? First, I believe that Government accounting is a muddle. The so-called distinction between above and below the line, between capital and current account, is such an inaccurate distinction in practice that if any of us presented accounts like that in our private business we would be going off to be Her Majesty's guests in Dartmoor for quite a number of years. [An HON. MEMBER: "A. good thing, too."] I should like to see my right hon. Friend putting his officials on to a study of our financial statements; to find whether it is possible to produce above the line those items which arc in the ordinary commercial sense current expenditure and put below the line those which are capital expenditure.

Mr. Jay

The hon. Member will recall that that was done for five years from the time of the Labour Government onwards but, because nobody showed much enthusiasm for it, it was discontinued by the present Government.

Mr. Price

The right hon. Member has the advantage over me. I was not in the House at the time, but he and I have agreed together on certain matters of Government finance when neither of our Front Benches has agreed.

We want to get an accurate picture of that part of the expenditure which represents current goods and services and of that which is investment and which will remain in the future for the nation. It seems to me nonsense that when Chelsea Barracks is rebuilt it should be financed out of this year's taxation and not be paid for as a capital investment in the way one does such things in one's own company. If we were to make that distinction we could finance current expenditure out of current taxation and then consider how many of the capital items could be covered by Government borrowing and how many would have to be covered by taxation, bearing in mind the state of the gilt-edged market.

We cannot consider that until we have the proper figures. I hope that my right hon. Friend the Chancellor will consider producing what I am rash enough to ask for—proper figures. The Government's defence may be Edmund Burke's, that It is the nature of all greatness not to be exact. I believe, however, that we must find new ways of paying for Government action in a number of fields, distinct from either current taxation or Govern- ment borrowing. The Government too frequently follow the advice of Voltaire, when he said: The art of government consists in taking as much money as possible from one class of citizens to give to another. And one asks the question, "Are we not overdoing it?"

I hope, also, that my right hon. Friend, in the next Budget, will take the opportunity to do what I wish he had done in this Budget and in this Finance Bill, and that is to make some of those changes in the pattern of taxation which do not require any change in the general incidence of taxation. I would mention three, in particular—a move to a corporation tax, a change from Estate Duty to a legacy duty as advocated by the noble Lord, Lord Robbins, and a move to current year assessment of company taxation, as recommended by the Royal Commission on the Taxation of Profits and Income.

This Bill will put into law those features of the Budget which require legislation. It was a sound, steady, even cautious Budget, and soundness and steadiness are undramatic—they lack political sex appeal—but marriage with Surtax is better for the nation than adultery without it.

9.15 p.m.

Mr. H. Rhodes (Ashton-under-Lyne)

The hon. Member for Eastleigh (Mr. D. Price) asked whether some of us on this side of the House were of the same opinion as the right hon. Member for Flint, West (Mr. Birch). He asked about our opinion of last year's Budget. The stimulus which was given in that Budget was overdone, because out of that stimulus came a situation in which consumer expenditure overran capital investment which should have been going into productive machinery.

It seems to be a pattern that is being followed time after time, that we have an easy way of stimulating consumer goods expenditure. It goes very fast, the Stock Exchange and sentiment generally take it up, and a long way behind lags the investment that should be taking place to produce consumer goods more cheaply. It seems as though that has been borne out by the events of this past year, because it was not until much after last year's Budget that any significant advance in capital goods expenditure was taking place.

The figures have shown that industrial capacity is slowly taken up until inflation begins again. It is now obvious to anybody with any practical experience in industry that all the time we must have capital investment in machinery likely to produce consumer goods more cheaply and quickly than before.

If we have Budgets of last year's type and then attempt to correct them, as we have done this year, we shall never get that development and persuade people to invest at the right time in machine tools to make consumer goods. When business is good and when a machine which has done its time can bring extra profits for a few more years, investment tends to go into the enlargement of the unit and not into replacement. If business is bad, the machinery is kept because there is no money to change it.

There is much airy-fairy talk about the Common Market and the Outer Seven and their results, but the fact is we are forced more and more to look to the Continent to buy our machines than we had to do fifteen or twenty years ago. If there is justification for encouraging expenditure of any sort, the expenditure should be on machines which will give a fillip to productivity rather than to increasing capacity.

It is not understood by many people that when a fillip in consumer goods is given to the market, manufacturers fill up their capacity before they start to spend money on improving plant. By the time they have filled their capacity, the Government starts a credit squeeze or a damping down of activities. It is time that the machinery manufacturers were given the encouragement which they deserve. Instead of turning the tap on and off, as we have done for the last few years, there should be discrimination between productivity investment and capacity investment. The Government should thoroughly understand the difference and be constant in encouraging productivity investment.

The other day I made one or two suggestions which might be of assistance. The Chancellor sends out questionnaires to 700 firms, but instead of asking only for the amount of money which they propose to spend on capital investment, he should ask for an estimate of what productivity they are likely to get out of the money which they are investing. Such information would help considerably.

The tempo of productivity in a factory should be a steady factor. When it comes in fits and starts, the sympathy of the people on the shop floor is estranged. As in anything else, a rhythm is needed so that change comes as a matter of course and not as something which happens once in a while simply because fortuitous circumstances prevail.

I hope that the dividend strippers and all those gentry get more pleasure out of doing it than I do from talking about it and hearing it discussed. I have one comment to make on that score. Hon. Members on this side of the House have raised their voices before about tax evasion and so on. This year, the Chancellor himself in his Budget speech gave details of how he intended to deal with the so-called "golden handshake". We then read in the newspapers that he had qualified that statement by saying that £5,000 was the sort of figure that he would allow. I suppose that if a rich man gets another "golden handshake" he will have a lot of trouble in giving it away and trying to leave himself right when he dies. It is not important from the point of view of a moral issue, but very often when a remedy is applied to a general abuse hardship which otherwise would not have occurred takes place. I am thinking, for instance, of the man whose capital is his working life.

During the last twelve months the cotton industry has been reorganised. People have been given Government money to close firms down. One of the basic principles enunciated in this House when the Cotton Industry Bill went through was that adequate compensation would be paid to those displaced. Manual workers will be catered for, but what of the managers? What of the working directors who have been displaced by this action of the Government to stimulate the closing of factories in the cotton industry? What of the man of 45 or 50 years of age who has spent the whole of his working life in a highly technical job and for whom there is no other demand once he loses his employment through no fault of his own?

What can he do? Should he go on the dole? There was a moving article in the Guardian about the manager of a cotton mill who went on the dole. Those who read the article could not have failed to be moved by it. The case of such a specialist who is out of work should be considered sympathetically. Very often he is a man who has no shareholding in the firm in which he was a valued servant. He does not have a lot of money on which to fall back, and I make this point briefly. The amount of £5,000 should be raised. This is an unusual request coming from this side of the House, but I make it in all sincerity because I know many of the people affected. Perhaps it should be raised to £10,000. I do not care how this is worked out. Perhaps the higher figure could be paid over a number of years from the date of the man's enforced retirement to the date of his normal retirement at 65. If the Chancellor thinks about this proposal he will realise the validity of it.

The Government are paying compensation for firms to go out of business. Through no fault of their own many specialists are thrown on the labour market with no reserves to enable them to carry on anything like the standard of living they previously enjoyed. I plead with the Chancellor to think again about this figure of £5,000. If he can devise some way of helping those who become casualties, he will earn the gratitude of many people in my part of the country.

9.30 p.m.

Mrs. Patricia McLaughlin (Belfast, West)

I hope that the hon. Member for Ashton-under-Lyne (Mr. Rhodes) will forgive me if I do not follow him in his discourse on the various points he made. At this late hour it is better to concentrate as quickly as possible on the points which I wish to make myself.

This Budget has been stated to be a Budget of stability. The Budget is extremely difficult to balance if we wish to keep alive the incentive for expansion and at the same time maintain a thoroughly sound economy. To this end we tend to think only of the major issues—only of those issues which are of general importance to our economic stability. But the Chancellor made it clear that this was a Budget of small things as well. He took a great deal of trouble to deal with small details, such as the abolition of duties on and licences for playing cards, tobacco dealers' licences, duties on mechanical petrol lighters, and so on. On not such a small scale, he saw fit to abolish Entertainments Duty, which was a great help to our people.

He paid attention to some small points which he realised were of great importance, but I am sorry that he has not seen fit to extend his provisions to other small matters which are also of great importance. In our hands today we have the interim Report of the Molony Committee, which has given many of us food for thought and which will no doubt be discussed in this House at some future date. The Report makes it clear that there are still many articles, especially in relation to consumer goods, which are unsafe to use.

There are many things which we have forgotten about in our great rush to maintain an expanding and sound economy. One is that the safety of our people has become of second-rate rather than first-rate importance. We should try to get it back into its proper perspective. Some time ago the Chancellor saw fit to reduce Purchase Tax on certain categories of articles, bringing all items into three major categories. In this way he reduced the Purchase Tax on many items which affect the safety of people. This year he has not seen fit to do anything in that line, and this means that it is not possible for us to raise this matter in Committee, or to endeavour to get something done by reducing Purchase Tax on items specifically designed for safe usage.

I wish the Chancellor would reconsider this matter, in order to see whether he cannot exempt consumer items specifically designed to promote safety and, in the long run, to keep the cost of accidents down. I hope that he will be able to remove these articles from assorted ironmongery and various other categories, and put them all under the heading of items designed specifically with safety in mind. This would be a great incentive to manufacturers to continue their research on various parts of their appliances and commodities, which are at present designed without the question of safety being considered, except perhaps as a last resort.

We shall hear much more of this subject in time to come. We have heard a great deal about oil heaters, and we will hear more about other articles. We are told by the manufacturers that they do not do more in this direction because, if they did, their goods would be more expensive and the Purchase Tax would be increased. There are some very ludicrous examples of the way in which Purchase Tax operates. A person can buy a stove or a cooker with a safety appliance attached, but if he buys the safety appliance separately he has to pay Purchase Tax.

I welcome the Income Tax reliefs which have been given to widows, widowers, and those responsible for looking after young children, but I would like the Chancellor to go further and realise that many elderly people who have never had the good fortune to get married, and are therefore neither widowers nor widows, are old and live alone, requiring a constant attendant. These people, with their own small income carefully balanced, can just manage to maintain a separate home or flat, or some place where they can feel they have a right to live, but they find it difficult to get someone to live with them and look after them.

We have raised this question time after time with the Chancellor. We argue that if Income Tax relief can be given in respect of housekeepers, to widows and widowers, of whatever age, relief should not be withheld from persons who have had the misfortune not to get married. I think we shall have to go on pressing over this matter until something is done about it. It is another small thing which would bring justice and comfort to a number of old people. Their number may be greater than we shall ever hear about, because they are quiet and unassuming people and unable to band themselves together in a trade union or similar body which could make a noise and bring pressure to bear.

There is the old question of taking a married couple's income and assessing it together for Surtax purposes. This practice will have a growing effect in the country as the years go by. Our young women are being highly educated and encouraged to enter a profession. After marriage, and having brought up their families, there will come a time—this applies particularly to the young women who are being trained as teachers—when they will have an opportunity to return to their profession and to make use of the education which they receive.

In order to do so, such women will have to make certain sacrifices and their husbands will have to sacrifice some of the time which they can spend together in the home. This means that the call to resume a professional life will have to include some incentive. We hear the old-fashioned statement trotted out time and again that it is still cheaper to live in sin today than to live as a respectable married couple if both are earning a professional income. It is time that state of affairs was tidied up and a 1960 look put upon it, instead of clinging to the old-fashioned aspect that anything will do for a married woman to tempt her to go back to her former work after she has raised a family. Then such women will be able to do something worth while for the country. I hope that the Chancellor will not fob us off with statements about the impossibilty of doing something about this sort of thing.

I am a bit nervous about the penalties for Income Tax returns which are incorrect. I am not thinking about large companies or people with substantial incomes or those who are obviously trying to evade taxation. I am thinking of people with small incomes who are anxious to be honest but who get nervous and worried. I hope that the penalties imposed will not be used in order to frighten people unnecessarily and the fact that they have made a genuine mistake will never be a cause for people being unnecessarily chivvied and harried. This may sound ridiculous now, but in future years we may come to accept that sort of arrangement as natural and fall into the error of making it difficult for people to be honest, and imposing threats upon people which go far beyond the extent of any mistake which they may have made.

This Budget, though highly unimaginative, is highly practical. The Chancellor has done a little where he could and given a little help where it could be given. But we have come to expect too much from the Budget. It is a sort of Pandora's Box which the Chancellor opens when he presents his Budget each year. If unpleasant things come out, there are people who will complain. If good things come out, there are those who will prophesy woe as a result. We have little about which we can prophesy woe or complain with regard to this Budget, but I believe that if we are to continue to do the country the service which it needs through the Budget we must remember that nothing is too small to be neglected if it helps those people who need help.

I hope, therefore, that the Chancellor will not forget the elderly, the spinsters and the bachelors. The right hon. Gentleman himself may be in need of a housekeeper at some time, and then he will appreciate any such measures which he may take. I hope also that my right hon. Friend will look at the other matters which I have mentioned where some action on his part surely would not upset the stability of our country.

9.40 p.m.

Mr. Stanley R. McMaster (Belfast, East)

I am very pleased, Mr. Speaker, to have caught your eye after my hon. Friend the Member for Belfast, West (Mrs. McLaughlin). We seem to be ending this debate on a good, strong Northern Ireland note. Like my hon. Friend, I am disappointed with the Budget. I agree with her and think it is negative and unimaginative. There is need for fresh thinking about Budgets and particularly about the Finance Bill.

I wish to refer briefly to the Chancellor's speech. He said at the start of the debate that he thought the Budget was a step towards fair play as between taxpayers. I wish to draw his attention to the punitively high rate of tax which those in the upper brackets have to bear. One should pause to contemplate what a man earning £800 would say if £600 were taken from him in tax, or if a man earning £1,200 had £800 taken from him in tax. Yet we stand by while those who receive £20,000 are having £15,000 taken from them in tax.

It is time that we fixed a top limit to Surtax after which the tax should be at a fixed rate of, say, 50 per cent. and if a man earned £20,000 he should contribute £10,000, which is a very large sum of money. There should be a top limit because this high rate of Surtax in the upper limits does the country a great deal of harm. It acts as a tremendous disincentive to saving, it impedes efficiency, it discourages people from being economic in the management of business. They spend vast sums of money advertising one soap powder against another because they can set off that expenditure against tax. It does not help diligence or industry and work.

In no country I know of, even in Communist Russia, does one find such high, discriminatory taxation. It only encourages young men to go abroad, young men with high administrative ability who go to Commonwealth or other countries. I am thinking particularly of professionally and technically qualified friends of mine who were at school and at university with me. There is a great need today to encourage skill, enterprise and initiative and also to encourage the traditional thrift on which this country has built the position we enjoy today. I should like to look forward with the Chancellor to a bright new world. I am young and imaginative and I think that we should be able to earn a fair reward for our efforts and also be allowed to keep a fair proportion of that reward.

I shall mention briefly the effects of the credit squeeze. I think that the rise in the Bank Rate, the depressive Budget, special deposits and hire-purchase controls which have been introduced are perhaps prompted too much by a fear of the bogy of inflation about which we hear so much. What do we mean when we speak of inflation? This has already been referred to by the hon. Member for Manchester, Cheetham (Mr. H. Lever). No one minds an increase in incomes; it is an increase in prices of which we are all afraid.

There need not necessarily be a rise in prices. We have a simple equation in the economy and, so long as the rise in incomes in the community is matched by increased efficiency and increased productivity, there will toe no rise in prices. We have only to look at Western Germany and other countries which have already been referred to in this debate. In Western Germany over the past ten years the average rise in productivity has been about 10 per cent. per annum as against nearly 3 per cent. in this country.

It has been suggested by the Chancellor that the imposition of hire-purchase controls and restrictions on credit and finance will have the effect of encouraging manufacturers to export surplus goods which they cannot sell in the home market. But is not this putting the cart before the horse? We cannot force people abroad to take more of our products. The only way we can export more of our goods is by lowering the price, and the only way to lower the price is by improving investment in industry and making use of all the technical skill and inventive capacity which we have in this country. When planning whether to invest, manufacturers are influenced first of all by a strong home market, and it is by encouraging a strong and stable home market that we can encourage manufacturers to invest and to increase the production of goods. The combination of investment and an increasing output lowers unit costs and prices and enables us to export more.

I suggest to my right hon. Friend that in this critical period in our history, with productivity advancing so quickly in Europe, he should not be mesmerised by the phantom of inflation but should instead focus his attention on increased productivity, and the incentives necessary to it, and on expansion so that we may keep our place in this world of rising productivity.

May I speak briefly about the special areas of high unemployment? They should be specifically excluded from the restrictions which have just been introduced. As I have indicated, I cannot completely accept the necessity for the Chancellor's measures, but even the Chancellor must admit that the measures which have been introduced to prevent strain in certain parts of the country leading to inflation cannot possibly be applicable to such areas as Scotland, North-East England, Wales and, in particular, Northern Ireland. There is still considerable unemployment and slack in the economy in those areas of the country.

I therefore particularly welcome the Chancellor's statement in answer to Questions last Tuesday and earlier in this debate that he intends to take steps to assist such areas. I ask him to consider, particularly, that they should be insulated from any form of capital restriction. I ask him to make sure that there is no shortage of bank loans in those areas and that, if possible, interest rates are kept low there in order that this slack may be taken up and that these areas may share in the prosperity of the country as fully as the south of England and the Midlands.

Thinking of the period of the next three or four years, not just of the next financial year, I look forward to a more liberal and equitable policy creeping into Conservative finance and budgetary. I look forward to tax reform and to expansion. All steps should be taken to utilise all our available resources in every part of the country in order that prosperity may be shared by all and that the unemployed resources in Scotland, Wales, Northern Ireland and other areas may be used not only for the benefit of the people to whom I have referred but for the good of the country as a whole.

9.49 p.m.

Mr. W. R. Rees-Davies (Isle of Thanet)

I feel that the atmosphere demands that I limit myself to about five minutes. I am very happy to do so, so that we can hear the Front Bench speakers conclude the debate.

I should like to adopt the great preponderance of speeches made earlier by my hon. Friend the Member for Wolver-hampton, South-West (Mr. Powell) and my right hon. Friend the Member for Flint, West (Mr. Birch). The only reason I rise is to ask my right hon. Friend the Chancellor of the Exchequer to consider three points which have not been raised in any debate.

First, the Chancellor must know that by the time he comes to prepare his Budget the amount of elbow room left for him is at a minimum. With regard to tax reliefs in any given year, unless he is extremely lucky and also has a very strong Prime Minister, the demands of Ministers upon him are such that he is left with little scope. As my hon. Friend the Member for Wolverhampton, South-West indicated, this situation demands that we must have an opportunity in the House of Commons to consider questions of policy before the Estimates arise. There must be some chance in the future to consider whether we are progressing in the right way.

My hon. Friend the Member for Eastleigh (Mr. D. Price) outlined all our election promises and a great deal of the election expenditure. We must somehow find about £100 million away from Government expenditure in the forthcoming year. That will hurt someone. It is not fair to put that political decision entirely upon the Chancellor of the Exchequer. Nor, indeed, is it the task of the Treasury. It is the task of the House.

I believe that the railways should be made to pay. That is a big subject. If they did, we would not have needed any of these tax increases this year. Ninety million pounds would be saved. I believe that the egg subsidies should be drastically and substantially reduced. I know that that would cause trouble among many of my hon. Friends who represent farming constituencies, but nearly twenty years after the war that position must be faced. Further, I think that it is wholly wrong that there is no maintenance charge in hospitals. Goodness knows, I have had enough experience of hospitals. People have to pay for their food when at home. When they enter a hospital, they or their families can at least make a contribution towards food in a hospital. That will provide millions of pounds.

I have many other suggestions. I believe that people would pay more for spectacles if it were put to them that they would get it back in the way of tax reductions. I invite my right hon. Friend to give the clearest consideration to the possibilities of wider pre-Budget debates to enable him to assess the temperature of the House and whether we would stand for such reductions. I believe now that we will. That is my first point.

Secondly, the realm of legislation in the House should cover many of the matters with which my right hon. Friend deals by regulation. The Treasury today seems to think that it is a law unto itself. I agree entirely with my right hon. Friend the Member for Flint, West that bank deposits are a matter for the House and not for the Chancellor without previous warning to the House or previous opportunity for debate. With regard to hire-purchase regulations, the stock market has been boomeranging with U.D.T. shares bobbing up and down because everyone was waiting to know what the Chancellor would do. That is wrong.

There should always be hire-purchase restrictions. A person should put down 20 per cent. deposit in cash. This should be the permanent situation as a matter of law. It is right. It is also good Tory policy on thrift. Therefore, it should be done by legislation in a proper Bill laid before the House. It should not lead to boomerangs on the Stock Exchange.

Put briefly, my second point is to invite my right hon. Friend to look very carefully at the matters which are the province of the House in the realm of legislation and contrast them with those which are creeping in and becoming the perks of Treasury financial control.

My third and last point is this. I am a lawyer. Law must be definable. I tell my right hon. Friend that Clause 26 as it stands is complete nonsense. I do not claim to be a tax lawyer. I am strongly in favour of trying to put a stop to dividend strippers, etc., although it is extremely difficult. I remind my right hon. Friend that Sir Stafford Cripps could not do this and I do not believe that my right hon. Friend can do it in this way, either. If he goes back to those days in the Treasury, ten years ago, he will find that Sir Stafford Cripps, who was a remarkable lawyer, as we all knew, had exactly the same matters in mind and wanted to achieve exactly the same purpose. He was unable to do it. I do not believe that any lawyer or any accountant could reasonably advise a client under Clause 26 as it now stands.

I should very much like to support that Clause, but I cannot do so as it now stands. I urge my right hon. Friend to seek the advice of the tax lawyers at the Bar over a wide range, and the advice of the accountants, to see whether, perhaps, some suitable Amendments may be forthcoming. However, if it comes to a choice between the Treasury and definable law, I must stand four-square to the proposition that our law must be capable of definition so that those who advise can advise what is the law and not on questions of motive.

It is because of my views on those three points—pre-Budget debates, clearly definable law, and the realm of legislation, which truly belongs to this House, not being relegated to the Treasury—that I have made this short contribution. I apologise if I have taken too much time in doing so, and I am indebted to the House for the opportunity.

9.55 p.m.

Dame Irene Ward (Tynemouth)

I have no intention of detaining the House for very long, as I realise that the hon. Member for Sowerby (Mr. Houghton) and my right hon. and learned Friend the Attorney-General want to wind up the debate, but it is too much of a temptation to see a quite formidable Front Bench available and not to say something about matters that cause me great concern.

I fully accept the basis of the Budget. I have tried to follow what the Chancellor is trying to do, and I certainly think that he deserves great congratulations for the way in which he has steered our economy in very difficult circumstances during the past few years. Far too few people realise that, for the foreseeable future, we shall, as a nation, always be operating on a razor edge.

In spite of our difficulties, I do not see why my right hon. Friend should not do justice to all sections of the community, and because of that I want to refer to the fact that shipping and dry docks find no place in the Finance Bill. I want also to refer to the increased reliefs given to widowers and widows while spinsters and bachelors are disregarded—although let me say that I have no personal interest in that matter at all.

In this Bill my right hon. Friend is taking powers to find capital sums for the nationalised industries. While I do not disagree with Ministers of the Crown, perhaps I may make an observation about my right hon. Friend the Minister of Transport, who has been saying to those interested in shipping, ship repairing and shipbuilding, "Tell me what is wanted, and I shall endeavour to help in providing what is considered essential by those who play a very large part in our economy."

That is all very well, but all Ministers are powerless if they cannot convince the Chancellor of the Exchequer, and for many years now we have tried to persuade him about the claims of the dry docks. The nationalised industries are, in fact, in direct competition with shipping, shipbuilding and ship repairing, and quite recently those engaged in our shipping interests have very strongly pointed out that our coastal shipping is being practically wiped out while, at the same time, the Chancellor is allowing money to be spent on the modernisation of the railways.

I do not disagree with him on that, but there is no co-ordinated or concerted policy. The interests concerned have been begging my right hon. Friend to remember that shipping, ship repairing and shipbuilding have an importance for this country equal to that of the nationalised industries, in both peace and war, but in this Finance Bill nothing has been done for them.

I give my right hon. Friend notice, and I enjoy doing it, that if I do not find something in the future which will be of benefit to those interests to which I have referred and, incidentally, of benefit to the railway superannuitants, I shall have the greatest possible pleasure in voting against him, in the interest of those for whom I and many of my hon. Friends believe we have a right to speak. That is my first point. I promised my Chief Whip, whom I always find very helpful, that I should not be too long, but I could not resist the opportunity of saying what I had in mind when such a body of admirable and formidable people was assembled on the Front Bench to listen.

I come now to the subject of widows and widowers versus spinsters and bachelors. My complaint about my right hon. Friend and the Treasury is that they are so overwhelmed by the big national problems which must be faced that they never take the trouble to ask those who really know about the lives of these people and their problems. I take great pleasure in saying that the only Chancellor of the Exchequer who has ever done anything imaginative and set a new pattern for those living on small fixed incomes was my right hon. Friend the Member for Monmouth (Mr. Thorneycroft). I have never forgotten that. I disagreed with him when he resigned, and I do not agree with him today. I think that all those who talk about Government spending are generally not here to discuss the details of the Estimates. I shall not go further than that. My right hon. Friend the Member for Monmouth, however, did at least in his Budget set a new pattern for people living on small fixed incomes, and, as I say, I am very grateful to him for that. The present Chancellor of the Exchequer, the Prime Minister and all the other Ministers of the Treasury should take a leaf out of his book and do something for those who really helped us to win our victory in the last war.

The basis of the housekeeper allowance is that one must be reasonably well off to be able to afford a housekeeper. My right hon. Friend has selected a section of the community which is in a reasonably good position. I am glad that it is, but that is the situation. Such people are being left a little of their own money in their own pockets to spend in their own way, except that they must have a housekeeper to receive the allowance. But this is not the point. Why should one section of the community, just widow and widowers, be selected?

I am, of course, grateful for the little bits of comfort which are announced in the Budget statement and put into the Finance Bill to assist certain widows and single persons looking after children. But the point really is that there are many very wealthy widows and widowers, and I see no reason why people on normal incomes should have to accept extra reliefs for them when help is greatly needed, for instance, for the widows of ex-Regular officers. These Service widows are old, and the resources of many of them are below National Assistance levels.

It is an absolute scandal that wealthy widows and widowers should have an advantage when nothing is done for that other section of the community. I deprecate it. It annoys me intensely. It is most unfair and unjust. My right hon. Friend the Prime Minister, who has an imagination, in a letter the other day referred to the fact that he was at one time the Member for Stockton-on-Tees, and how proud we were of the fact, but I thought that he learnt a little more than he appears to have done when he was the Member for Stockton-on-Tees.

I have mentioned those who are being kept below National Assistance level for whom we as a nation have some responsibility, but I want to make a very important point about bachelors and spinsters. We started to argue about this matter during the war with Sir John Anderson, who later became Lord Waverley, a great predecessor of my right hon. Friend. Sir John Anderson always made it perfectly clear that the housekeeper's allowance for widows and widowers was an anomaly. He never sought to defend it in any way. None of the great pundits know how they come by the allowance. Obviously, my right hon. Friend has never bothered to find out. It has continued with successive Chancellors.

I have been in this House since 1950, and this point has been argued on almost every Finance Bill and the answer that has always been given is that it was an anomaly. The Royal Commission on the Taxation of Profits and Income suggested that the allowance should be withdrawn. It has always been regarded as an anomaly. Every Chancellor has said, "We cannot remedy the anomaly because this allowance should never have been given".

I have written to my hon. Friend the Financial Secretary, who is a very attractive bachelor. [Interruption.] I do not regard my right hon. Friend the Chancellor in the same way, and, in any case, I can deal with only one bachelor at a time. When I tried to intervene in the Budget, my hon. Friend said that he could not allow me to do so because he was making a very long speech. I noticed with a certain amount of dismay, heartburn and sorrow that the people who were not singled out for an answer were the spinsters and bachelors. Perhaps my hon. Friend had eliminated himself as a bachelor. I do not know whether that was declaring an interest, but the people who were disregarded by my hon. Friend were people on small fixed incomes.

When I wrote to my hon. Friend pointing out how very upset I was that wealthy widows and widowers will again benefit under the Finance Bill by an increase, I received a reply from him which indicated that he thought that I wanted to withdraw the allowance. That just shows the extraordinary mentality at the Treasury. I have been speaking on this matter for 25 years, almost before the Financial Secretary was born, and no one has yet understood that I am definitely and sincerely interested in people living on small fixed incomes. My hon. Friend has written to me saying, in effect, that I ought not to blame his right hon. Friend for increasing the allowance which the present Home Secretary introduced in a Budget when he was Chancellor. All I can say is that my hon. Friend cannot possibly understand a woman's brain. The difficulty is that the Economic Secretary, who has a very charming wife, does not enter into this matter at all. I simply tear bachelors to pieces for their absolutely inhuman approach!

I am delighted to see that my right hon. Friend is leaving the Chamber. I only hope that he is going to talk to his officials—it does not look like it—to find out whether he can make this concession. As my hon. Friend so eloquently pointed out, in the First World War many spinsters lost the men they would have married. They have had to work and many of them have had to keep elderly parents, or they have had had to build up a little income of their own so as not to be a burden on the State.

I do not know how many bachelors there are in the Treasury or whether my right hon. Friend could give me an answer if I put a Question down, but I give fair warning that unless something happens and someone really looks at this matter from a human point of view, I shall vote in Committee solidly against the Government on every single thing that I can. I think that is the only way to make some impression upon those who have treated the spinsters and bachelors over the years so scurvily and who have advanced arguments against giving them the same Income Tax relief as that given to widows and widowers on the ground that it is an amomaly.

I hope that what I have said will be read and digested and that, when we come to the Committee stage, if I put down an Amendment that is in order it will be called. I hope that hon. Members on both sides of the House, who have many spinsters and bachelors who vote for them, will come to their rescue and that we shall get this anomaly removed. That is all that I have to say. I hope that my hon. Friend who is to wind up for the Opposition—I call him my hon. Friend because he has so often supported me in this matter—will again support me and that we shall be able to knock some sense into the heads of the Treasury.

10.13 p.m.

Mr. Douglas Houghton (Sowerby)

Mr. Speaker, when I heard that the hon. Lady the Member for Tynemouth (Dame Irene Ward) hoped to catch your eye, I gladly deferred to her wish because I felt sure that her speech would be a good curtain raiser to the one that I have to make. Little did I think that she would make a special plea for some Income Tax relief for the Chancellor of the Exchequer and the Financial Secretary. Having praised the Chancellor and the Financial Secretary and then scolded them, she then drew the attention of the House to the claim of single person householders for some special consideration in the code of personal reliefs. When the hon. Lady sees the new Clause which I feel sure will be put down on this very point, we can confer together to see how best to achieve our mutual purpose in Committee.

We have had a long but very interesting and varied debate. My first pleasant duty is to congratulate the hon. Member for Brighouse and Spenborough (Mr. Shaw) on his excellent maiden speech. It gives me special pleasure to do that because he is a political neighbour of mine. We all deeply regret the cause for the by-election in Brighouse and Spenborough and I feel it particularly keenly because the late Mr. John Edwards and I did so much together. The hon. Member who comes from Brighouse will be (fully accepted toy the House, and I hope that he will have a fruitful and successful period of service here. I hope that in the meantime he will dissuade his Conservative friends in the West Riding from giving undue attention to Sowerby. They must not set too much store on the result at Brighouse and be unduly encouraged in my constituency.

I agreed with the Leader of the Liberal Party when he differed from the belief of the hon. Member for Brighouse and Spenborough that the Budget was one of a series in a general pattern of economic and fiscal strategy which had been devised by the Chancellor of the Exchequer. I do not believe that this Budget and this Bill are the ones which the Chancellor expected to introduce this year. It is difficult to understand hon. Members who so confidently predict that the Budget and today's Bill are just about right. I do not know on what they base their calculation, however marginal, unless it is confidence in the judgment of the Chancellor and little else.

To go from slack to overstrain in twelve months takes a little explaining, unless it is that there was an election in between. When the hon. Member for Eastleigh (Mr. D. Price) chides us with not answering his question, "What would you have done last year?" the answer is that we should have started the year before and then, we hope, there would have been less justification for blowing hot and cold between 1959 and 1960.

When the right hon. Member for Flint, West (Mr. Birch) offered a plausible explanation of the choice that lay before his right hon. Friend, I thought that it would have been politically damaging or even unthinkable to reimpose any part of the tax remissions that the Chancellor made last year. How curious it is that when a tug at the reins has to be given, the reimposition of taxes is always in a different sector from that where the reliefs were given. This we found in 1955, and we have seen it again this year. Last year, tax was taken off beer. This year, it is put on tobacco. Last year, Income Tax was reduced. This year, it is put on Profits Tax. When one looks at the balance of the fiscal changes in the Bill, one wonders whether they have any relevance to the economic situation today.

The tax reliefs in Entertainments Duty and Income Tax, and bits and pieces in Clauses 6, 7, 8 and 70 and the additional taxation on tobacco and Profits Tax make a net increase in taxation this year of £21 million and, in a full year, just over £70 million. What is the relevance of that to the present economic situation? How marginal must these calculations be? I call these economic refinements. It is extraordinarily difficult, even when adding up the total sum, to find that they are an answer to what the Chancellor says are our present difficulties. This is not a Budget so much as an economic abrasive. It has to be approached with that in mind.

The Chancellor has had a much better day than we on these benches expected him to have. We had been ready to make room for him on this side in case he wished to face his critics and not be stabbed in the back. He has been kindly treated, however, both by the high priests of Toryism and his rampaging critics. It may be that they are holding their fire for the Committee stage.

Mr. Cyril Osborne (Louth)

Who is the high priest?

Mr. Houghton

The rampaging critics? Does the hon. Member not know—

Mr. Osborne

Who is the high priest?

Mr. Houghton

If hon. Members interrupt me much more, I shall become one, too.

I underline a proposal which was made by the hon. Member for Aylesbury (Sir S. Summers), because he echoed a request that I have been making every year. It is for an explanation of the Clauses of the Finance Bill in non-legal and non-technical language. It is disgraceful that we have to deal with a Bill of this complexity without a single word of explanation of any Clause until we come to the Second Reading itself, and we have to read professional magazines and financial correspondents and other people to find out what Bills mean which we are asked to study and appraise and criticise and pass.

Strong insistence should be made on proper facilities to understand a Bill of this complexity so that we can do our job properly. Who is being pigheaded about this? I have asked for this year after year and Treasury Bench spokesmen say that it is not practicable. Yet the Chancellor knows full well, and the Financial Secretary knows, that they have in their hands, or close to them, the explanations which we require in order to approach the Bill with some degree of comprehension.

However, most of us have done our homework on the Bill, I suppose, and we understand it moderately well. Certainly, I understand that there is a great deal in the Bill that I have advocated ever since I came to the House eleven years ago, and I look forward to the Committee stage with considerable relish. One suggestion made by my hon. and learned Friend the Member for Kettering (Mr. Mitchison) is of particular interest in connection with a Bill of this kind. We realise that this is quite an exceptional Finance Bill. It is normally the Bill of the Budget, but there is so little of the Budget that there could not be very much of the Bill unless something happened, and it did happen.

The Inland Revenue saw these wide open spaces, moved in, set up its tents and brought a lot of complicated apparatus with it, and that is most of the Bill. It would probably be convenient when one has a Bill of this length and complexity to deal with some parts of it in the more congenial atmosphere upstairs, or to have measures of this kind included in an Inland Revenue Bill or a taxes management Bill, or something of that kind, so that we could separate measures which are not truly fiscal measures but are for the better administration of our tax system and deal with those proposals separately from the rather close timetable of the Finance Bill. I hope that that will be considered in the future.

Some of the proposals in the Bill have waited for years, presumably, for the opportunity of introducing them. The amount of money which has leaked out of the Exchequer during those years of waiting would be found to be quite formidable if we could calculate it even approximately. I think that millions of pounds have been lost on the steps recommended by the Royal Commission for the stopping of tax avoidance, because we have been so long in introducing them into the Bill.

Last year, the Chancellor of the Exchequer, when he was pressed to make concessions in personal reliefs, said that it was then the turn of the standard rate, and all pleas for higher personal reliefs were rejected. He had done so much in reducing the standard rate of tax, and so on, that he could not do any more.

Most Members on both sides hoped and expected that this year it would be the turn of personal taxation, of personal reliefs. The fact that the Chancellor has included very moderate improvements in particular directions suggests that he is conscious that something should be done in that field this time. We certainly welcome the new relief, modest though it is, for certain categories of taxpayers who are not eligible for the housekeeper relief.

We have frequently challenged the residential qualification for housekeeper relief, particularly, of course, for taxpayers with young children, and we are glad that the Chancellor has thought of this way of meeting that anomaly. In the housekeeper and dependent relative allowance, an improvement has been overdue for some years. We have reached the position when the whole field of personal reliefs is in need of review.

There have been some striking differences in the increase of personal reliefs since 1951. The child allowance for those over 16 has risen 114 per cent., whereas the wife's allowance has increased by only 25 per cent. The present position is that relief for a child over 16 is higher than the relief for a wife. Whether that is justified, having regard to domestic circumstances, is a matter for debate. Certainly there is scope for the Chancellor to improve personal reliefs another time.

We also express regret that the Chancellor has failed again this year to introduce the small yet important easement of tax for the special cases recommended by the Royal Commission. We think particularly of the 100 per cent. disabled, the blind and the incapacitated child over the age of 16. We may call attention to them once more during the Committee stage. With the hon. Lady the Member for Tynemouth and the hon. Lady the Member for Belfast, West (Mrs. McLaughlin), we shall devote some attention to the special claim of elderly spinsters and bachelors or single persons who are householders who may be entitled to some preferential treatment over the normal single person's allowance.

Clause 17 deals with the National Insurance contribution. I was a little shocked to read in The Times of 5th April that this proposal for a flat rate relief for the National Insurance contribution was described as a monstrosity which should be firmly resisted. As the Chancellor has said, unless this flat-rate system were adopted there would be endless trouble in adjusting at the end of the tax year the liability of millions of people who would be included in the graduated schemes. It would be tiresome, probably even annoying for them, and certainly of great administrative inconvenience.

We realise that, in adopting a flat rate of standard relief, unless it is to be pushed unduly high, those who make the maximum contribution will not get the full relief, but the greater number lower down—I believe that it will be the greater number lower down—will get something slightly above the precise relief to which they would be entitled if it was strictly calculated on their contributions. There are very strong arguments on practical grounds for what the Chancellor is proposing, and we accept them, while regretting that any question should arise of adding to the disadvantages of the higher-paid employees under this slick piece of financial wizardry called the graduated pension scheme.

Now I come to the main subject, anti-avoidance. Hon. Members on both sides of the House have been surprised and disturbed to hear the Chancellor say that the amounts involved in these avoidance devices are very large indeed. We had been led to believe that they were very small. In fact, we had been led to believe that they had been stopped altogether. Looking back to 1955, one sees the sordid story of the humiliation of the House and the Government in their efforts to stop these devices, and one must come to these Clauses with a sense of considerable indignation.

We shall ask the Chancellor at some time to tell us his estimate of the leakage by these devices. I remind the House that when some of my right hon. and hon. Friends were saying during the election that by tightening up tax avoidance we could save £100 million of revenue a year, that was denounced as wild exaggeration and as an irresponsible attempt to secure electoral advantage. I believe that at least £100 million a year is involved in all these tax-avoidance devices today. The figure is certainly much greater than we were led to believe and it is now a serious matter. The Opposition will give the Chancellor every support in tackling all these tax-avoidance devices boldly and resolutely.

The Chancellor has dealt rather lightly with farming losses as a form of tax avoidance. I know that he has followed the recommendations of the Royal Commission on the Taxation of Profits and Income, but the Royal Commission had a somewhat palsied hand in this matter. It admitted in paragraph 496 of its Report that: … we should not expect our recommendation to bring about any considerable change in the present position, or markedly to reduce the volume of loss claims in respect of farming. The Royal Commission thought that its recommendations would only put out of court those claims which could be clearly seen to lack commercial inspiration and to be nothing more than hobbies or private amenities. The hon. Member for Aylesbury questioned whether the onus of proof should be put on the taxpayer in this matter, that he should be required to satisfy the Inland Revenue that he was carrying on his business on commercial lines with a view to realising a profit. It would be very difficult indeed for the Inland Revenue to prove that a taxpayer was not trying. In many matters, on questions such as expenses wholly, exclusively and necessarily incurred in the performance of an office, the onus of satisfying the Revenue rests upon the taxpayer.

There are two features about farming losses which the House should notice. The first is that half of them, both in numbers and in amount, occur around London and the South. Is it not curious that out of 330,000 farmers, 10,000 make losses and the rest of them average net profits of £1,700 a year? Another curious thing is that 70 per cent. of the 10,000 farmers who make losses are Surtax payers on their other income. It is curious that men who are so obviously successful in other branches of their business lives are dismal failures when it comes to agriculture. I do not think that we should be too tender-hearted, still less, chicken-hearted, when dealing with avoidance of this kind.

I am glad to see that under Clause 18 it will no longer be possible for a stockbroker farmer to set off losses on his farm against his profits as a stockbroker. They will be set off against other income and not against the profits of his business. Of course, he will be able to carry forward his losses in the future in the hope and expectation that one day he may make a profit and set off his losses against that. My judgment in the matter is that it would have been much sounder to have provided that these losses may not be set off against other income of any kind. They should be a running account with the Inland Revenue and set off against future profits. That would have saved all the arguments, disputes and appeals on whether a farmer is really trying to make a profit or not.

Coming to the really crucial avoidance Clause in the Bill, Clause 26. I wonder whether the Chancellor now regrets not having stood his ground on retrospective legislation two years ago. Had he done so, there would have been the clearest warning that these practices should not be continued or new ones thought up. In answer to my hon. Friend the Member for Gloucester (Mr. Diamond), who advocated a warning followed by retrospective legislation as a better course of action, the Chancellor himself retreated from retrospective legislation on the ground that the warning was not sufficiently specific to justify retrospective effect to the legislation, which suggests that unless the warnings can be given in specific terms, Chancellors will be confronted with the same dilemma. It is not warnings in specific terms which can easily be given; it is warnings only in general terms which can easily be given and they, it seems, would fail to satisfy the test the Chancellor has adopted as a justification for restrospective legislation.

Hon. Members opposite who may criticise this Clause, indeed hon. Members on this side of the House who may criticise it, have surely to support the Chancellor in his search for some remedy for this scandal of tax avoidance by transactions in shares. It cannot be allowed to go on if the taxpayer is to retain confidence in the machinery of taxation and if this House is to be respected as an effective body to check these malpractices.

If it is not to be done this way. I suggest that there are two choices. One may lie in a capital gains tax, which would certainly take care of a great many of these gains, because there is no question that they are capital gains. The only question is whether they are income, and avoidance is possible because we tax only income and not capital gains. The other choice may lie in the suggestion made by my right hon. Friend the Member for Huyton (Mr. H. Wilson) of dealing with the specific loopholes by Statutory Instrument from time to time, but I think it was said in the course of the debate that there would be a time lag even then. It may be that we shall want all three before we have finished. I hope that all who will criticise this Clause are ready with some equally effective alternative.

I am quite convinced in my mind that there is no foundation for the criticism which I read in the Accountant on 16th April that the Clause makes no distinction between the sophisticated avoider and the ordinary taxpayer. I believe that all operators in this field are sophisticated, even if they are not all sophisticated avoiders. They know what they are about and it is a specious plea to suggest that the ordinary taxpayer may be at the mercy of bureaucracy under this Clause. He will not, for the ordinary taxpayer is not in this racket. He has not the wealth, and in many cases not the ingenuity, to indulge in it. However, the main leak of revenue here undoubtedly comes from very substantial operations, and it is those that we must have in mind.

I say to the right hon. Gentleman that we on these benches want to end this racket. We are sick of it, and we will gladly consider any effective alternative. We have suggested one, and there may be others, but in the last resort we shall support the Clause rather than see the House defied and the Revenue cheated up hill and down dale by slick manipulators of wealth.

There are other Clauses which are of importance as checks on tax avoidance. Clause 35 deals with one which has received a good deal of publicity, that of the so-called "golden handshake." It is interesting to recall that Sir Stafford Cripps dealt with another form of "golden handshake," and dealt with it, incidentally, retrospectively. But that was about a bonus not for going but for staying on, a different kind of bonus and, incidentally, a very much bigger one.

I think that here, again, the Chancellor's restraining hand is comparatively gentle. In fact, nearly everything that the right hon. Gentleman does is gentle, from squeezes to handshakes. We shall have to see whether this is too mild an approach to this problem. In principle, however, we agree with the Clause and with the Schedule, but we have been critical of the Chancellor's inaction on this matter for some years.

The next important part of the Bill is Part III, which the hon. Member for Brighouse and Spenborough claimed quite modestly, but I am sure sincerely, that he had mastered. Of course, we heard in him the authentic voice of the practising accountant, one whose ambition it is to get on equal terms with the Inland Revenue. The hon. Gentleman thinks that Part III of the Bill puts him in a pretty good position to be on equal terms with the Inland Revenue. Unless I am much mistaken, the will be on top of the Inland Revenue with the proposals for penalties under Part III.

The present scale of penalties has been such as it is for a very long time. Harsh as the penalties may appear on paper, they have been sanctified by mitigation. Various Commissions and Committees have reviewed them, and nothing has been done about them. The Colwyn Commission of 1920 was in favour of more severe penalties in some cases, especially for aiding and abetting. The Royal Commission in those days was very tough.

The Codification Committee of 1936 put up a whole new code of penalties. I notice, incidentally, that the penalty in the Bill for aiding and abetting is exactly the same amount as that proposed by the Codification Committee of 1936. I rather thought that the value of money had fallen since then. Anyhow, the Inland Revenue saw nothing very much amiss with the penalty Clauses, nor, of course, was there, so long as the Revenue was given a free rein on negotiations within very wide margins of penalties.

Then along came a Mr. Hinchy who upset the applecart, and there was a considerable outcry at the extreme powers that seemed to be in the hands of the Inland Revenue Department. This has been a very grievous thing for the Revenue, as we see from the last Report of the Comptroller and Auditor-General—in the accounts 1958–59—because a great deal of recovery work had been at a standstill for a long time while the Hinchy case was going through the court. The amount of tax recovered as shown in the last Appropriation Accounts is well down on previous years. Therefore, there is no time to be lost in putting the Inland Revenue in a position to proceed with this work.

What I am sorry about is that there is not more room for negotiation in the penalties in Part III. I do not believe that in some cases lenient money penalties will match the crime. My forecast is that if justice is to be done, there will be more prosecutions of the real crooks of Income Tax evasion in the future than in the past. In 1958 only nine prosecutions took place for false accounts and returns of income whereas there were fifty-four prosecutions of miserable wretches who made false claims on their personal tax returns—men who claimed for wives they had forgotten were dead and men who claimed for children they had never had; they were put in the dock and convicted, but the big boys in the evasion line came to terms with the Inland Revenue Department. Now there will not be as much scope, and my forecast is that although the money penalties will be lower, the number of prosecutions will be, and should be, higher.

I have no hesitation in saying, when I look at the proposed reduced penalties for fraudulently making incorrect returns and statements—£50 plus twice the amount of the tax lost—that they will not be in the class of the nuclear deterrent. I believe that these proposals on penalties do not make the way of the transgressor hard; they make it almost soft. We will come to that when we reach Committee. I may find that some of my right hon. and hon. Friends are a little milder in their approach to Part III than I am, but that will all come out in the wash.

Mr. C. Osborne

In view of the hon. Member's long practical experience in these matters, will he tell the House whether he would choose a prison sentence rather than a heavy fine?

Mr. Houghton

I am never likely to be in the position of having to make that choice, so what on earth is the good of asking me? If ever I appear in the dock I will tell the learned judge which I should like to choose.

The Attorney-General (Sir Reginald Manningham-Buller)

It would then be too late.

Mr. Houghton

All right, it would be too late. I should take what was coming to me and that would be the end of it.

May I make a few comments on things which are not in the Bill? I realise that it will go hard with the Chancellor to say that this long Bill should be still longer, but there are still some points which require the attention of the Chancellor and the House. We have not dealt with the question of expenses and we have recently heard some very hard words from the judicial bench on the difference between the rule for expenses under Schedule D on profits and the rule for expenses under Schedule E on employment. When a taxpayer goes to court to move from assessment under Schedule E to assessment under Schedule D solely in order to get the benefit of the more liberal and unquestioning basis of charging expenses, it is time to pause and see where we are going. One of the learned judges said that how much tax one paid seemed to depend on which Schedule one was under. It is almost as simple as that.

Mr. H. Lever

May it not be that the rule under Schedule E is too harsh rather than the rule under Schedule D being too lax?

Mr. Houghton

It may be, but my hon. Friend will get a much more ready response on that point from the Conservative benches than he will from me. I am not saying that the solution is easy, but I have said before that the Schedule D rule is absolutely wide open. If the Schedule E rule is also made wide open, it will be a taxpayer's picnic. That is the problem. Something will have to be done about it sooner or later.

Should the Chancellor of the Exchequer have withdrawn the initial allowance for all private cars? I fully expected him to do that. It seemed rather the obvious thing for him to be doing, unless he was anxious not to annoy the motor car industry, which was about to go to places it did not want to go to in order to expand its manufacture of motor cars. However, that was a point.

The question of commercial and industrial entertainment is still almost of the dimensions of a scandal. Should a limit be put on the charge against taxable profits for entertainment and other expenditure which confers benefits or amenities on those concerned? We should decide whether not more than half the cost shall be allowed, or none in the United Kingdom but all overseas, and so on. They are questions which should be answered.

Another very large source of loss of revenue is in matters of travelling and subsistence expenses. Other countries are prescribing maximum admissible allowances for travelling and subsistence. That is worth looking at. Why should some quite low-grade commercial people travel and live in hotels on a more luxurious scale than top-ranking Civil Servants, the Permanent Secretary to the Treasury, Members of Parliament and, indeed, Ministers? It is very difficult to see the justice of it.

We cannot stop the expenses racket merely by tightening up the administration. The whole operation is too irksome and too unpleasant for both taxpayers and tax gatherers. One cannot carry strictness of administration too far without provoking unfavourable reactions. It is most desirable to keep a good relationship between taxpayers and tax gatherers. Rougher justice, but unquestioned allowances, should be chosen rather than variable ones with a good deal of argument, temptations to exaggerate, and other abuses of expenses and allowances.

The Bill contains so much of which we approve that the Chancellor will have from us more co-operation than opposition or obstruction. We want some of these things to go on the Statute Book. That does not mean that we swallow everything as the right hon. Gentleman now proposes it, but his intentions are those we approve of. We want to help in this very bold set of remedies to deal with avoidance devices and practices. Whether the Bill is relevant to the general economic situation is another matter. Finance Bills are not always that, and there is quite a lot in this which, from a fiscal point of view, will keep us occupied in fruitful endeavour.

10.54 p.m.

The Attorney-General (Sir Reginald Manningham-Buller)

We have had a very long debate, which has really fallen into two distinct parts. The first part was a discussion of the general economic situation and whether the fiscal proposals in the Budget are right in the light of the assessment of the situation. The second part consisted of a discussion of the proposals in the Bill.

The hon. and learned Member for Kettering (Mr. Mitchison) began his speech by a somewhat delicate approach to the economic situation and by references to economic concessions and economic hiccups. I must say that I was very pleased to note that, although he advised my right hon. Friend the Chancellor on what he should do in the future, the hon. and learned Gentleman appeared to have absolutely no doubt whatsoever as to the result of the next General Election, because he advised my right hon. Friend to make fewer economic concessions before the next election and then, he said, my right hon. Friend would have less trouble afterwards.

It is interesting to note that a number of speakers today have referred to the Budget of 1959 on rather the same lines as the hon. and learned Gentleman, but nobody at the time of that Budget—neither my right hon. Friend the Member for Flint, West (Mr. Birch), the orthodox economists nor anybody else—criticised it for being too inflationary. It is, of, of course, easy to put forward criticisms of one kind or another after the event, but at that time there was no criticism of the Budget on that account.

The hon. and learned Gentleman concluded his speech by saying that this was not an occasion on which he found it too easy to speak. I share his difficulty. I agree with him there, for this is, I Chink, my maiden speech on the Second Reading of any Finance Bill. On that account, particularly, I should like to join in congratulating my hon. Friend the Member for Brighouse and Spenborough (Mr. Shaw) on what was, if I may say so, a most enjoyable speech, excellently delivered. I am sure that his assurance of loyal support brought great comfort to the ears of the Patronage Secretary.

I am sure that the House will not expect me, at this late hour, to deal very much with the economic considerations that have been advanced on one side or the other. I am winding up the debate because there is so much in this Bill of a legal character. Although my remarks will not replace the sort of explanatory memorandum that the hon. Member for Sowerby (Mr. Houghton) wanted but which, in his speech, he showed he did not really need at all, I hope that it will help hon. Members, when they came to consider what Amendments to put down, to see at least what we are trying to aim at by the wording of some of the Clauses.

There are many Clauses that, as hon. Members have said, are tax-avoidance Clauses. Indeed, two of them really go beyond dealing merely with tax avoidance. They are Clauses that seek to prevent persons from making a profit out of the Revenue or, as the Press so rightly said after the Finance Bill was published, from "milking" the Revenue. I want to deal as shortly as possible with these proposals.

The first on which I want to comment is Clause 18, which deals with what we call "hobby farming" but which, of course, is not limited in its operation to hobby farming. The Clause has come in for some little critiscism both inside the House and outside it. Some doubts have been expressed about the use of the words … on a commercial basis and with a view to the realisation of profits … That is not a new phrase in the Statute Book. It is to be found in the Finance (No. 2) Act of 1915, and it has been on the Statute Book ever since. So far as I can ascertain, in the forty-five years in which it has been part of the law it has given rise to no difficulty whatsoever. It has been on the Statute Book in this connection. Ever since 1915 the occupier of woodlands can, if he proves to the satisfaction of the General Commissioners that the woodlands are managed … on a commercial basis and with a view to the realisation of profits … elect to be taxed under Schedule D instead of under Schedule B. Indeed, unless he can prove that, the woodlands cannot be taxed under Schedule D, and, if they are not taxed under Schedule D, there can be no question whatever of setting off losses on woodlands against other taxable income.

Therefore, those owners of woodlands who are now taxed under Schedule D in respect of their woodlands should have no difficulty about Clause 18. The test is the same under Clause 18 as it is under the existing law: they have to show the same thing, in the one case, before they are taxed under Schedule D and, in the other, to come outside the scope of Clause 18.

The hon. Member for Sowerby, if I may respectfully say so, made one error in the course of his entertaining speech when he said in this connection that the farmer and stockbroker would not be able to set off his farming losses against his stockbroking profits but would have to set them off against his other income. The truth is that, if the farmer and stockbroker can show that he is carrying on on a commercial basis and with a view to the realisation of profits", then he can set off farming losses against profits on any other business, including stockbroking.

My hon. Friend the Member for Aylesbury (Sir S. Summers) raised the subject of onus of proof under Clause 18 and asked whether it should rest on the taxpayer. I agree with the hon. Member for Sowerby that it would be impossible really to put the onus on the Revenue here to prove a negative, and I should like to explain how the Clause works. The onus on the woodlands owner is the same as the onus on the claimant here who is claiming to set off a loss against other income. In the first place, he makes his claim. If the Revenue is not prepared to admit the claim as well founded, he can go before the General Commissioners, who will usually be a body of people acquainted with what is going on in the locality, and argue the matter out before them. If they come to the conclusion that he is carrying on on a commercial basis and with a view to the realisation of profits that is the end of the matter. That is conclusive. I do not think that it will in practice work at all badly.

The hon. Member for Sowerby expressed the view that this Clause would deal with farming losses rather lightly. I wonder whether he is right about that. I have no doubt that what he has said about it will be noted outside the House. So far as the Government are concerned, we accept the view of the Royal Commission, that this Clause, following the wording the Royal Commission recommended, will operate satisfactorily to stop hobby farming and the promotion of private amenity at the expense of the general body of taxpayers. I think that is all I need say about those provisions.

Not very much has been said in the debate about Clauses 19 to 22, which deal with another form of tax avoidance. These Clauses deal with a comparatively simple form of tax avoidance, namely, the sale of shares in a company instead of the sale at a profit of a trading asset. None the less, although that is a simple form of tax avoidance, by transmuting income into capital, it takes no less than four Clauses occupying more than five pages of the Bill to stop it and to stop all the loopholes which could be used, so far as one can discern them in relation to that particular form of avoidance.

I think that I can now come to the only two Clauses which really ought not to be described simply as tax avoidance Clauses. The first is Clause 25, which deals with sales cum-dividend when no dividend is, in fact, payable, with a notional dividend, and with the seller getting the benefit because the difference in price between cum and ex exceeds the amount which he takes out of his own pocket to represent the dividend after deduction of tax, leaving the Revenue with liability to a claim for the return of tax when it has never received tax; that is, the case of sellers of shares who engage in these operations trying, not to avoid liability to tax, but to make money out of the provisions of the Statute.

I am sure that the House is united in thinking that that ought to be stopped. I should like, but will not because I think that it is too late tonight, to explain in detail to hon. Members the form of operations now practised and which comes under the heading of dividend stripping. There was a simple form of dividend stripping in operation just before 1955. We stopped that by legislation. There were certain loopholes and they were stopped in 1958. In 1959, we had a provision, which was not made retrospective, dealing with a more complicated form of dividend stripping.

The hon. Member for Sowerby was wrong in one respect about it. He should not assume that dividend stripping would be countered by a capital gains tax. The form of dividend stripping which was current or commencing before our 1959 legislation was a form which made use of bodies which were exempt from Income Tax, and they were the people who claimed back a sum which was notionally deducted from dividends.

Mr. Houghton

I did not suggest that a capital gains tax would take care of all those, and I was not thinking of dividend stripping at that moment.

The Attorney-General

I do not want to go further into detail on that. I challenge the proposition that this situation would have been completely dealt with if my right hon. Friend had merely made last year's legislation retrospective. I do not think that it would have. It is true that there were some operations of dividend stripping which were not caught because that legislation was not made retrospective but they may be caught under the law as it stood before that. In two oases in the High Court and in the Court of Appeal it has been held that they are caught, but that may not be final. One does not know.

I ask the House to bear in mind that in any single transaction of this kind a very large sum of money may be involved. Merely to have made the last piece of legislation retrospective would not in any way have stopped those who engaged in these activities from developing the operations which have come into use since then. As has been said, there are no fewer than five variations which are known about now. I do not think that the hon. Member for Sowerby was right when he suggested that millions of pounds have been lost, or anything like £100 million. I think that that is wildly exaggerated. Nor was the hon. Member right in saying that some of these proposals have waited for years. There has been no need for a proposal like Clause 26 until now, when we see our efforts to tell these people that they must not take part in this kind of operation having no practical result in stopping them from undertaking new operations.

If the House agrees that that use of the provisions of the Income Tax Acts must be stopped, then the question is: what is the best way to do it? There are, as far as I can see, three possibilities. One—and this is the one we normally follow so far as we can—is to introduce specific clauses to deal with a particular method.

I do not know how many Clauses would be required to deal with these five extremely complicated variations on the same theme but, bearing in mind that we have five pages of Clauses, 19 to 22, to deal with one much more simple form of tax evasion, it would lead to a very lengthy bill. Again, that might not put an end to the business.

The choice, if the House agrees that this kind of thing must be stopped, lies between retrospective legislation and a proposal on the lines of Clause 26. The hon. Member for Gloucester (Mr. Diamond) strongly urged that we should engage in the regular practice of retrospective legislation. I thoroughly disagree with him about that. He suggested that we should have warnings followed by legislation. Then he went on to say this rather curious sentence, "… a Government warning given in precise terms so that the will of Parliament shall have effect."

I only hope that any statement made by the Chancellor at any time will always conform to the will of Parliament subsequently expressed, but just think what that means. The hon. Member talked about us not surrendering the authority of Parliament, but to adopt that practice surely must mean a total surrender of the authority of Parliament.

The Chancellor gives a warning, then the Government do not legislate unless that warning is ignored. If the warning is satisfactory, then there is no legislation and we get rule by warning and not rule by law. I do not think that would be a satisfactory practice, and there was great force in the observation of the hon. Member for Sowerby that even that system could not work because one cannot give a clear and specific warning which will cover all the subsequent variations unless one is in a position to legislate at the time one gives the warning.

It is for those reasons, and because we all dislike retrospective legislation—legislation which makes unlawful something that was lawful at the time it was done—that we have adopted the other solution. I hope that I am not talking too long, but I want to say something about that.

Mr. Diamond

The Attorney-General has referred to a suggestion I made directed towards seeing that tax avoidance is ended, which is the wish of both sides of the House. Is it not the case, as he himself has said, that there was a theme and that subsequently there have been five variations which have recently come to his notice? Is it not easy to define what is the theme, although it may be impossible to define in advance in specific legislation the five methods to be adopted in the five variations?

The Attorney-General

I do not think that it would be easy to define the theme in words clear and precise. One could give a general warning. The Chancellor might say that anyone who engaged in tax avoidance would have that nullified by subsequent legislation. That would cover everything, but no one would be satisfied with that.

I come now to Clause 26, having, I hope, given reasons why we have come to the conclusion that something on these lines is necessary to stop what is going on. No one likes giving a general power, but sometimes this House is justified in so doing, as I think in this instance it is. One must, of course, be very careful to confine the exercise of this general power to these particular kinds of operation; and that we have sought to do.

I should say at this stage that I must completely dissent from the observations of my hon. Friend the Member for Isle of Thanet (Mr. Rees-Davies)—who, I think, does not claim to be a tax lawyer—when he says that this Clause is unworkable and one which could not be advised upon. When one looks at Clause 26, one sees that subsections (1) and (2) set the framework for the Clause. The actual scope of the Clause does not depend—and here I part company with the hon. and learned Member for Kettering and the hon. Member for Gloucester—on motive.

If one looks at subsection (1), paragraphs (a) and (b), and the definition of the circumstances in subsection (2), and the words dealing with bondwashing, one sees the importance of this point. Subsection (2) really brings within its scope those categories of persons and transactions coming within what we know as bondwashing and dividend stripping. From conducting cases on this matter in the courts, and in working upon it as a matter for legislation, I can say that it really is a very easy thing to recognise a dividend stripping operation, whatever permutations and combinations there are; and the same can be said for a bond-washing operation.

Let us suppose that one of these operations appears to come within the scope of subsections (1) and (2). None the less, the persons concerned can get out of the scope of this section by showing that the transactions were carried out for bona fide reasons such as for managing or making investments, and not because they really wanted to obtain tax advantages.

That is the way in which something which comes within the scope of the law can be excluded from the operation of this clause. The hon. Gentleman the Member for Gloucester told us that attempts to prove a man's motives were utterly impossible; but I should have thought that he would have known that if that was true it would be quite impossible to get any conviction on anything concerned with intent to defraud. One has to judge a man's motives from his actions and one can then say that he intends the natural consequences of his acts.

There have been questions raised—not here—about the words "main objects" and whether they will cause a difficulty. I do not think so, but if one postulated a sole object I think that it would be found that these operators put forward two objects in the course of their transactions. As I have said, these transactions are really easily recognisable and there is not much chance of a borderline case being caught in this net.

Mr. Mitchison

I am much obliged to the right hon. and learned Gentleman. All I want to say is that it seems to me that the scope of this Clause depends as much on the matter of the motive as on the circumstances described in subsection (2). It is rather a verbal point, and if I said anything else I think that it was only a verbal difference.

The Attorney-General

I quite agree. I want to make this point clear because the scope of the Clause initially does not depend on motive. If the transactions appear to come within subsections (1) and (2), then, on proof of those matters, the person operating the transaction can get excluded.

Supposing that he puts forward a claim that he is acting for a bona fide commercial reason and that tax advantage is not one of the main objects, what happens if the Revenue does not accept his contention? It is not left to the Revenue to decide—and that is where the hon. Member for Gloucester went wrong again. The person concerned can go before the Special Commissioners and assert that the transactions do not have as their main object a tax advantage. If he satisfies the Commissioners that that is so, then that is the end of the matter.

If he does not satisfy the Special Commissioners, he can go on to the new tribunal, presided over by the Chairman of the Board of Referees and with two persons of special commercial and financial experience to assist him, and if he can satisfy the tribunal that the transactions do not come within the description of dividend stripping—and I am using that term colloquially—or bondwashing, that, again, is the end of the matter. If the tribunal decides against him and there is a point of law, he can go still higher up.

Although one does not like a general power, if one recognises that there are cases where it has to be used, then I suggest that we have properly fettered and controlled the limits of the exercise of this power so as to hit the targets at which the power is aimed and nothing else. Indeed, persons who do not engage in this kind of operation and who feel that their transactions might be so regarded by the Revenue will find that the power to obtain the opinion of the revenue in advance is a very great safeguard. I will not say more about the Clause now. I agree that it is a complicated Clause to read.

Sir K. Pickthorn

Will my right hon. and learned Friend say something about subsection (2, c)?

The Attorney-General

That deals with different forms of dividend stripping, one of the most recent of which is stripping not so much of dividends as of assets. I will readily explain it to my hon. Friend in detail if he so wishes, but it would take some time to do so now. I will do it later. I hope that my hon. Friend will accept what is, in fact, the case, that paragraphs (a), (b) and (c) cover the three kinds of circumstances which give rise to dividend stripping.

The Government have been asked why Clause 30 does not apply to lawyers. The Leslie Howard and Peter Cheyney cases established that book royalties paid after the death of authors were not subject to Income Tax. Following upon those cases, some authors have found it wise to discontinue their profession as authors and to become the employees of companies which they form and to write for the companies. The result of doing that is that they receive royalties—it may be for many years—on the books which they wrote before they voluntarily ceased to carry on their profession, and such royalties are free from Income Tax and Surtax. That is pure tax avoidance.

The barrister is not in a like position. The barrister who has built up a practice cannot cease his profession and then do the work of a barrister as an employee or partner. In fact, practising barristers do not cease to practise just for tax avoidance reasons. They may cease to practise on grounds of ill-health, age, or appointment to the Bench, or, as many Members did, in the event of war, but I have not known of a case where a barrister ceased to practise just for the purpose of tax avoidance. If he did he might find it very difficult to reestablish himself again. So this Clause is designed to stop a form of tax avoidance which can be voluntarily operated, and to make royalties accruing after the death of the author subject to tax.

I shall say a word or two about Whit-worth Park. It is, of course, quite easy to use the word, "retrospective" about Clause 37 and I dislike retrospective legislation in the sense in which it is generally used as much as anyone. By that I mean retrospective legislation which makes unlawful something which was lawful at the time it was done. This Clause does nothing of that kind. It merely validates and declares to be the law what everyone thought was the law at the time and it does not vary the liability which did exist to tax any individual. The only benefit which the collieries can get if this Clause is not passed, is the benefit arising from the fact that the time for assessment has now passed.

My hon. Friend the Member for Aylesbury suggested that a simple remedy would be to enlarge that time of assessment. Unfortunately, it is not quite so simple as that. One of the reasons why this Clause is necessary is that in the light of what the House of Lords said in the course of giving judgment in the Whitworth Park case the Grown may be faced with claims by landlords of premises which the Crown occupies for the amounts which have been deducted by the Crown under Schedule A during the last six years. That may amount to a very substantial sum. That is why we have to bar claims of that kind in a rather more complicated and detailed Clause than my hon. Friend suggested.

Mr. H. Lever

As I understand, the only reason why the Revenue might save if this legislation were not enacted retrospectively is that the Revenue would be liable for a repayment claim by the citizen, but the Crown would not have a remedy for the appropriate tax because it would fee statute-barred. If the citizen's claim is not statute-barred, why would the prompt enforcement of the Revenue in its case be statute barred?

The Attorney-General

The difficulty about that, as the hon. Member will find if he studies it, is that the Crown would deduct Schedule A tax when paying the landlord and the landlord would be able to say, "You have no right to deduct it." I need not go into it in detail. I do not think that this is the time to pursue it, but it has been considered and that is one of the reasons why Clause 37 is of wider import.

Now I come to the penalty provisions to which my hon. Friend the Member for Brighouse and Spenborough and the hon. Member for Sowerby referred. I am sorry that the hon. Member for Sowerby was rather critical of these provisions. I do not think that they will put the accountant on top of the Revenue. I think that they will make it easier for the Revenue and the taxpayer to arrive at a just solution. It is not the Hinchy case alone which drew attention to the need for this kind of legislation.

The hon. Member referred to the Codification Committee of 1936. That Committee reported, on the penalty provisions: The flotsam and jetsam of a century's legislation have nowhere accumulated into a greater confusion than in the mass of enactments which prescribe penalties for failure to make returns, or for the making of incorrect returns or claims. It is true to say that the penalty provisions form no logical system and are capable of being very savage in character. A penalty of three times the total tax chargeable can in these days reach astronomical proportions.

One of the curious things is that these penalties of treble tax go back to the very early Income Tax Acts. Of course, then the penalty probably did not mean anything like as much. What we have worked out is this. Instead of what happened in the past, when the Revenue used the penalty provisions to collect back duty plus interest—I think it was compound interest—under the high maximum penalty, we have separated the penalty from back duty, and I hope that the House will think it right.

We have acted on two principles, first, that the taxpayer who neglects to make a true return of income and has done so over a number of years should not benefit from that at the expense of the general body of taxpayers, and, therefore, that the Revenue should have the right to make fresh assessments, even more than six years after, to collect the back duty. But we do not give the Revenue an unlimited right under the provisions of going back.

If, in the last six years, say, the open years, the Revenue finds that four years ago there was an omission from a return due to neglect, then the Revenue will have the right to make fresh assessments for the six previous years, making ten years. If, in the six previous years, the Revenue finds that there has been an omission owing to neglect it can go to the Commissioners and apply to them to take power to levy assessments within the six preceding years and the taxpayer has the right to resist that application.

That is all machinery for collecting the back duty, and the Bill provides, and I think rightly, for the payment of interest at 3 per cent. on that back duty. After all, the taxpayer has had the use of the money. As the hon. Member for Manchester, Cheetham (Mr. H. Lever) said, the payment of interest on tax which is not paid on the due date is quite a common thing.

It has been asked why, if that is so for the taxpayer, the Revenue should not pay interest. The answer is that the omission to pay tax by the taxpayer is due to his neglect to make a true and proper return. The Revenue, before it repays, has to be satisfied that the repayment is justified. That may take some time, so it is not easy to lay down a period of time after which one can say that the Revenue has been neglectful and should pay interest because it should have paid the money before.

In addition to the recovery of back duty and interest we provide for the payment of penalties on a scale which, it is true, is reduced, but it is quite wrong for the hon. Gentleman to say that there is less room for negotiation under our penalty proposals than under the existing law. I also think it quite wrong for him to say that the result of these proposals will be that there will be more prosecutions.

I hope and believe that we have secured not only the machinery for the collection of the back duty, but that we have provided penalties on top of that which will generally be regarded as fair and, at the same time, will operate as a satisfactory deterrent to deter people from being careless and neglectful, and, indeed, fraudulent, in discharging their obligations under the Income Tax Acts.

I hope that I have covered most of the subjects that have been raised in the course of the debate in relation to the Bill and I am not going to be tempted to follow the hon. Gentleman through his usual hobby of dealing with expenses and entertainment, travelling and subsistence claims, and things of that sort. I hope that the Bill meets with the approval of the House. I have no doubt that its tax avoidance provisions and particularly Clause 26 are absolutely necessary and I invite the House to give the Bill a Second Reading.

Question put and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

Committee Tomorrow.