HC Deb 03 May 1966 vol 727 cc1453-9

But having stripped myself of this valuable armoury I need a new source of taxation. It must be able to do three things. First, avoid the adverse effects of increases in Purchase Tax and Income Tax. Second, broaden the tax base. Third, make a positive contribution to the long-run structural changes we need in order to achieve a healthy balance of payments.

These requirements have led me to consider the position of services in our tax system. By services I mean the shops which sell goods to the public, and the wholesalers standing behind them; those who provide personal services, like hair-dressers, laundries, garages, dry-cleaners, photography; domestic service; entertainment; banking, insurance and finance; professional services. A review of the tax system shows that virtually all services lie outside the scope of indirect taxation, which is concentrated on goods, notably tobacco, drink, petrol and the manufactures covered by Purchase Tax.

I can put it this way. The value of the manufactured goods subject to Purchase Tax and Excise duties, which consumers at present buy, comes to about £6,000 million a year, excluding the cost of distribution. Out of this sum, tax accounts for about 40 per cent. But the sum which consumers pay for services of various kinds, including the distribution of the goods they buy, but excluding passenger transport, is even larger—about £7,000 million. And out of this sum, indirect tax accounts for less than 1 per cent.

In my view it would be wrong to intensify the rates of taxation in existing fields without making an effort to ensure that services make a proper contribution. What is needed is to broaden the tax base by creating another source of revenue in a field that has so far contributed a comparatively small amount.

The existing arrangements have tended to shift the pattern of consumer spending in favour of services and hence to produce a similar shift in the pattern of output and employment. With the standard of living at its present level, there is in any event a natural tendency for consumers' spending on services to rise as incomes rise. The result is that in recent years most of the increase in our labour force has gone into services, and there has been relatively little labour for the expansion of manufacturing industry. Beween June, 1960, and June, 1965, employment in manufacturing rose by 142,000. On the other hand, employment in services, distribution, and construction rose by more than 1 million. So only some 10 per cent. of the total increase has gone into manufacturing industry.

Despite some hoarding and waste of manpower, it is still true that the growth of manufacturing output has been seriously impeded by labour shortages; and this has hampered the growth of productivity. If manpower can be saved in the service industries, whether through a slower rate of growth in demand for services or through greater economy of manpower, extra labour might well become available for manufacturing, giving it greater scope for growth. It would be helpful to have a tax system which recognised this.

The fact that our prime problem is to economise in the use of manpower was made clear in the National Plan. In years ahead we face a very slow growth in our total labour force. The growth of output must, therefore, depend primarily on the growth of productivity, which, in turn, means making the most effective use of manpower.

A payroll tax that was universal would not achieve this. Its direct effect on labour costs would be the same as a general rise in the level of wages. What is needed is a differential tax which will increase the cost of labour in services and reduce the cost of labour in manufacturing.

I therefore propose to introduce a system to be called the Selective Employment Tax that will at one and the same time tax employment in services and construction but lessen the cost of employment in manufacturing. The tax will apply to construction in the same way as services so as to encourage the industry to scrutinise its use of labour more closely; but the effect of the tax will be partially offset to the extent that the construction industry incorporates large quantities of manufactured goods—equivalent to about a third of its total costs. But I do not think I can tax employment in construction without bringing the industry within the scope of the investment grants scheme, thus encouraging it to make use of more up-to-date equipment. My right hon. Friend the President of the Board of Trade will, therefore, be taking the necessary steps at the appropriate time to include the construction industry within the benefits of the investment grants system.

There has been a considerable administrative problem in devising a new system of taxing employment in some sectors and reducing the cost of it in others so that it can be introduced this year, but, thanks to a great deal of effort by all concerned, a scheme has been prepared, using as its basis the existing administrative machinery. The scheme is outlined in a White Paper which will be available to hon. Members in the Vote Office at the end of my speech.

To begin with, I propose that the present system for collecting employers' National Insurance contributions should be used for collecting the new tax from all employers throughout the country both in manufacturing and services. The self-employed will not pay the tax, nor will employees. I repeat, the tax will be paid by employers only.

I use this method for collecting the tax because it is the one most readily available. Although the tax will be collected together with the existing employers' National Insurance contributions, the proceeds of the two will remain entirely separate, and the National Insurance Funds will be entirely unaffected.

The rates of tax will be 25s. a week for men, 12s. 6d. for women and boys, and 8s. for girls. The Committee will notice that the relationship between the rates of tax for different classes of worker will be totally different from National Insurance contributions. They have been calculated in the light of the relationship between average earnings of men, women, boys and girls.

In order to provide the benefit I seek for manufacturing, I further propose that manufacturing employers should get back more than they pay in tax. This will be done by paying to manufacturing employers what I propose to call premiums. These will be approximately 30 per cent. higher than the tax the employers have borne. In respect of each individual employed by a manufacturer the rate of the premium will be 32s. 6d. a week for men, 16s. 3d. for women and boys, and 10s. 6d. for girls. In other words, the manufacturer will pay 25s. a week tax for men and get back 32s. 6d. Here again we shall use existing machinery; the premiums will be paid through the Ministry of Labour offices.

The financial effects of the tax on Government employment will be neutral since the Exchequer will be both payer and receiver of the tax. For local government, nationalised industry and for transport undertakings generally the cost will be offset, but no more than offset, from the Exchequer. For agriculture, the effect of the tax on the industry will so far as practicabe be offset through the normal machinery of the Annual Review.

To sum up the scheme, employers will pay the tax—but not their employees. The self-employed will be excluded from the tax. Employers who pay the tax are divided into three broad groups: first, those in manufacturing industry who will get the premium; the second group will comprise employers who will get refund of the tax but nothing more—for example, transport undertakings; the third group, of services and construction, will pay the tax but will get no refund.

The tax will be collected throughout the United Kingdom. The Northern Ireland Government has been informed, and has decided to frame its own legislation about refunds to employers.

First payments of the tax will become due to the Ministry of Pensions and National Insurance from 5th September next. Payment of the premiums by the Ministry of Labour will begin in February, 1967, and will cover the period September to end-December, and thereafter the premiums will be paid quarterly.

The yield to the Revenue from the scheme is estimated at £240 million in a full year. This is the net sum that will accrue to the Exchequer after all premiums and refunds have been paid. The gross revenue will, of course, be much bigger. The yield will be higher in this fiscal year, namely, £315 million, mainly because of the interval between the collection of the tax and the payment of premiums and refunds,

The premiums to manufacturing industry will have the effect of ensuring that any rise in the price of services and goods bought by the manufacturing sector which may result from the tax will be more than offset for the average manufacturing establishment.

There will in general be no increase in manufacturing costs. On the contrary, there will be a net gain to manufacturers. There are, therefore, no grounds for a rise in the general price level of manufactures: rather the reverse. It is true that manufacturers, as well as those employers receiving simple refunds, will have to wait for the premiums for which they are eligible. I have not overlooked this, and, against the background of the general credit restraint which it is necessary to maintain, I shall be considering what steps may be needed to enable the banks to respond to temporary needs for credit in such cases.

I have referred to complaints about the wasteful use of manpower in manufacturing industry: many of these complaints are justified. Nevertheless, in present circumstances I think it is more important to encourage the redeployment of labour and to give manufacturers a relative advantage in costs compared with the service sector. The fact that employment in manufacturing, in the public sector, and other parts of the economy, will be relieved of the tax in various ways increases the importance of using labour efficiently in these sectors.

I do not expect the price of services to be increased automatically to the full extent of the tax. But even if this did take place and all changes in costs were passed on, the rise in the price of services would be broadly comparable to a Purchase Tax on services at an average rate of between 3 and 4 per cent. The effect on the cost of living would be well under 1 per cent.

I believe that the Selective Employment Tax is a major step forward. It will prove in future years to be a very valuable addition to the measures available, first, as a means of raising——

Mr. R. J. Maxwell-Hyslop (Tiverton)

On a point of order. Sir Eric, is it in order for somebody in the Box behind the Chancellor to get up and wave a handkerchief as a signal to somebody here?

The Chairman

I did not see anything that was out of order.

Mr. Maxwell-Hyslop

Further to that point of order. It was seen by many Members in the House. It did take place, and is it in order for it to have done so?

The Chairman

That is hypothetical, and I deprecate hon. Members drawing my attention to things which I have not seen. [Interruption.]

Mr. Callaghan

Further to that point of order.

Mr. Maxwell-Hyslop

rose——

The Chairman

The Chancellor of the Exchequer.

Mr. Maxwell-Hyslop

Sir Eric——

The Chairman

Order. I have called the Chancellor of the Exchequer.

Mr. Callaghan

This is a traditional device—[HON. MEMBERS: "No."] I have been in the House for twenty years, and I know that this is a traditional device which is exercised every year with the consent of hon. Members in order to give the Vote Office an opportunity to get the Resolutions down to the hon. Gentleman.

Mr. Maxwell-Hyslop

Further to that point of order. In view of what the Chancellor has said, I take it that it is agreed that this is no longer hypothetical and that it did, in fact, take place.

The Chairman

In any event, it is not out of order.

Mr. Callaghan

The hon. Gentleman has done a good afternoon's work.

As I was saying, it will prove in future years to be a very valuable addition to the measures available, first, as a means of raising revenue, and also as an incentive for labour economies and manpower redeployment. The scheme will produce an easing in home demand this year, will open the way for a progressive strengthening of manufacturing industry, and will make more resources available for exports with a beneficial effect to our balance of payments.

Sir Douglas Glover (Ormskirk)

On a point of order. Sir Eric, I thought that before the Chancellor rose you gave instructions that these Resolutions were not to be issued until the right hon. Gentleman finished his speech? This is ruining the Chancellor's wind-up, and I find it very annoying.

The Chairman

I did give such instructions, but something seems to have gone amiss. [Interruption.] I hope that the Committee will remain silent and enable the Chancellor to conclude his speech.

Mr. Callaghan

Given the new character of the tax, it is not possible to calculate the precise effects on demand in the same way as we have been accustomed to do for the traditional taxes. Nevertheless, taking the Budget as a whole, I estimate that so far as the general level of demand is concerned, the effect will be nearly the same as if I had increased the 25 per cent. rate of Purchase Tax to 33⅓ per cent. and also increased the 10 per cent. rate to 15 per cent. As the Comittee will recognise, if I had taken that step in relation to Purchase Tax, or had increased the rate of Income Tax, none of these would have secured the positive benefits of the structural changes in the economy which the Selective Employment Tax should bring.

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