BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 09 May 1966 vol 728 cc40-172

3.33 p.m.

The President of the Board of Trade (Mr. Douglas Jay)

This is a debate both on the Budget and on the economic situation. I am sure that hon. and right hon. Members opposite are very interested in the proposal of my right hon. Friend the Chancellor for a Selective Employment Tax. A number of hon. and right hon. Members opposite have tried to make it an argument against this tax that it will push up the cost of living and, in particular, the cost of foodstuffs in this country.

This, I think, comes very oddly from the party opposite, one of whose main proposals in economic policy at the present time is to impose a series of import levies on basic foodstuffs which would raise food prices by far more than this tax could do even indirectly. We have no intention of imposing any such levies on imported food. Indeed, it is one of the merits of the Selective Employment Tax that it will exert the maximum of disinflationary effect on demand with the minimum upward push on the cost of living.

Mr. Edward Heath (Bexley)

The right hon. Gentleman has made a very important statement. Is he saying that the Government have now changed their policy and do not intend Britain to become a member of the European Economic Community?

Mr. Jay

We intend to maintain the conditions that we have laid down and not, like the right hon. Gentleman, to accept any conditions advocated by other countries. I am always delighted to assist the right hon. Gentleman to understand these matters.

If, of course, hon. Members opposite want to restrain demand, as I gather they do, without any effect on the cost of living at all, they will have to tax profits very much more heavily, which I gather they do not want to do. I also doubt whether right hon. Gentlemen opposite yet understand to what conclusions their two chief arguments about the employment tax lead. They complain—I have heard this many times in the debate so far—that because, in effect, of the exemption of manufacturing industry from this tax, the tax will do nothing to restrain labour hoarding in manufacture. If that is true, then it will restrain labour hoarding in services, which, presumably, they do not want to see happen.

Secondly, they argue that as a result of the tax the costs, and, therefore, the prices, of services will be raised. If that also is true, costs and perhaps prices of manufactured goods will be lower than they would have been, which presumably hon. Members opposite also want to see. Therefore, if their own arguments are right in this respect, we shall achieve at least two desirable aims by this tax.

Turning from the arguments of hon. Members opposite to the real economic facts, the truth is, of course, that in the field of services the whole cost will not be added on to prices. A share of it will be absorbed in greater productivity or from profits. Already, Marks and Spencer have said publicly that this will be so in their case, and their case is not an unimportant one.

Mr. John Hall (Wycombe)

I am sorry to interrupt the right hon. Gentleman, but he has made an interesting statement about Marks and Spencers. Is it not true that they are keeping their prices, not by taking tax out of profits, but by insisting on manufacturers reducing theirs?

Mr. Jay

That means greater productivity all round and I am glad to hear it.

In manufacturing industries, as even the right hon. Member for Enfield, West (Mr. Iain Macleod) admitted, there will be very few employers who will waste labour because of the tax and very many whose costs of producing, both for the home and the export market, will be less than they would have been if all round taxes had been imposed on food in the manner in which the Tory Party proposes. However difficult the distinctions may prove at the borderline—and I fully realise that they are difficult as always in these cases—between manufacturing and services, there are two convincing arguments for basically discriminating in this way.

These are nothing whatever to do with the outdated and discredited idea that manufacture is somehow more virtuous than services or the professions. That, frankly, is nonsense. The first reason behind our policy is this. Under our tax system now, as the Chancellor showed, we place indirect taxes of nearly £2,500 million on total consumer expenditure on goods worth about £3,500 million before tax and almost none on £7,000 million of expenditure on services. That in itself is a gross distortion of the present tax system on consumer spending and justifies in itself the new levy. Most industrial countries already tax services as well as goods.

Secondly, valuable as are very many of the services and professional groups in promoting invisible exports—and I fully recognise that and pay tribute to them today—the fact is that the great manufacturing industries bear the main brunt of overseas competition and of sustaining our balance of payments. Exports of visible goods last year actually accounted for 63 per cent. of our current earnings and imports for 65 per cent. of our current spending overseas.

Mr. T. L. Iremonger (Ilford, North)

That is all very well, but visible exports contain a very large import element, whereas invisible exports have no such counterbalancing element of imports.

Mr. Jay

I do not know what the hon. Gentleman thinks he proves by that. The outstanding fact is that visible exports are the major element in our overseas earnings and, therefore, if we are serious about our balance of payments problem, I think that we must give support and stimulus to them.

Therefore, in framing both this tax and the Industrial Development Bill, which was published last Friday, the Government have been abundantly justified in taking these facts expressly into account. The fiscal measures which I have been defending are an essential backing to the direct export promotion campaign which we have mounted in the last 18 months. It is because it is so much better I think that I shall carry right hon. Members opposite with me in this—to achieve solvency by increasing exports than by limiting imports that we in the Board of Trade have put into force during the last 18 months a whole array of measures to assist and stimulate our exporters, and we shall continue to adopt any which are practical, however novel or unorthodox.

The direct export rebate is now, I find, increasingly valued by industry—all those not receiving it are, for some reason or other, extremely anxious to get it. We have also already made a whole number of sweeping improvements in the export credit guarantee system. We have arranged with the banks for them to extend their special fixed lending rate of 5½ per cent. to the whole range of business covered by bank guarantees and financial guarantees. This has been of great benefit to heavy industry, shipbuilding and aircraft.

We have also reduced the minimum contract limit to which this fixed rate applies from £100,000 progressively to £25,000. Contracts under £25,000 are also now eligible. We have introduced a new bank guarantee scheme for credit periods down to 30 days, with interest at bank rate. Insurance premiums have been cut and the risks covered have been extended.

All this has helped materially to stimulate and cheapen our exports, nearly 30 per cent., or £1,500 million, a year of which are now covered by E.C.G.D. guarantees of one kind or another.

I am now glad to announce that we can again move forward. I have decided to cut premium rates for most classes of E.C.G.D. business by an average of 15 per cent., following the cut of 10 per cent. made a year ago. The percentage cut will vary from one case to another according to the risks involved, but will average 15 per cent. I should like, at the same time, to thank the businessmen who compose the Advisory Council of the E.C.G.D. for all the help they have given me in making this reduction in premiums possible.

This improvement will apply to the whole range of exports from consumer to capital goods, including financial guarantees for the largest projects, and only excluding merchanting transactions in non-British goods and ship mortgages which are already very favourably treated.

The charges for most supplementary guarantees to banks for sales on two years' credit or more are also being further reduced after being halved last year. In addition, the new bank guarantees for short-term business which I announced in March are now operating, and we have invited applications from 600 policy holders whose exports together total some hundreds of millions of pounds a year.

The new cuts I have announced today amount to over £1 million a year. They have been made possible by the rise in the volume and spread of E.C.G.D. business and they are an example of a public enterprise which makes a profit, reducing its prices as a result of greater efficiency.

Mr. John Tilney (Liverpool, Wavertree)

I am sure that the Committee will welcome this news, but why are the Government determined to tax export merchants, because it is they who rather than industry are responsible for the bulk of our exports?

Mr. Jay

The Government have given a great many concessions and a great deal of help to exporters and exporting merchants in the past year. I am sure that the hon. Gentleman knows that export merchants, in certain circumstances, are eligible for the export rebate, which is of great assistance to them. If the hon. Gentleman has further detailed proposals to put forward, he will no doubt do so in the debates on the Finance Bill.

Next—

Mr. William Baxter (West Stirlingshire)

Before my right hon. Friend leaves this point, may I ask whether this is the maximum that can be done to help the export industry within the terms of G.A.T.T.? Would it not be far better to consider making the Selective Employment Tax applicable only to industries that are in the export field instead of it being applicable to all industries?

Mr. Jay

No, this is not all. I am coming on to a lot more which, I am happy to say, is wholly consistent with G.A.T.T.

In the pursuit of that, we are vigorously expanding our forward programme of exhibitions, fairs, British Weeks, store promotion and other such marketing ventures overseas which are organised in partnership between the Board of Trade and industry. In 1965, the Board of Trade joined industry with 85 overseas fairs and exhibitions, compared with 62 in the previous year. This year the total will rise to 141.

These, together with British Weeks, will in the present year include major ventures in Lyons, Moscow and Mexico City and in Toronto next year, in addition to those already launched at Hong Kong and Oslo. There is growing evidence that this sort of promotion achieves solid results; but we are seeking to measure the effects more precisely so as to vary the method wherever a case is made out.

In all this the British National Export Council and its area committees, on which nearly 200 leading industrialists now serve, are doing a major share of the job and, incidentally giving a great deal of their time, for which I would again like to thank them most warmly. The B.N.E.C. is also organising on our behalf the new schemes for assisted export missions, overseas markets research and the overseas distribution of trade directories and other schemes. Already, 120 missions and 51 market research projects have been approved; and the applications are mounting. On top of all this, we are supporting the British Overseas Engineering Services Bureau set up recently to encourage British participation in civil engineering projects abroad which are becoming increasingly important.

We have greatly simplified export documents. A major British Trade Centre will be opened in New York in July. By common consent we have enormously improved the service which our commercial officers are now giving in 200 posts abroad to British exporters. I have received a growing number of tributes from active exporters to the valuable help they get from commercial officers abroad.

At home, the Export Services Branch of the Board of Trade handled, in 1965, 380,000 export inquiries by post, or a 16 per cent. increase over 1964. So that these services and the details of them may become even more widely known in industry, my hon. Friend the Minister of State has just written to all hon. Members giving full details of them.

We are now examining a number of possible new exports promotion ideas—this will be of interest to my hon. Friend the Member for West Stirlingshire (Mr. W. Baxter)—and all practical suggestions will be gratefully received.

I would not pretend that one can estimate the precise effect of any one of these methods of export promotion, although we have tried hard to do so. All that one can say is that in 1965, when world trade was increasing more slowly than in 1964, United Kingdom exports rose by 7 per cent. in value and by 5 per cent. in volume, compared with 5 per cent. in volume and 3 per cent. in value in 1964. Since then, there has been a further rise in the first three months of this year of 5 per cent. in value over the 1965 average.

However, direct export promotion is not enough, in my view, to achieve the even more rapid increase in exports which we clearly need. It must be backed by the incomes policy, restraint of home demand and better planning and productivity in our internal economy. Here we are making real progress, I believe, in checking the drift of industry and employment to the South-East, which has so long been generating the inefficiencies of waste at one end and congestion and labour shortage at the other.

In 1965, the four regions of Scotland, Wales, the North-West and the North-East got about 50 per cent. of the new factory approvals, compared with under 40 per cent. over the previous five years, and the share of the Midlands and the South-East went down from 40 per cent. to 30 per cent. These same proportions have been roughly maintained by the Board of Trade's industrial development certificate controls in the first three months of 1966.

In the development districts we have supplemented new private industrial schemes by Board of Trade-financed building on a large scale, including the development of a number of new industrial estates now building or planned—for instance, at Bellshill, in Lanarkshire, Tees-side, Kirkby and Llantrisant, South Wales. Altogether, 55 advance factories have been announced in two programmes in the last 18 months, very largely in mining areas, with surplus manpower. I can now give details of the third advance programme of another 18 factories, which was announced in total in March and which will make the total over the last 18 months 73 new Government-financed factories in these needy areas.

The new 18 will be sited almost entirely in areas where manpower is being released from declining pits. Six will be in Scotland; two in the Lochgelly-Cow-denbeath area, one at Leven, one at Sanqhuar, one at Cumnock and one at Douglas. Seven will be in the South-Wales coalfields—three in the Upper Swansea Valley and one each at Fforestfach, Maesteg, Merthyr and in the Rhondda. The remaining five, in the North-East, will be at Ashington, Blyth, Newburn-on-Tyne, Brandon and Crook. The whole programme will total 378,000 sq. ft. of new factory space costing £1,600,000.

Mr. J. T. Price (Westhoughton)

My right hon. Friend has enumerated the allocation of these new factories. What has the North-West done wrong to be ignored completely? Whole areas of Lancashire are troubled with the same problem of closing coal mines and of industry lagging behind the general uplift in the country as a whole. What is being done for Lancashire to replace the declining coal mines and cotton industry, where the situation is just as bad as in other parts of the country?

Mr. Jay

Apart from the factory building that has already been announced for ale North-West, the coal mining areas of Lancashire at the moment are not suffering heavy unemployment. That is why, although they have been included in previous programmes, they are not in the one I have just announced.

The total number of workers now employed in Board of Trade-owned factories in development districts is over 260,000 and more than 99 per cent. of the Board of Trade-owned factory space is now in occupation, so we need not have fear of these factories not being used.

The unemployment figures recorded to date strongly suggest that the whole of this concerted policy of development at oue end and restraint at the other is showing solid results. In April, unemployment again dropped markedly in Scotland, Wales the North-East and Northern Ireland and there was no change in the Midlands and the Eastern and Southern regions.

That was the picture for one month, but if one looks at it over the two years from April, 1964, to April, 1966, the fall is from 3.9 per cent. to 2.5 per cent. in Scotland; from 3.6 per cent. to 2.3 per cent. in the Northern Region—and I point this out to my hon. Friend the Member for Westhoughton (Mr. J. T. Price)—from 4.6 per cent. to 2.5 per cent. on Mersey-side and from 7.3 per cent to 5.9 per cent. in Northern Ireland.

The new Industrial Development Bill, published last Friday, will now give us wider powers over wider areas and the 40 per cent. investment grant offered for the development areas is already proving a real incentive.

Mr. J. T. Price

I am grateful to my right hon. Friend for giving way. I am sorry to interrupt him again. Will he take it from me that I do not accept unemployment figures as the absolute test in this equation? In a dying area, population drift will in some ways cloak the unemployment in that area, with the result that it will not get the regeneration that the Government are trying to impart to other parts of the country. It is no answer to say that Merseyside has been dealt with. It is no answer to the general problem confronting large parts of Lancashire.

Mr. Jay

I always listen to my hon. Friend the Member for Westhoughton (Mr. J. T. Price), but I also note that when people say that unemployment figures are wrong they are usually, happily, very low.

As I was saying, the Industrial Development Bill will give additional incentive to development in these areas. I believe that we must also try to steer office as well as factory employment to the North and West, even although this is rather more difficult. The Bill provides for grants for office building in the development areas.

Here, the Government must follow the maxims which they are urging on private employers. That, is why I have decided that out of five new Board of Trade local offices administering the new investment grants under the Bill, four will be located at Glasgow, Billingham, Bootle and Cardiff—all in development areas—and only one in the South-East, and that not in Central London but in Southend. We shall disperse other Government work similarly as opportunity occurs.

Simultaneously with all this, we are pressing on, both in my Department and in others, with direct measures to stimulate greater productivity and an end of restrictive practices in individual industries. In the case of shipbuilding I published the Geddes Report in March, which, as had been promised, was as soon as possible after I had received it. At the same time, I sent 100,000 copies of a short version to all those working in the industry and announced that, while further examining the details of the Committee's proposals, the Government would be prepared to help in achieving the necessary forward moves if industry were prepared to do the same.

My hon. Friend the Minister of State has since met both sides of the industry, separately and together, to ensure that this work goes on, and has also addressed a conference of all union executives concerned with shipbuilding. A similar meeting with the management side has already been arranged. Already, one or two firms have announced moves towards the wider grouping recommended by the Report. The Board of Trade has also twice met the steel industry to examine the Geddes proposals for cheapening steel supplies.

In the special case of Fairfields, in which right hon. Gentlemen opposite did not support our operation to maintain the firm in existence, better industrial relations and negotiating procedures and arrangements for full consultation and greater flexibility have already been achieved. The company is willing, with other companies, to apply for consultant services at Government expense on the best reorganisation of upper Clyde shipyards.

Mr. A. G. F. Hall-Davis (Morecambe and Lonsdale)

The right hon. Gentleman has given way very frequently and I am sorry to interrupt him yet again. He referred specifically to office work being transferred to the North-West. Will he look at one proposal for the transfer of Government office work from the North-West—350 Post Office Savings Division jobs from Morecambe—a proposal which is directly against the representations of the Merseyside Industrial Development Association?

Mr. Jay

I will certainly consider that if the hon. Gentleman will give me details.

To return to the North-West, the cotton industry, which has suffered so much from instability and insecurity in recent years, has now been given a five-year breathing space in which to reorganise and modernise itself without fear of disruptive imports. This country is importing a far higher share of its consumption—and here, I think, I carry the Leader of the Opposition with me—of textiles than any other industrial country.

At the beginning of the year, therefore, we introduced provisionally a total limit on imports from all countries likely to cause too much damage to the industry, and our aim is to continue this arrangement until the end of 1970. Let me make it clear that this is designed to allow our overseas suppliers, whom we must also consider, as well as our home producers a share in the growth of the home market.

I hope that by the end of this month, after very full discussion with our overseas suppliers, we shall have achieved a firm working arrangement. Meanwhile, rapid reorganisation is being achieved within our textile industries and I am sure that all those in these industries will understand that the import quota which we are now proposing over the next few years can be justified only as a means to technical advance and not as an excuse for inertia. The aim is emphatically not to preserve the industry as it was, but to adapt it to the needs of the 1970s. Therefore, just because the old cotton industry is now being converted into a multi-fibre, vertically organised new industry, we are working with the industry to convert the old Cotton Board into a wider council covering a greater variety of fibres and processes and, of course, representing both sides of the industries concerned. This must clearly be done by agreement, but I hope that it will very soon be completed.

In the pursuit of greater efficiency we must also intensify the pressure against restrictive devices on both sides of industry. I have, therefore, strengthened the Monopolies Commission, as promised in the House, and it is now working more quickly. It is at this moment conducting major inquiries into detergents, rayon, glass and the cinema industry. I have just received a valuable Report from the Commission on the supply of colour films which, frankly, shows that the public is being charged too much. I have, therefore, started a review of the tariff protection of this industry and I am discussing the Commission's other recommendations with the firms concerned.

Meanwhile, we must see both that desirable industrial mergers go ahead and that the undesirable do not. Out of 72 significant mergers examined by the Board of Trade since the new legislation on this subject, that is to say, since early 1965, I have found it necessary to refer only three to the Commission. I am impressed by the success of the Commission in producing very full reports in these cases within the three months requested—some people were sceptical about the possibility of this and I am convinced by the experience of the past year that Parliament was right to put these precautionary powers on the Statute Book. Competition certainly has its value, as do the economies of scale, in stimulating higher efficiency as well as protecting the consumer.

We shall have to push on rapidly with all the measures which I have mentioned, and many others, if our economy is to achieve a steady surplus despite the end of the surcharge and so repay the debts with which we were saddled by the deficit in 1964.

Mr. Heath

The right hon. Gentleman will agree that one of the most important of the Monopoly Commission's inquiries is that into the cinema industry. I understand that it has made very good progress and is almost concluded. However, the whole of the financial basis will now be changed by the introduction of the Selective Employment Tax. Can the right hon. Gentleman ensure that that is taken into account before the Commission makes its recommendations, because it would be of great value if the Commission took a little longer and took the tax into its financial calculations?

Mr. Jay

I hope to have the report before the end of the year and I am sure that the Commission will take into account Parliament's decisions about the tax. However, if there is any likelihood of its not doing so, I will ensure that the right hon. Gentleman's wishes are carried out.

I was saying that if we were to achieve the surplus which we needed after the end of the year, we would have to take account of the ending of the surcharge and the debts which we have to repay. Some signs here are favourable. First, E.F.T.A. will reach its full status as a tariff-free area of 100 million people at the end of the year. By the end of the year, internal trade in E.F.T.A. since the Stockholm Treaty was signed will have increased by nearly 100 per cent., a remarkable and striking fact.

Secondly, on the home front, I was glad to see that in his improvised speech following the Chancellor of the Exchequer at the beginning of the Budget debate the right hon. Gentleman the Leader of the Opposition admitted, in his own words, that the Government had "held down prices" in recent months. He was quite right. Since the prices and incomes policy got going in the spring of last year, the retail price index, despite very full employment and very high demands, has risen only from 112.0 in April, 1965, to 114.6, the latest figure, in March this year, a rise of 2.3 per cent. and far less than in the previous 11 months. Having achieved that, having controlled rents and having taxed capital gains, the Government can fairly ask, as they must ask, for more restraint in income claims from now on. Certainly, if we do not get such restraint we shall not succeed in hitting our export targets or earning a real overseas surplus again.

If the price record is hopeful, the prospect for imports implies a more urgent warning than some people seem to have realised. In the financial Press and elsewhere I still hear talk of the possibility of imports falling. So far as I can see, there is no reason to expect anything of the kind. In 1965 our real national income was about 2½ per cent., or a little more, above that of 1964. It was not stagnant, as some have said. Yet imports rose by barely 1 per cent. in volume.

Today, after a slight fall in the middle of last year, both real national output and industrial production are now rising. The latest figures indicate an increase at the rate of some 3 per cent. a year. We must, therefore, be prepared for some further rise in imports. That is the main justification for the further tightening of hire-purchase regulations which we carried out in February—not waiting until after the election, as right hon. Gentlemen opposite probably would have done—and for the £315 million of purchasing power which my right hon. Friend's new tax will absorb this year.

If one looks with a rather longer perspective at Britain's economic problem, one is struck by two facts: first, how narrow is the margin between success and failure; secondly, how easy it is to slip back into debt. The narrowness of the margin I have heard very well expressed in the debate, but a fortnight ago I heard it expressed by Dr. Holtrop, the Governor of the Bank of Holland and himself a distinguished economist as well as a central banker, in a comparison of the performances of the United Kingdom and Dutch economies over recent years. Over the last 10 years—the actual figures I give are U.K. official ones and not Dr. Holtrop's—the U.K. had a current payment balance of 0.1 per cent. of G.N.P. and Holland of about 1 per cent.—not very different. Holland aimed at net capital exports of 1 per cent., but because of greater inward investment, achieved a small overall surplus. The U.K., with a current surplus of 0.1 per cent. found for investment abroad, aid and debt repayment, about 0.7 per cent., and so finished with an overall deficit of 0.6 per cent. This is not very much on the face of it, yet it is the source of all our difficulties.

I fully agree that 0.6 per cent. of our G.N.P. nowadays is quite a lot of money, about £170 million a year. But it is a very small proportion of the total working effort of all of us when one remembers the effort made during the war, and the first post-war years. These facts show that it is demonstrably and indusputably within our grasp to re-establish a solvent economy and increase again our net overseas investment, as I hope we shall one day. It is also fatally easy, as all experience over the last 20 years proves, to slip back into deficit in a very short time, if inertia or indiscipline spread too wide, or sectional interests grab for themselves at any cost. The conquest of our economic difficulties is certainly not easy, but it is manifestly within our power.

4.12 p.m.

Mr. Peter Walker (Worcester)

We thank the President of the Board of Trade for the interesting information he has given us. I particularly noted the warning at the end of his speech about imports. I rather regret that he did not spend a little more time in analysing the recent trade figures, because they certainly indicate, as I shall try to show later, an alarming trend. We were interested in the measures relating to the regions. He quoted the very favourable unemployment figures. The point has been made about the emigration of people to industrial areas, and it is an important one. This is particularly so in the case of Scotland, where one sees, from the latest Scottish statistics, that about 10,000 more people left Scotland last year. This is more than the average for the previous five years. The figures also show that for the first time in any decade the working population in Scotland actually decreased.

Behind some of these figures there are factors which give cause for alarm. The President of the Board of Trade has had a degree of bad luck recently. I felt very sorry for him when he had to go to Norway, alas only a few days before the announcement of the removal of the import surcharge. There he met the hostility of some Norwegians who feel strongly on this subject. It was very bad luck for the right hon. Gentleman to find himself, yesterday, with a speaking engagement to a conference of the distributive trades, within a few days of the Chancellor's announcement of his non-Selective Employment Tax.

We welcome the announcements about the E.C.G.D. terms. Over the years all Governments have sought to improve these facilities and we welcome the continuance of this trend. I am sure that both sides of the Committee would like to pay tribute to the staff of the E.C.G.D., who have constantly coped with an increasing volume of work and problems, and done it so well.

The improved terms announced today are more than counteracted by the adverse effects of the new Selective Employment Tax. On Friday, in reply to a Question by my hon. Friend the Member for Oswestry (Mr. Biffen), the Chief Secretary said that the amount of revenue obtained from the tax from manufacturers, and from those categories that will get complete rebate, would amount to no less than £759 million per year. This will mean that in the six months before the rebates commence these industries will provide the Government with an interest-free loan of no less than £378 million. This is to be provided during a period of credit squeeze, when these people are probably paying something like 7 per cent. or 8 per cent. on the money which they borrow for this purpose.

The figures disclosed by the Chief Secretary were remarkable and reflect what a swindle this whole tax is. We know what harm the tax will do to the service industries, but the Government will claim that at least the harm done to them is to the benefit of the manufacturing industries. If one examines the figures given by the Chief Secretary one finds that this benefit is rather small, indeed almost non-existent for many years. The figures show that manufacturing industries will pay a tax of £442 million a year and will obtain back in premiums £575 million a year, giving them a net advantage of £133 million a year. From this one must deduct the increased cost of services to manufacturers. There is no figure provided for this and I have discussed this during the weekend with a number of industrialists and economists.

The most modest estimate that I can obtain it that at least 15 per cent. of the extra taxation on service will be passed on to industry. This would amount to £55 million to be deducted from the £133 million, giving a net benefit to the manufacturing industries of £78 million a year. This is not the end of the story, because that £78 million is subject to a 40 per cent. Corporation Tax and reduced to £46 million, which is the real benefit to industry. For this, the manufacturing industries will provide the Government with what will be, at the beginning of any one quarter, an interest-free loan of £110 million, and at the end of any one quarter an interest-free loan of £220 million. Therefore, before industry can recoup the amount it has had to lend to the Government at the peak of any one quarter it will be January 1971.

There is no real benefit to the manufacturing industries, in cash terms, until January, 1971. Until this date manufacturing industries will suffer as well as service industries. To return to the right hon. Gentleman's suggestions on the trade figures, I was hoping that he would point out to the Committee the serious deterioration in our balance of trade figures during the first quarter of this year.

Mr. Jay

indicated assent.

Mr. Walker

The President nods, but the fact is that the adverse balance of trade in the first quarter of this year is almost double what it was in the first quarter of last year. If the right hon. Gentleman is not disturbed at that, I believe that he ought to be.

Mr. Jay

I am sure that the hon. Gentleman realises, when comparing the first quarter of this year with the first quarter of last year, that the imports were artificially depressed by the United States dock strike last year.

Mr. Walker

But to counteract that, during this coming year there will be a similar sort of perversion of the figures for the latter part of the year. There is an adverse balance of trade in the first quarter of this year of more than £70 million, and I would have thought that this was a very unhealthy trend. If one looks at the import figures the picture is even more alarming. The import figures—including that much-vaunted subject of the import of finished manufacturing goods—have gone up alarmingly during the last quarter. They are 30 per cent. higher than in the first quarter of last year. This is a very remarkable change and they are now nearly 30 per cent. higher than they were in the corresponding quarter of 1965, when there was no surcharge and no perversion. There is no room for complacency in the trading figures.

I wonder how the Government will tackle our economic problems in 1966. They will be very different from the problems of 1965. In 1965, as the President of the Board of Trade and the Chancellor of the Exchequer know full well, there were many factors which worked to the advantage of our balance of payments. First, the terms of trade were to our advantage. Probably the right hon. Gentleman would agree that the likelihood this year is that they will go against us. Secondly, the Government had the advantage of £385 million of increased stocks of industrial materials imported by the previous Conservative Administration during 1964. The current published figures on stocks show that there has been a decline in our stocks and work in progress of about £200 million during the past year.

Mr. J. T. Price

The hon. Gentleman is making a good fighting speech, but surely he is on dangerous ground when he refers to the shop window provided for electioneering purposes. The goods were not paid for. One day the day of reckoning will come, and the goods imported will have to be paid for. We cannot take them "on tick" for ever.

Mr. Walker

I am grateful to the hon. Gentleman. The reason that hon. Members opposite were able constantly to talk about the deficit of £700 million was that these goods were paid for and they remain, in the same way as our overseas investments remain, good solid assets of this country. These stocks to the value of £385 million were good assets of this country and they have been used during the past year by hon. Members opposite in connection with our balance of payments figures.

Last year, the Chancellor of the Exchequer was able to defer the repayment of some of our debts. This year, he will not be able to enjoy the same deferment arrangement.

Mr. A. Woodburn (Clackmannan and East Stirlingshire)

The hon. Gentleman says that these goods were paid for. With what were they paid for?

Mr. Walker

If the right hon. Gentleman wants a recital about the £750 million figure, I am willing to give one. During 1964, this country did two things—increase its stocks of raw materials, and increase its overseas investments. Neither of those things resulted in a run on the £ or in any difficulty. The proper financing arrangements were made. It was not until hon. Members opposite tried to give a complete misrepresentation of the position that sterling was put under pressure.

I think that both sides of the Committee will agree that in 1966 the Exchequer will be in very real difficulties. I regret that the President of the Board of Trade, who has responsibility for these matters, has not been a much better champion of the invisible export industries, as they are rather wrongly called, which make an enormous contribution to our balance of payments situation.

It is interesting to note that on last year's figures we had a deficit on visible trade of £265 million, which was almost completely counteracted by a surplus on our invisible earnings of about £235 million. It is also interesting that Government expenditure abroad last year of £454 million was exactly met by our earnings from foreign investments abroad, most of which were made during the 13 years of Conservative government.

The effects of the new tax on these industries are very alarming. Let me take the insurance industry, with which I have been personally connected for most of my working life. London has always been one of the great international insurance centres, and insurance has provided us with a great volume of foreign earnings. Insurance is becoming very much more competitive in the world. Before the war there was no great competition for London. Today, the American insurance market is vigorously trying to take British business. The European insurance market is doing the same.

There are only three factors in the competitiveness of insurance: the claims payments, the earnings from investments, and the cost of administration. It is these three factors which decide the cost of insurance. The claims record is the same for any company, whether it be American, German or any other. Therefore, the two respects in which insurance can be competitive are investment earnings and cost of administration. This Budget is damaging to both those factors. The 40 per cent. Corporation Tax will harm the investment earnings of the insurance industry, and the Selective Employment Tax will substantially increase the costs of administration. Exactly the same arguments can be applied to banking.

This all fits in with what can only be described as "the little Englander" attitude of the Government, and their failure to realise that the future of world business will rest on an international basis. When I hear the Chancellor of the Exchequer speaking at the Boat Show and about overseas investments, I cannot help but be reminded of an anecdote in Harold Nicolson's book on the life of George V. When George V was sent a memorandum from the Prime Minister suggesting that he should visit a European capital, he wrote in the margin "Abroad. That's bloody". The attitude of the Chancellor of the Exchequer is similar.

When considering the Government's failure to encourage an international attitude to world business, we remember the speeches of the Prime Minister about the brain drain. Last week, the Government had to announce substantial increases in doctors' remuneration. One reason why this was so necessary and was supported by both sides of the House was that there were many doctors going abroad. But make no mistake: there are many skilled people going abroad as the result of this Government's policy. The Government have done nothing to try to prevent the loss of ability to this country. Do they really consider that £1,000 million of extra taxation will encourage the ablest young people to stay here?

What about mortgages? At this very moment, in Harrogate, the building societies are meeting to decide on mortgage interest rates. One thing is quite certain: they will not decide that they should go down. They may go up. There has been a considerable increase in the cost of buying a house as a result of the Government's financial policies. The same is true in many other spheres. The people of ability whom we want to retain are being put aside by the Government.

The Chancellor of the Exchequer announced proposals on stock option schemes. He says that he will stop what he considers to be a form of tax evasion. We do not know the detail of his proposals. But we on this side of the Committee would have been much happier if he had announced schemes whereby many more executives in British industry could have participated in the ownership of their companies. This is the type of measure which we should have to encourage the free enterprise sector of industry. But, instead, we have a Government who have basically created a stagnant economy, increased taxation and created a climate in which young people will not go round the world to the benefit of Britain, but, if we are not careful, will go round the world working to the benefit of other nations.

The Chancellor of the Exchequer, in his Budget speech, gave his analysis of the economy. It is rather remarkable that after a year of stagnant production the right hon. Gentleman made no mention in the whole of his speech of the fact that production had been stagnant.

The Chancellor of the Exchequer (Mr. James Callaghan)

It is not.

Mr. Walker

The right hon. Gentleman says that it is not. The fact is that the production index is lower today than it was in January, 1965. If the Chancellor does not call that stagnation, if he is talking about the rise last year over the previous year, he knows full well that the whole of that rise took place before January, 1965. I am rather shocked to have heard him saying "It is not", perfectly satisfied at having been Chancellor of the Exchequer during 14 months of stagnant production.

Mr. Jay

The hon. Member repeats this. He must recognise that for the last six months industrial production and the gross national product have been rising at a rate of 3 per cent. a year, which is not perhaps the best we could achieve, but is not altogether unsatisfactory.

Mr. Walker

The President of the Board of Trade publishes each month his index of industrial production. His latest figure shows clearly that industrial production is one point below what it was in January, 1965.

Mr. Jay

indicated dissent.

Mr. Walker

What is the reason for this stagnant production? Why has the Chancellor made no analysis of what went wrong during 1965? Did he expect the industrial production figure to remain static throughout the year? Did he expect that at this time it would be lower than in January, 1965? If he did not expect that, why does he not analyse the reasons for it?

I believe that there are several reasons. One of the first reasons has been the credit squeeze, the longest in our history, which, the right hon. Gentleman announced in his Budget speech, is to continue. It is an expensive credit squeeze and one which will be increased as a result of the compulsory loan feature of the new tax.

Another factor is the failure of the Government in National Savings. What a contrast between the Chancellor's references to National Savings this year and his references to the subject in his Budget speech in the spring of last year, when he said: The last year was again a good one for National Savings; the total amount invested increased by £316 million. There was no such phrase in this year's Budget speech. Had the Chancellor bothered to give us the figure this year, he would have had to announce that National Savings last year actually fell. This is why the right hon. Gentleman now has to take this compulsory interest-free loan from industry. It is his failure—and it is a failure on his part—because in that same Budget speech last year he went on to say: I do not consider that any change is needed at the present time in the terms of the existing National Savings securities.… I emphasise, once again, that the need for additional savings is very great if we are to finance the modernisation and reconstruction of our nation."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 277–8.] Perhaps the Chancellor will now admit that he was completely wrong in saying that the terms of the National Savings securities did not need changing. He has now changed some of them, but too late, after a period in which National Savings have gone into sharp decline. This is a gigantic miscalculation on the part of the Chancellor, for which industry will have to pay in the form of the interest-free loan under this new tax.

Then we have the whole situation of restrictive practices. The President of the Board of Trade has mentioned his great campaign against restrictive practices. Let me ask a question, which perhaps the Chancellor will answer. Why, for example, when the Prime Minister settled the dispute with the National Union of Railwaymen, did he not, as part of the settlement of that dispute, take up the question of the ridiculous restrictive practice on liner trains?

Let me ask another question. Why, on Friday, did the Minister of Labour give his approval to a 7 per cent. increase in wages in the road haulage industry, twice the norm, against the recommendations of the Prices and Incomes Board, who stated five conditions for higher productivity? At least two of those conditions were connected with restrictive practices on the part of the unions. Before the Minister of Labour approved that increase, did he get the agreement of the Transport and General Workers' Union that both of those restrictive practices would be removed? If he did, why did he not make an announcement to that effect? It would be interesting to know how sincere, when it comes to the crunch in these negotiations the Government are about removing these restrictive practices on the part of industry.

Another factor to cause our stagnant production has been the uncertainty primarily created by the Chancellor him-by his ill-thought-out and ill-prepared tax reforms—the continuation of the Capital Gains Tax uncertainties, the incertainty that reigned for many months concerning the investment grants and, now, this ill-prepared Selective Employment Tax.

The Chancellor, of all people, claims that his ambition is to move people from the service industries to manufacturing.

Mr. Callaghan

indicated disent.

Mr. Walker

I can understand the right hon. Gentleman shaking his head, because he has created one of the biggest new service industries of all—the tax industry, an enormously fast-expanding service industry.

About 3,500 more people will be working in the Inland Revenue by the end of this year than when the Chancellor took office. The Land Commission, for the collection of its tax, will take on 2,000 extra civil servants. The Board of Trade had to increase its staff by 1,100 for the new investment grants. And how many thousands of extra employees are we to have in the Ministry of Labour and the Ministry of National Insurance as a result of this new tax?

Not only do we have this increase in the number of civil servants, but there will be an enormous increase on the other side, in industry, when it has to fill in all these complicated forms, answer all the queries and keep in work these thousands of extra civil servants.

What result can we expect from this new tax? The Chancellor must be slightly shocked at the reception which it has received.

Mr. Callaghan

Not a bit.

Mr. Walker

All I can say is that the Chancellor ought to be shocked. Every newspaper, almost without exception, has come out against the tax. Even the New Statesman came out with the words: He is in the hands of his civil servants and the pity of it is that he represents their views too ably. Actually, it was not the New Statesman which said that. It was the New Statesman quoting a Labour Member of Parliament who had said it. [HON. MEMBERS: "Who was he?"). He remained anonymous. [Interruption.] I hope that the Chancellor is not accusing the New Statesman of misquoting a Labour Member of Parliament. This would be too shocking an attack to make.

Mr. Callaghan

On a serious point, I revert to what the hon. Gentleman said about it being my ambition to achieve large-scale redeployment between service and manufacturing industry. I did not put that forward as the reason for this tax. That has been taken up by a great many people—the hon. Member and others have said it—but it is not my basic case for the tax.

Mr. Walker

We are interested to learn that the Chancellor does not want a redistribution. [Interruption.] That is an incredibly naive statement on his part. The fact is that almost every journal newspaper and economist has come out against this tax.

Mr. J. T. Price

Will the hon. Member, who is putting forward a vigorous argument, say that The Guardian, for example, has supported his argument? Has the Observer supported it? Has the Sunday Times supported his argument? He may, of course, be quoting the gutter Press.

Mr. Anthony Barber (Altrincham and Sale)

Would my hon. Friend allow me to quote from the Co-operative News—not the gutter Press—which starts its leader in this way: For all its innocent appearance, Mr. Callaghan's main Budget proposal is sinister and dishonest".

Mr. Walker

I shall certainly not stand here as the defender of either the Co-operative News or the New Statesman. The fact is that almost every newspaper, including all those quoted by the hon. Member for Westhoughton (Mr. J. T. Price), has had grave misgivings about this tax.

But what annoys me about the attitude of the Government on this is that all of these objections which have been made, and all the objections of these vital industries, are brushed aside by the Government as being kinds of fringe objections—anomalies in the tax, anomalies which, perhaps, could be looked at and thought about. There is nothing "fringe" about the agricultural and horticultural industries. These are very major important industries, and when we think they agree to a Price Review, and that the then leaders of the N.F.U. were quite clearly rebuked by the rank and file members for making that agreement, what those leaders must think now at having had this burden put on them after making that agreement would, I think, hardly be repeatable in this Committee. But the tax will have very serious effects upon them.

I do not know whether the Chancellor would apply that "fringe" argument to the effects on insurance and banking. Certainly, it is not a fringe argument as to the effects upon the tourist industry. This industry earns £320 million of foreign currency a year, and where it is successful it saves a great deal of foreign currency in getting people to take their holidays at home instead of abroad. And there is no labour force to be saved in this industry. Indeed, the recent manpower inquiry into this industry showed there were no fewer than 48,000 unfilled vacancies.

The industry is our principal dollar earner. It contributes an enormous sum to the Chancellor in Purchase Tax and collects for him enormous sums through the tax on beer and spirits. During the last 18 months this industry has had the effect of the industrial training levy put upon it; it has had various other tax increases; now, finally, it has this blow which will put up its wages by 10 per cent. This treatment of this high foreign currency earning industry with a very low import content can only be described as irresponsible folly on the part of the Chancellor.

Then there are social implications and there are very important social implications. One well respected provincial newspaper, the Birmingham Post—[Laughter.] Hon. Members may laugh, but I certainly think that most people in the Committee will agree that it is a very well respected provincial newspaper. This newspaper actually started a campaign about the Chancellor's proposals and their effects on charities. Hon. Members have noted how the Chief Secretary, in reply to a Written Question by one of my hon. Friends as to whether he will consider the position of charities, gave a very quick, brusque and complete answer: No."—[OFFICIAL REPORT, 6th May, 1966; Vol. 727. c. 173.] Then there are other social effects—on the arts: there have been many complaints about the effects on them. And sports. What is the effect of taxing sport in this way? With what object can the Chancellor put this tax on county cricket teams or our professional football teams? Does he hope that they will reduce the size of the teams from eleven to nine?

The President of the Board of Trade is reported as having said yesterday at a conference he attended, and saying, presumably in reply to questions put to him, that he will "consider the position of part-timers". This is such a vital and enormous question that it is thoroughly irresponsible at this stage for the Government to say they will start considering it. This is an absolutely fundamental question.

Mr. Jay

Does the hon. Gentleman mean that my right hon. Friend should rule out consideration of any Amendments put to him?

Mr. Walker

No. What I mean is that questions as enormous as this, the treatment of part-timers, are so important that any responsible Chancellor would have thought of them before.

Then there are the effects on education, and upon private educational establishments—[HON. MEMBERS: "Ah."] Oh, we understand hon. Members opposite being, as a result of their partisan views, delighted at this question, but remember, also, for example, the effect upon technical colleges and colleges of technology, and trying to persuade employers to take people for sandwich courses, and what will be the deterrent effect upon that important part of our educational system.

Then, of course, there is all the tremendous uncertainty which will be created in the coming months as to what is an "establishment". We do not know how a head office apart from a factory will be classified. I presume that the Chancellor does not know yet. Perhaps he has not thought this one out. If he has, perhaps he will tell me. He does not know? We do not know what the position will be, for example, of research establishments and sales offices.

The Chancellor has not yet thought this one out, but to help him in his thinking let me put to him the instance of the head office attached to one of the firm's factories with a total staff of 1,000 people, of whom 550 are service staff and 450 on the manufacturing side. There are many such situations. It will pay the employer to employ 101 people who sit in the factory on the manufacturing side at £15 a week in order to draw a total rebate on the 1,000. This is the sort of nonsense which can be created by this tax.

It is thoroughly irresponsible of the Chancellor to have published a White Paper creating all this uncertainty and not to have clarified this tax far more. In fact, doubtless both in the Budget debates and in the debates in Committee on the Bills, it will be rather like last year—a kind of teach-in for the Chancellor of his own tax proposals. He will try to learn what all the effects will be.

The country has paid a very dear price for the ill-thought-out tax reforms of the Chancellor. He implied at the end of his Budget speech that this was another great historical event in our taxation system. The Chancellor is always rather keen on these historic events. It was a great historic event which he announced in March. Last year he described his Budget as a historic landmark in taxation.

Mr. Woodburn

It was.

Mr. Walker

All I can say is that Britain has paid very dearly for the Chancellor's search for a place in history, and I can assure him that he has already found a firm place in history as the first Chancellor in history to have increased taxation in 18 months by £1,000 million; and he is the first Chancellor in history to have managed to combine stagnation and inflation. He is the Chancellor who has borrowed more money from abroad than any Chancellor in our history.

The real reflection on the Chancellor is that people are willing to pay a 26 per cent. premium to invest in a country where he is not the Chancellor. This attempt at ill-thought-out tax reform has been disastrous to our economy, disastrous to the future potentialities of our economy, and the sooner this chapter of history is closed the better for Britain.

4.48 p.m.

Mr. Alex Eadie (Midlothian)

Since this is a maiden speech I want to make reference to the former Member for Midlothian, Mr. J. M. Hill, who served in the House of Commons for seven years. Unfortunately, he had to resign—or, rather, not seek re-election—because of ill-health. Since I have come here I have learned that he earned the respect of most of his colleagues in the House of Commons, and I am quite sure that all hon. Members will join with me in wishing him better health in the future.—[HON. MEMBERS: "Hear, hear."] At the outset, I want to give general support to the Chancellor's Budget Statement. I can understand hon. Members of the Opposition quoting various newspaper articles which are favourable to their cause, because I would seek to argue that the article written by Margaret Naylor, in last Sunday's Observer, lends support, to some extent, to the Selective Employment Tax.

If the tax means something for Scotland by providing better job opportunities for the school leavers of Scotland so that they do not go into dead-end jobs, but are able to acquire a skill for their future lives, it will have made a contribution to the people of Scotland.

In the time at my disposal, I want to draw the Chancellor's attention particularly to some aspects of the mining industry. I have been a miner for 30 years and have literally come from the coalface to the House.

In the presentation of his case, my right hon. Friend tried to put into words the old miner's saying that everything comes off the point of the pick; in essence, he wanted more production.

I congratulate him on ignoring the very strong and substantial pleas that were made about the fuel oil tax, and I want to draw his attention to the crisis of confidence which has arisen in the mining industry today. Some people tend to describe it as an act of demoralisation of the miners, but I wish to point out that the miners did not create the crisis of confidence in the industry. The crisis was created when the last pit closure programme was announced.

We are running the mining industry down at present at a very dangerous pace, and I suggest that it can do the economy of the country substantial harm. When we find economic pits in some areas with manpower problems and it is suggested that they may be in danger of being closed, it is time that we took notice of it.

As a miner, I have always argued that the country cannot hope to be a large prosperous industrial country unless it has its own indigenous resources of energy. We are allowing the industry to contract at a moment in time when we do not have the necessary indigenous resources to replace its production.

I want to be critical in one respect. I followed the argument made in the Budget speech, but the Chancellor has advanced an argument to remove coal price differentials in the regions, and I am considering Scotland mainly because I believe that the regional discrimination in coal prices there is having a bad effect on the mining industry.

I know that the Committee may resent what I am about to say, but the attitude of the miners is that they are not prepared to send their sons into the industry. They feel that they have been let down, and say that other people's sons should have the chance to go and work in the mines. The Committee may resent it, but if we ignore such an attitude, the country will ignore it at its peril.

We will not solve the problems of the mining industry by making it attractive for miners to leave Scotland and work in pits south of the Border. For too long, Scotland's manpower has been the dripping roast for industry south of the Border, and it is becoming apparent that some miners move into other industries and aggravate congestion in parts of the South and the Midlands where we are trying to prevent that congestion taking place.

I want to make a plea to the Committee, the Chancellor and the appropriate Ministers for a national fuel policy which gives coal its proper place in our energy requirements. To some extent, we can assist in bringing back confidence to the mining industry if the Government will decide to suspend pit closures.

We should help to restore confidence in the mining industry if we accelerated the inquiry into the distribution of coal. When one thinks of it, it is ridiculous that it should cost more to distribute coal than it costs miners in the bowels of the earth to produce it. I urge the Government to accelerate the inquiry.

It may be that I have stretched the cordiality of the Committee too far in its toleration of a maiden speech. [HON. MEMBERS: "No."] You, Sir Eric, would probably not want me to develop fully the argument which I should like to advance in favour of the miners. At the election, I received the overwhelming support of my fellow miners, and I said that if I was selected to the House, and was fortunate enough to catch your eye, I should try and reflect the views of miners.

In my very short maiden speech, I have tried to do something to reflect some of those views. They may be unpalatable, but they are the views of the miners who helped elect me to the House.

4.58 p.m.

Mr. Anthony Grant (Harrow, Central)

It is a very great pleasure for me to rise and follow the hon. Member for Midlothian (Mr. Eadie). I think that we should all wish to assure him that he has made an excellent maiden speech. [HON. MEMBERS: Hear, hear."] It is very pleasant to hear a Scottish brogue in the Chamber, particularly one which we can understand so clearly. It is also very interesting to know that the hon. Gentleman has been a miner for 30 years and has only recently left the pits.

We have heard a great deal recently about the changed image of the hon. Gentleman's party, with academics and theoreticians coming into Parliament to sit on the benches opposite, but I am sure that the House will benefit from hearing an hon. Member who has practical experience of the industry about which he speaks with considerable authority. He will find, as I did, that the House is a warm and friendly place, and I am sure that it will respond to him in the way in which it did to me.

We are very sorry to hear that his predecessor, Mr. Hill, whom we all remember with respect and affection, is suffering from ill-health. We hope that he will soon be better. He can be assured that he has a worthy successor in the hon. Member for Midlothian.

The new Selective Employment Tax has been fully debated and criticised in the House. It has been the central theme of this Budget. In my constituency of Harrow, Central it has been very vigorously criticised indeed, judging from the letters which I have received. My constituents are far more concerned with services—as indeed are many constituencies in the Metropolis—than with manufacturing industry, and so far as I can see the prospects for them, regardless of how efficient and hard working they are, are less employment opportunities, higher prices, and possibly lower remuneration.

None of that arises because they are inefficient or idle. It is simply because, in spite of what he says, the Chancellor and his team have turned back to the old Socialist prejudice that in some vague way factory workers are good and office workers are bad. This is the thinking which has permeated the Chancellor's Budget, and, although he says that it is not his purpose to cause a switch of workers from service to manufacturing industries, this is clearly how it is being interpreted.

It is a great illusion to suppose that because of this tax there will be a great switch of personnel from service to manufacturing. Let us consider "Mr. Snooks", of Harrow, working very efficiently and ably in an accountant's office in London. Merely because of this tax he will not, overnight, switch and become a capstan operator of something in a factory, because there are social and other reasons underlying his choice of employment. On the other hand, the nearest that we might get to it is that he would become an accountant in the offices of a factory and thereby inflate the already bloated numbers in many of our manufacturing industries.

I thought that my hon. Friend the Member for North Fylde (Mr. Clegg), in in a letter to The Times today, summed up the absurdity of this tax very well. If I remember the purport of the letter, it went something like this: "The people who lift the fish out of the sea are to be subject to the tax, and will then get it back. Those who translate the fish into fish fingers, a manufacturing process, are to get a benefit from their operation—they will get 7s. 6d. But the people who finally transport the fish fingers to the stomachs of the public are to be penalised and taxed". This illustrates the absurdity of the whole tax and its indiscriminate nature.

Last week the Chief Secretary had a dream about the splendid flowers which he was going to receive, and was receiving, for the wonderful tax arrangements made in this Budget. If he comes to my constituency, he will receive a different type of vegetation.

This new tax is a novelty, but my reactions to the Budget are rather similar to my reactions to the late and rather unlamented Companies Bill in the last Parliament, and it is possible that it will go down in history as being more notable for its ommissions than its substance. There have been some interesting reactions in the Press. We have heard remarks like "Stunned", "Relieved", and even "Pleased". It seems an extraordinary reflection on our times under Labour rule that we should expect taxation to increase as a matter of course, and, as my hon. Friend the Member for Worcester (Mr. Peter Walker) said, it has increased by £1,000 million in 18 months.

It seems to me that we are getting into a state where we are rather like a lunatic who is knocking his head against a wall because it is so nice when he stops. If we agree that greater drive, initiative, and energy should be infused into our economy in an increasingly competitive world and we are continually being exhorted to do just that—we should be yelling from the rooftops for a reduction in taxation. We should have the courage to make a dash for freedom, rather than heaving sighs of relief.

We want a more radical approach to the whole question of direct taxation and Income Tax. I do not want to waste the time of the Committee, but I draw the Committee's attention to the article by Mr. Rees-Mogg, in the Sunday Times, in which he argues that the Chancellor and his advisers should apply their subtle minds to the possibility of abolishing Income Tax altogether. This is the line along which they should be thinking.

I admire the Chancellor's ingenuity in introducing this novel tax. Introducing new taxes has been his main occupation since he has been in office. We have had Corporation Tax, Capital Gains Tax, and now we have the Selective Employment Tax and the Gambling Tax. I have great admiration for his ability in introducing these novel taxes, but I wish that he would use the same ingenuity and the same enthusiasm to find ways of reducing taxation, to find ways of simplifying it, and to find ways of encouraging saving.

Perhaps I might say something on the question of the complexity of taxation, which causes almost as much frustration and sapping of energy as the high level of taxation itself. Every year the volume of tax laws in libraries increases, and professional examinations become more difficult for accountants and lawyers. A quite disproportionate amount of mental effort and time is expended by business and professional men on taxation wrangles when they ought to be doing more useful things.

Mr. J. Bruce-Gardyne (South Angus)

Did my hon. Friend see the report which a firm of accountants sent with its latest taxation returns to the inspector? The firm said that it would like the right to revise the return once it had had a chance to understand the working of last year's Finance Act. The inspector replied that it could, provided that he had a chance to revise his findings when he had had a chance to understand the Act.

Mr. Grant

I am obliged to my hon. Friend. To get top tax counsel's opinion one has to wait anything from three to six months. This is not only on the private side. The problem arises on the Revenue side as well, and I was glad that last week my hon. Friend the Member for Finchley (Mrs. Thatcher) referred to the declining morale of the Revenue men themselves; and reference has also been made to the morale of the taxpayer.

I note that in the article from which my hon. Friend quoted Revenue officials complained that they have to study a booklet which has recently been issued containing more than 7,000 clauses explaining the new Tax. The situation is getting absurd, and I am not surprised that their morale is failing. I think that if the complexity of taxation is not dealt with, there is a danger of the whole system grinding to a halt.

One reason why taxation is complicated is that there is a desire to achieve fairness. Fairness causes complexity, but I think that we are moving to the stage where a little less fairness for the sake of a little more simplicity might be justified. All sorts of interesting arguments can be put forward. For example, what would be the effect of making taxation a straight percentage of one's income? This would cause a great deal of unfairness, but it would be simple. Perhaps one cannot go to that extreme, but one could be thinking along, such lines, and I hope that the Chancellor, as an ex-Revenue man, will apply his nimble brain to this problem.

Savings are vital. One of the vital phrases in the Chancellor's speech was that more savings meant less taxation. Of course, the right hon. Gentleman is not the first person to say that. Many of us have said it before, but he carried authority with him when he said it. They are fine words, but we want action, and not words, in relation to savings.

I know that the Chancellor has introduced a new certificate, but it is not all that attractive, as my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) said last week. I am very disappointed that under the new Post Office Savings scheme the first £15 of interest will not be tax-free. The Government are not concerned with encouraging savings. I should like to see an awareness on the part of the Chancellor of the need for a broader base for savings, and a greater desire to spread ownership throughout the community, because there is more than a mere financial reason for savings. There is a social purpose as well, and this is why I have frequently urged the encouragement of the ownership of shares, both from a taxation and social point of view.

Many ideas have been urged on the Chancellor. The Wider Share Ownership Council, of which I am a member, has given him many ideas. What has happened to the idea of a National Unit Trust? I do not share the misgivings which some of my hon. Friends have expressed on this score. I remember that there was a rather subterranean rumble from the benches below the Gangway last week about this; but this matter could be explored. With special safeguards it could be very useful. I am disappointed that the Chancellor has not thought about it before.

There are excellent company thrift schemes which work very well in America, and changes in the tax law would enable such schemes to be developed. Why should not the Chancellor exempt the first £500 or less from Capital Gains Tax? This would provide a tremendous boost to savings, and would be a great encouragement. We shall return to that point later in the summer.

Again, why should not some help be given to investment clubs. These are designed for the small savers and really encourage savings, which everybody regards as commendable. Last year's Finance Act put them in a hopeless position, and there has been a falling off in numbers. Over the year the Chief Secretary has tried to iron out all the administrative angles, but we have come to the conclusion that it cannot be done. The only thing to do is to change the law and to make those engaged in investment clubs pay Capital Gains Tax only on realisation. We have been given the answer, "This is a policy of change". Why not have a policy of change if it will help to increase savings?

Why should not the Chancellor consider the West German law—the DM312 law—which enables employees of a firm or plant, or all the members of the union, to negotiate with the management for the establishment of a special employees' savings account into which the employer pays a sum up to DM312 per annum, or more if the employees have dependent children? The effect has been not only that savings have increased, but that several million workers have been concerned in collective agreements. This is taking money out of consumer spending, which is the sort of thing that the Chancellor and the First Secretary surely wish to do. This is working extremely well, and I commend it to the Chancellor.

I regret the decision to clamp down on the friendly society scheme. This is a wholly retrograde step. We are urged to find new mediums of saving, and to attract money from spending into saving. The friendly society scheme was advanced and was working extremely well. What is wrong with it? Why not use the existing law to encourage saving? There is nothing wicked about 42,000 people having already embarked on this scheme and having put about £10 million into it. This works out at an average of about £200 each, and in any case there is a limit of £500 to the scheme.

Why should it be suggested that there is something sinister about this scheme? Why should the Chancellor clamp down on it? It is not a question of £500 being offered to Surtax payers as a bonanza. The sole effect of this clamp-down—which has been almost universally condemned by the financial Press—will be to leave this means of saving as a monopoly in existing hands instead of opening it to a much wider range.

I have put forward a few ideas to encourage savings and I hope that the Chancellor will think about them seriously. We shall have an opportunity to put down many Amendments to the Finance Bill in Committee. I hope that the Government will consider these suggestions seriously and sympathetically and will bear in mind the long battle we had last summer, when, on one occasion, we succeeded in improving the Bill by using the excellent process of parliamentary democracy. I do not imagine that this year we shall be able to repeat that success. However, in spite of the difference in the majority, I hope that the Chancellor will consider favourably the sincere attempts that we shall be making in the summer to improve the Bill on the lines that I have suggested, and will be receptive to proposals to remedy many of the anomalies and inequities that exist.

In my opnion, this is only an interim Budget. There is likely to be worse to come. I have some sympathy with the Chancellor's view that annual Budgets should cease. I always assumed that what irritated industry most was the fact that annual changes in taxation prevented it from planning two or three years ahead, as was necessary if it was to be efficient. Now we have had the experience of having not an annual Budget, but a number of Budgets every year. We might even get them on a monthly basis. This is the exact opposite of what industry wants.

The Chancellor should not underestimate the effect of an annual Budget on people's minds. The more dramatic it is the more it can convince people of what matters. The Chancellor should not underestimate that effect. That is the greatest failing about the Budget. Having persuaded people, in some way or other, over the past year that we had to go for higher wages and higher prices, with stagnant production, the Budget is designed to persuade people that all is well and that we can drift on in the same old way and that somehow Jim, George and Harold will see us through. That is one of the greatest criticisms of the Budget.

Last year the Chancellor was referred to as "Grim Jim". He cannot be described as "Grim Jim" this year. I have been trying to think of another epithet. I do not think that we can call him "Slim Jim", because he is in robust health, but he might be in danger of earning the epithet "Dim Jim"—not for any lack of mental powers, which we know are considerable, but because he has succeeded in dimming the harsh light of reality that we tried to expose over the economy at the General Election.

The Budget does not deal with the question of wage inflation, or grapple with the problem of higher prices. It does not deal with the problem of the balance of payments. The Government and, alas, the people may be sure that the day of reckoning will come.

5.17 p.m.

Mr. John P. Mackintosh (Berwick and East Lothian)

It was interesting to hear the hon. Member for Harrow, Central (Mr. Grant) talking about dimming the harsh light of reality, when we have had not one word about what form of taxation the Opposition would introduce. As a maiden speaker I cannot, unfortunately, indulge in direct cross-Chamber repartee, which I would enjoy doing.

For the whole of my adult life I have been teaching, studying and writing about the British system of government, and I rise with the usual feelings of humility and excitement, but perhaps to an even more intense degree. Hon. Members will appreciate that for someone who has always regarded an hon. Member of this House with a degree of excitement, much as a small boy tends to regard a new model car or a special jet plane, my entry to the House has created in me almost an unseemly pleasure and enthusiasm. I hope that hon. Members will excuse this.

But what is to me a pleasure, is, unfortunately, a blow to others. I am sorry that my election was, of necessity, a blow to my predecessor, Sir William Anstruther-Gray. I learned to like and admire him during the contest. He was a genuine gentleman. He had an element of non-political approach which made hon. Members opposite choose him as Chairman of the 1922 Committee, and also persuaded this Committee to select him as Deputy Chairman of Ways and Means. I do not want anybody to think that he was not a decisive man in his way.

It is perhaps not well known to hon. Members that Sir William was one of the men who returned from the Front in May, 1940, and persuaded 32 of his back bench colleagues to go into the Lobby against their own Government—against the leadership of Neville Chamberlain— thus helping to bring down that Government. On that occasion he was a true patriot. Like my predecessor, I hope to represent efficiently the constituency which has elected me. I shall work hard on its behalf.

I want to pick up two points which are obviously most important in terms of the economic policies of the Government. In my constituency, at the week end, I found that there was a tremendous feeling of gratitude and relief at the terms of the Chancellor's Budget. Every person who has considered it appreciates that when £6,000 million worth of manufacturing industries pay 40 per cent. of the taxation, whereas the service industries pay only 1 per cent., it is a reasonable proposition that tax should be increased in respect of the service industries. There has been no feeling other than relief that we have not gone back to a reliance upon increases in taxation—on beer or tobacco—and all the other tedious methods of taxation adopted by past Chancellors.

There is one particular aspect of this Selective Employment Tax which could be reorganised in the coming months to meet the Chancellor's desires—in no way to undermine his tax, but to help to allay the worries of the farming industry. I represent a constituency with some of the finest farming land in Scotland—

Mr. Woodburn

In the world.

Mr. Mackintosh

In the world. It was there that the eighteenth century agricultural revolution was born and it was there that we learned to drain, to plant tree belt barriers, to try new forms of stock. The farmers of East Lothian are among the finest in Britain.

They have felt a squeeze from Governments of both parties since the 1957 Agriculture Act and this squeeze has gone on and on, despite increasing efficiency and effort on their part. We cannot, as the economists say, quickly drive men in farming bankrupt. These men's farms are worth £120,000, £180,000 or £200,000. A man can be driven into debt—a bank will carry an overdraft of £40,000 or £50,000 on assets of this kind—but if a man is driven into debt for ten successive years, he gets worried and begins to wonder.

My hon. Friend the Member for Midlothian (Mr. Eadie) talked about a crisis of confidence in the mining industry, and the same is true of the farming industry. The farmers are disillusioned and cynical about politicians of both parties. What we have to do now is to assure them that this tax is not yet another blow aimed at them. I think that it is within the Chancellor's power this afternoon to do this. Let us be clear about it. We now have, for the first time, a steady future for farming. We have given farmers, by way of the National Plan, long-term targets and shown them that they will get selective expansion. What we need to do now is assure them that this is a genuine policy and that we are not attempting to add fresh burdens to men who have increased efficiency and who, in 1963, took an 8 per cent. cut in income, in 1964, a 15 per cent. cut in income, and who are now offered a small 5 per cent. rise in the present Price Review.

The three things which I should like the Chancellor to consider and which, I think, would restore confidence would be within his own aims. He does not intend the farming community to have to pay the tax. He intends them to get it back. Let him make it clear that if they start paying this September and pay through the following year, whatever method of reimbursement is used will cover all these payments from September and will not cover only the payments from the 1967 Price Review onwards.

Secondly, could he not devise a method of seeing that the repayment went to the people who made the original payment. As has been stressed in the House again and again, the people who will be paying in proportion to their manpower, if the money is given back through the Price Review, will not be the same people. There is no reason why a different principle should be applied to farming from that applied to manufacturers.

My third point is that I should be grateful if he would find some method of solving the problem of horticulture, which operates on very thin margins and which would have to pay the tax. This industry does not come under the Price Review. I appreciate the Chancellor's point that this is a vital, important and progressive tax reform. He wants to get it launched. He cannot dab bits of paint on the funnel to suit every interest, but I ask for something within the limits of his own policy, which is part of his intention and which requires only administrative manipulation.

We have, of course, light industry in Berwick and East Lothian, although unfortunately too little. I am sorry that the Financial Secretary has just left the Chamber, as I wanted to address my remarks to him, through the Chair, on this point. If anything tilted the scales in my constituency at the election, it was the National Plan, broken down into its regional framework, which offered us in our area, for the first time, a border development plan, an attempt to bring population, to give to Berwickshire, an area which is losing population faster than the Highlands and faster, I think than any other place in Britain.

It offered the Lothians a chance of employment, to replace industry and jobs lost in mining. I think we were all moved by my hon. Friend the Member for Midlothian, a neighbouring constituency, when he made his eloquent plea for the miners. Many of them work in my constituency and their alarm is great. I can only emphasise my hon. Friend's point. We need industry in the Lothians to replace those lost jobs. We have the plans before us, but what I want the Government to consider is who is to carry out these regional development plans. I do not think that adequate thought has been given to this.

The target is set out before us in the Scottish White Paper for the next five years, giving advance factories, houses, roads—an infrastructure—but who will put them on the ground? I know that the present tendency is to say, "Let the local authorities do this", but I should like all hon. Members to think about their own constituencies. I am sure that they will agree that local authorities cannot be adequate engines of development in all parts of Britain. If hon. Members represent constituencies in the North-West, they will know that there are four local authorities in that area which can do a magnificent job—Lancashire, Cheshire, Liverpool and Manchester—but the places which need most regeneration are the smaller boroughs, which have not the money, the skill nor the expertise to do this job.

Who will do it there? We in Scotland, in the Borders, have some excellent local authorities. I am fortunate, with two good county councils, but I have 11 small burghs which have good hard working men but do not have the manpower, the skilled town clerks, the surveyors, the architects, or the money to do the job.

I know that the answer which I will get from my right hon. Friends on the Front Bench is, "We will reform local government and when we have big units they can do the job". However, my reply would be, "It will take two years to get the report from the Royal Commission and another two years before we get a Bill through the House which will result in these new big local authorities". We cannot wait four years for this development. I am frightened that it will be a continuing song throughout this Parliament of, "Wait for the Report of the Royal Commission on Local Government".

If we cannot wait for four years, who will do the job? What frightens me is that we will have another rash of ad hoc bodies, what we in the study of political science call "intermediate government"—scrambled-together agencies, consultative committees, bodies here, consultants there, who will replan, rethink a bit here and there, who will work hard, but who will not organise the crash programme which we require to halt depopulation, to provide jobs in the declining mining and agricultural industries.

I ask the Government to consider a uniform executive agency for this work. I would prefer something like the new town authorities but, instead of being tied to a particular town, attached to an area, including town and countryside, to which we would appoint a specialist group of men with the technical expertise to do a package deal, to bring in the advance factories, put up the houses, build the approach roads and provide the power. Naturally, they can work in co-operation with the local authorities, if they are capable of doing the job. If not, this agency could do the job on its own.

At the last election, we won because we were able to offer—I am wearing my academic hat now, rather than my political hat—an idea. We offered a positive programme of ideas and attempts to tackle old-fashioned, difficult problems which no one had looked at for the past 10 or 20 years. At the next election, we will not be judged on plans and programmes but on actual, concrete activity on the ground. Are the factories there? Have the houses been built? Is agriculture thriving? This is how we will be judged.

I also believe that, in doing this, we have brought the country a step nearer to a society animated by social justice, with more enthusiasm, openness and willingness to consider new ideas. It is because this tax is a new idea that I welcome the Budget. I hope that, with his enthusiasm, the Chancellor goes on from strength to strength and sees that we, in our areas, get the jobs, the opportunities on the ground, where people need them.

5.30 p.m.

Mr. Maurice Macmillan (Farnham)

I am very grateful and privileged to be able to congratulate both hon. Members opposite who have made maiden speeches. It is difficult to choose between them for eloquence and sincerity. If the hon. Member for Berwick and East Lothian (Mr. Mackintosh) is a student of political science, he is certainly no mean exponent of the art of political oratory.

I am not quite in the same position as were the two hon. Members, but I should, nevertheless, like to pay tribute to the work of my predecessor as Member for the Farnham Division, Sir Godfrey Nicholson, whose independence of mind was as greatly respected in the House as was his integrity of spirit.

This is the first time that I have spoken from these benches, but it is by no means the first time that I have found something to criticise in successive Budgets. I have frequently been dismayed by the analysis and have disagreed with the proposals which my right hon. Friends have put forward when in government, but this is the first time that I have ever found anything to criticise in the objects of the Budget.

On this occasion I must agree with my hon. Friend the Member for Harrow, Central (Mr. Grant) in saying that this Budget is designed not to deal with the economic situation, but to give the appearance of doing so, to appease our creditors and to delude people generally. It is not so much what is being done or left undone as the manner in which the Chancellor is proposing to carry out his plans that causes concern.

We see this in the new Selective Employment Tax. I do not want to add to what my right hon. and hon. Friends have said about it except to say that in addition to being an interest-free loan to the Treasury, it is an artificial revenue surplus in the last quarter of the year giving a misleading impression of our strength to us here, and abroad. The same criticism can be made of the announcement of the repeal of the surcharge, which was done for the same purpose—to create an artificial temporary reduction of imports now, giving a misleading impression later in the year of improvement in our balance of payments.

None of this would matter so much if it did not betray the Government's reluctance to tackle the main problem which confronts us, that of dealing with production and productivity, and if it did not show an appalling willingness to put our future at risk just for the sake of making the present look better.

This is perhaps shown most of all in the Chancellor's proposal to restrict investment in the overseas sterling area, in the developed countries of the Commonwealth. I found the reasons which he put forward in his speech almost totally unconvincing. Of course, we must all agree that we should not "create unemployment at home", to use his words, "in order to allow capital from this country to pour out overseas". But he put forward an entirely false antithesis and he ignored several vital and important factors. First of all, he ignored the extent to which he has created the difficulty by failing to tackle the problem at home of productivity in manufacturing industry.

Secondly, he ignored a fundamental change in the composition of our current deficit, in the mounting proportion which is due to Government spending overseas. For the first time it has become larger than our total deficit. If we compare 1964 with 1965, we find that the deficit has been reduced by £270 million, but that Government expenditure is still up by £20 million. What is a greater contribution to reducing that deficit than the steady income earned on invisible account?

I wish that the President of the Board of Trade, who made comparison with Dutch figures, had made a comparison between the expenditure overseas by the Dutch Government and that by the United Kingdom Government. I hope, too, that we can get a little greater sense of urgency into dealing with the problem than that implied by the words of the President of the Board of Trade, "I hope that one day we shall be in a position to resume overseas investment". He has a perhaps natural partiality for enhancing the improvement of our balance of trading account rather than for the invisibles.

In his speech the Financial Secretary to the Treasury referred to "the pouring out of capital overseas which we are not earning by current trade". I suggest to him that we have never earned it by current trade and that if investment were linked to our current surplus, the level of investment which is now producing a vast income would not have been achieved. Investment overseas are bringing into the current account £900 million a year. If they had been limited in the way which the Financial Secretary suggests, the figure would have been nearer £400 million and our current deficit would look £500 million worse than it does today.

Mr. Tilney

Would not my hon. Friend agree that not for decades have we balanced our visible trade, but that during two years of Conservative Government, in 1956 and 1958, we did so?

Mr. Macmillan

I am grateful to my hon. Friend. I made a note of that when the President of the Board of Trade was speaking, reflecting that it was only twice that our balance on visible account had been positive and that that had been in years of Conservative Government.

Another point which was not mentioned by the Financial Secretary was the extent of, and the effect of the changes in the overseas sterling area's own position on both current and capital accounts. The hon. Member for Manchester, Cheetham (Mr. Harold Lever), who reinforced his argument, failed to distinguish between the effect of loans and investments in the overseas sterling area, much as I always admire his eloquent and elegant argument. The general argument from the Treasury Bench seems to be that capital outflow must be financed by an equivalent surplus on current account. That is true in the sense that if it is not, there is a reduction in the reserves or an increase in the sterling balances. But despite the argument of the hon. Member for Cheetham, an outflow of capital to the overseas sterling area can be, and in the past to a very large extent has been, financed by increases in overseas sterling balances in London.

As for the effect on the reserves, it is absurd to take one or two years in isolation when the general post-war trend on current account has been for an overall surplus, a surplus amounting in the 13 years, the much-maligned years, of Tory Government to £670 million, including increased Government spending and investment overseas.

Mr. Callaghan

The hon. Member is not meeting the argument. I do not suggest that we must always finance our overseas investment out of a current balance. The weakness of the last 13 years has been that we have borrowed short and lent long. Once we can get out of that difficulty—and that is why I am pressing companies to borrow overseas on a longer-term basis—we can carry on overseas investment. That is the argument which I want him to meet. I want him to tell me why he disagrees with it.

Mr. Macmillan

If the right hon. Gentleman exercises a little more patience. I am about to come to that point.

I was dealing, first of all, with the arguments of the hon. Member for Cheetham, of the Financial Secretary to the Treasury and of the President of the Board of Trade. All of them either said or implied that a current surplus was the main method of financing overseas investment. As a matter of fact there is a good deal of evidence that a current deficit does not greatly affect reserves. It was only twice in the whole series from 1946 to 1963 that an increase in current deficit coincided with a reduction in reserves. I was of the opinion that the whole of the right hon. Gentleman's argument—that the reserves should be rebuilt out of current surplus rather than that investment overseas should be increased—had been rejected by the Radcliffe Committee, which considered that the main reaction would be on sterling balances.

That Committee drew a parallel, in considering restrictions to overseas sterling area investment, with the distribution of the surplus on current account. Unfortunately, what the Radcliffe Committee did not consider—and what the Chancellor has not considered carefully enough—is the effect of this on capital imports. These have become of crucial importance in the composition of the balance of payments.

Considering the sterling area as a whole, it is not only capital movements that they affect, but they also have a considerable effect on net investment income. Naturally, capital imports, in the first instance, replenish the reserves. To the United Kingdom they virtually all come from outside the sterling area—but now in the overseas sterling area also imports of capital are largely, and increasingly, coming from external sources.

In the longer term, once-for-all credit on capital account creates a continuing debit on current account. The record shows that the amount now payable out on investment income is putting a severe strain on our current invisibles. This is happening at a time when Government expenditure is rising, when there is a net deficit on the shipping account and when the "other items" in the accounts are either static or declining. It is only the income from overseas investment—United Kingdom investment overseas—that is providing the funds with which to pay for this mounting rate of interest on capital imports to the sterling area.

The import of capital can have a possible adverse effect on trade balances. Imported capital must, and does, mean some increase in imports of capital goods. It is an official United States estimate that its exports of capital in the post-war period have greatly improved its trade balance. United States firms operating in the United Kingdom are now spending £250 million a year on plant and equipment, although I do not know—and perhaps the Chancellor will tell me—what proportion of that is on imports into the United Kingdom. In view of the importance of capital imports to the balance of the sterling area as a whole, it is extremely undesirable to restrict capital imports because of the need to earn the countervailing interest which they bring in.

The United Kingdom's position is dependent to a very great degree on the overseas sterling area as a whole. In the past, the deficit on current account of the United Kingdom has, in fact, been matched by earnings on current account in the overseas sterling area. Now the overseas sterling area itself is in deficit. What has changed is the vast increase in capital imports into the sterling area.

During the period 1958–63 the United Kingdom had a net surplus on capital account of about £600 million, but the overseas sterling area had a net surplus on capital account of about £1,200 million, so about two-thirds of the capital contribution to the reserves came from the imports of capital, not into the United Kingdom but into the overseas sterling area. Our investment overseas has been financed not out of lending long and borrowing short—because during the period I have mentioned the short-term capital movements had no significant balance whatever; they were self-cancelling, even the heavy 1960 imports were withdrawn the following year. Our investment overseas has been financed by the import of capital into the overseas sterling area, and since the Chancellor of the Exchequer cannot control this, the effect of his present control will be very small indeed.

The evidence is complex and before the Government brought in such a measure, disrupting the entire sterling area's arrangements, a little more care should have been taken to examine these complexities. The result of what the right hon. Gentleman proposes can do very little good to the state of the reserves, but it could do a great deal of harm to the sterling area. Indeed, the action which he proposes is justified, and has only been justified to Parliament, by specious and rather superficial arguments. It is risking a delicate balance and putting our future in jeopardy for the sake of making what is, after all, a statistical balance—the so-called basic deficit—look better for one year. The Chancellor is doing the same thing in other parts of his Budget.

This demonstrates the extent to which the Government are willing to act recklessly for the sake of appearances. It is like a business which, rather than facing the real problems of management, concentrates on presenting the accounts in such a way as to hide its own deficiencies from the shareholders. Unfortunately for the country, the next shareholders' meeting, as it were, from the point of view of the Chancellor of the Exchequer, will take place some time ahead. However, this is no reason why he should be allowed to get away with things meanwhile.

There is little that can be said in favour of the Budget. Even its admitted qualities of boldness and cleverness—which we grant the right hon. Gentleman—fail to redeem its other features. Rather, they make them worse, for not only is this exercise bad in method; it is wrong in objective.

5.47 p.m.

Mr. Hugh Jenkins (Putney)

It would be inappropriate for an hon. Member who came to the House only recently—at the election at which the hon. Member for Farnham (Mr. Maurice Macmillan) left it—to congratulate the hon. Gentleman, because he made his maiden speech more than 10 years ago. Indeed, he made it perfectly clear that he does not regard what he just said as being in any way a maiden speech. His remarks could hardly be described as non-controversial.

I can, however, join the hon. Member for Farnham in one respect, and that is in extending my warmest congratulations to my two hon. Friends who made their maiden speeches today. Those maiden speeches were of such a quality as to rather frighten some of us who have been in the House only a short time longer, though no doubt my hon. Friends who have been here for much longer do not have the same sense almost of inferiority that maiden speeches of such quality place in me.

My hon. Friends made their maiden speeches with confidence and I assure them that it was not misplaced confidence. My two hon. Friends not only spoke with confidence but showed that they are well versed in their subjects. I am sure that we all join the hon. Member for Farnham in extending our warmest congratulations to them and in expressing the hope that we will hear from them on many future occasions.

I wish, first, to make a suggestion to my right hon. Friend the Chancellor, although it was first made in a letter to The Times by a Mr. Brearley, who is, I believe, the Secretary of the Incorporated Society of Musicians. This suggestion may enable my right hon. Friend to increase his income and it should, therefore, be dear to his heart. Will he disallow for tax relief purposes all expenditure by advertisers on pirate radio or television? I hope that he will consult his right hon. Friend the Postmaster-General on the matter.

Why should we bother to make the pirates walk a legislative plank? My right hon. Friend the Postmaster-General seems to have some difficulty in constructing the legislative plank along which they are to walk, so why should we proceed with this apparently laborious task when we could easily starve them out by the addition of a simple Clause to the Finance Bill?

Why cannot we say that this expenditure shall not be allowed? I doubt whether this form of advertising is so valuable that it could survive tax disallowance but, even if it did, my right hon. Friend would at least no longer be subsidising advertisers who, in turn, finance the pirates who are making his right hon. Friend the Postmaster-General look just a little silly. I hope that my right hon. Friend will give careful consideration to this suggestion.

Benjamin Franklin once said that in this world nothing is certain but death and taxation. As taxes go, the Selective Employment Tax is not, in itself, a bad one, in spite of what hon. Members opposite have said about it. But it is not as good as Income Tax—with great respect to an hon. Gentleman opposite who spoke against Income Tax and wanted to get rid of it. Income Tax is extremely fair, which may be why some hon. Members opposite want to get rid of it. Our Income Tax system is extremely sensitive, and it is true to say that it is hard to introduce a sensitive taxation system which is not also complex.

Surtax has no great complication, and I wonder why my right hon. Friend did not think of doing away with the Surtax reliefs granted by the previous Government. It would be better if he were to acquire some additional revenue from this source. A tax on wealth would be better still and might serve to give some semblance of credibility to an incomes policy. All the same, the Selective Employment Tax is a fiscal weapon no Chancellor should be without, and I congratulate my right hon. Friend on his determination to acquire it.

I do not congratulate him on his application of the weapon. He is like a man who has acquired a rapier—or, perhaps, a scalpel—and starts swinging it about like a club at all around him. Some complaint has been made of the differential approach of this tax within a single industry, but I think that that is good. The example given of a differential approach within a single industry was an example of the tax being used selectively, and this is supposed to be that sort of tax.

But why is it that my right hon. Friend has gone wrong in his application of the new tax? I am sure that it is because he has decided to apply it on the absurd basis of the Ministry of Labour's standard industrial classification, which is merely a rough-and-ready statistical guide to employment distribution. Its inaccuracies do not matter too much, because everyone knows that Government statistics, while good enough for broad conclusions, are hopelessly inadequate in detail. But when we use this rough guide as an executive instrument for dividing employment in categories we are bound to make terrible mistakes and inflict serious injustices which do no one any good and which harm not only the sufferers but the Government as well, because if the tax is applied unfairly and unreasonably, it becomes discredited—and the Chancellor with it.

That would be a pity, because I am a fan of my right hon. Friend. I may be at times a critical and encouraging fan, but I am a fan. He has recognised the inadequacy of his list in connection with transport and has made special provision there, and that leads me to hope that he is open to argument about the list, not about the tax in general but about its application.

I should like to give an example from a sphere I know well. What about film production? Does that fall under 499—miscellaneous manufacturing industries, or 111—miscellaneous services? My clear belief is that it is a manufacturing industry and, as such, falls into the premium category, but I should welcome confirmation of my belief.

What about film distribution and exhibition? Equally clearly, this is a service, but does the Chancellor intend to impose a tax on a service that quite recently has been released from Entertainment Duty because it was running down? Film manufacture is separate from distribution and exhibition as food manufacture is separate from food distribution and food retailing. In the latter case they are treated separately but, in the former, production is to be treated as though it were distribution. Surely, this cannot be so. I hope that the Monopolies Commission will soon make it very clear that it does not regard the integration of production and distribution as desirable in the film industry. But would it not be simpler for my right hon. Friend to remove cinema from the service category altogether? I hope that we shall have some such assurance.

What about television production? The heading here refers to television shops and services, to the sale and distribution of television sets, but the instrument the Chancellor has selected is so blunt that it appears also to embrace the production as well as the distribution side of the industry—or does it? Will the Chancellor say whether we will have to amend the Finance Bill, or will that Measure make it clear that only the distributive side of the film, radio and television industry is taxed while the productive side is reimbursed? Many of use would like to know.

What about gramophone recording? The making of a record is clearly a manufacturing process. The record does not always consist of a straight translation of the sound put in by the performer. It is so much added to with echo and reecho that "pop" groups are often compelled to mime to their records because they are entirely unable to reproduce in person the article sold in their name. This is a product in the fullest possible sense of the word, so it is employment in something which, in some of its manifestations, some of us think might well carry an even higher tax than that proposed. It is not distributive, neither is it a service. What is being manufactured is, I think, electrical goods, which will not only pay no tax but will receive a bonus.

I now come to my main point. Will the Chancellor take theatre out of the category of miscellaneous services? It is not a miscellaneous service. I doubt whether it is a service at all—certainly not in the same sense as hairdressing is a service. The audience at a play is not given a service, except from an usherette—and if my right hon. Friend is saying that front-of-the-house staff, who do serve the audience, have to be paid for, I would agree that they are in a service category.

But the man responsible for putting on a play does not distribute it. He produces it. He is a producer. He is called a producer. He makes something. He creates it before us. He does not take a packet of Shakespeare from the shelf and sell it, but presents it as the recreation of the product of a great mind—or, sometimes, the product of several tiny minds. None the less, it is a product, because we absorb it there and then into our hearts and minds. Are the actors, the backstage workers—the electricians and others—engaged in distribution or in carrying out a miscellaneous service? Of course, they are not in either category. They are engaged in a category of employment that is not mentioned in this bulldozer of a list. They are, with the musician, giving a performance, and when the performance is a great one they are engaged in the task of uplifting the human spirit.

Is this employment to be taxed? Is the manufacture of the arts less important than that of explosives so that the first is to be penalised and the second to be rewarded? Is the presentation of a symphony to be equated with carpet beating? What does my right hon. Friend think he is up to? I hope that he will reassure us when he replies. I have some confidence—I will not say confidence, but belief rather—that he will.

My right hon. Friend may tell us that he intends to readjust all this by greater generosity to the Arts Council. That would not do it. The Arts Council itself would be the first to tell my right hon. Friend that much essential and good work goes on without its aid and that even the interval between the imposition of the tax and its return would be fatal to theatres all over the country, most of which are tightly budgeted and run on a shoestring.

To illustrate this, Oldham Rep. exists on grants totalling £6,000 and the tax will amount to nearly £2,000. That theatre might not survive. Glasgow Citizens' Theatre has £47,000 and the tax will be £3,000. Its plans will obviously have to be curtailed. The Royal Shakespeare has received a special grant of £90,000 to enable it to run both at the Aldwych and Stratford, but the tax would cost £30,000. This would have to be replaced at once or the company would collapse, and probably Peter Hall would resign.

What of the other theatres all over the country? I have had letters from some of them. I have had one from Richmond which tells me that the tax will cost £2,665. It gets from the Arts Council £7,000, of which £4,000 is allocated to raising artistes' and staff salaries, leaving £3,000 for production, against £2,000 last year. The effect of the tax will leave a surplus of only £335 this coming year against £2,000 last year. As against rising costs, this will be catastrophic.

The Century Theatre is an even worse case, but, as it is typical of many others, I shall not weary the Committee by giving the details. There is scarcely a theatre which this tax will not hinder, and some it will totally close. This is not only true of the subsidised theatres but also of the unsubsidised theatres. The Joe Collins management was planning to send out four pantomimes at Christmas. With a tax of £2,000, none of those will be able to go out.

Theatres all over the country have been rescued by the Chancellor's left hand operating through the work of my hon. Friend the Parliamentary Secretary to the Ministry of Education. That is a Government measure for which my right hon. Friend is as responsible as any member of the Government. We can see that he is responsible for this generosity, but if he goes ahead with this matter, his right hand will be sweeping together those who can well afford to pay the tax and those who cannot afford to do so into a job lot to have the tax squeezed from them without any selectivity.

Mr. John Hall

The Committee is very interested in the examples given by the hon. Member. Could he go further and say by about how much the average cost of entrance will have to be raised to meet the additional cost of the tax?

Mr. Jenkins

That is difficult to estimate at the moment because the problem in the theatre, particularly in the provinces, is that there arrives a point at which if one increases the cost of entrance one does not necessarily increase revenue. There is a very nice question of judgment in each town as to whether the audience is capable of withstanding an increase in the cost of entrance. I therefore find it impossible to give an accurate answer on that point, but of course it is a serious and important one.

There is no real selectivity in the tax as at present proposed. Why does not the Chancellor take the opportunity to be really selective? Employment in the theatre is difficult and there are other areas into which, if he is to look again at the whole application of this tax, he might give some consideration. Employment is difficult among actors and also generally difficult among older and handicapped persons. Why not exempt them from the tax altogether? That would be a very good encouragement to employers to engage the services of pensioners and disabled, many of whom would like to work if they could get it. Why is not part-time work rated lower than full-time work in this respect?

Above all, if my right hon. Friend does not make the other exceptions which I have suggested, and even if some of them have to wait while, as I hope, the tax becomes more and more selective, let him immediately, without delay, exclude the living theatre so that it can go on living.

Mr. Callaghan

I have been listening to my hon. Friend with sympathy, but not much hope. Will he give judgment on this? Why is it that Mr. Collins, who proposed to send out four pantomines next Christmas, will be stopped by the Selective Employment Tax at a rate which cannot be more than 4 per cent. or 5 per cent. on wage costs? How has he managed to absorb wage costs in the past when they were a far greater amount?

Mr. Jenkins

The commercial theatre in the provinces, as distinct from the general theatre, has been in decline for many years. At the moment it is still hanging on, and hanging on by the skin of its teeth. What my right hon. Friend proposes to do now is to remove the skin from its teeth.

6.7 p.m.

Mr. David Howell (Guildford)

I am grateful to you, Dr. Broughton, for my good fortune in catching your eye, and I ask the indulgence of the Committee as this is the first time I have spoken in this place. Many hon. Members will remember with affection my predecessor, Sir Richard Nugent, a wise, just and fair man. I believe I shall have the support of hon. Members on both sides of the Committee in saying that we wish him well in his future work outside this House.

I do not propose to take the Committee on a conducted tour of my constituency. But I would just say this. In a sense, the problems we face in my constituency are a microcosm of the problems which the country as a whole faces. Half choked by traffic, hard pressed by demands for more housing, more schools and considerable pressure of population on all sides, preparing for a new university, we certainly do not lack any new ideas or bold approaches to meet these challenges. But what we in Guildford do lack, as do many communities elsewhere, are the resources to implement the ideas and a prospect of steady growth in those resources in the future.

No, it needs no theoretician to tell us in Guildford that behind the problem of resources lies the central problem of the need for a very rapid rise in productivity. I do not mean the kind of very modest rise which we have had in the last year nor the equally modest rise envisaged in the former five-year National Plan—now the one-year rolling plan. Hon. Members must know in their hearts that, however successful a prices and incomes policy is, in future earnings will rise at substantially rapid rates. That is right because we want to get away from the old low-wage economy. But the only way to absorb substantial percentage increases in wages is by very substantial increases in productivity. That is the way in which other industrial countres have done it and the only way in which we in this country can do it.

Against this perhaps rather commonsense and obvious background, I must confess that as a newcomer here I have found myself a little bewildered by the Budget. One would have thought that, as the desperate need for a really rapid increase in productivity is the central aim, the whole long-term strategy of the Budget would have been directed to this end and would have been aimed at providing an impetus to the input of intellect, imagination and vigour which are the raw materials of high productivity in an economy like ours.

It is very difficult as a newcomer to see from the Budget that this has been the end. In a sense, if the Selective Employment Tax has been the prima donna of the Budget, productivity has been its Cinderella. It is true that the Selective Employment Tax is a very ingenious, if a little heartless, device for withdrawing substantial purchasing power from the economy and widening the tax base. As a device for making 1967 virtually a year of stop—an objective which I view with increasing unease—I have no doubt that it will be devastatingly effective.

But will it really have the desired effect on productive capacity? Will it really increase the inducements to manufacturers to put in more capital intensive equipment? I doubt very much whether it will. This afternoon I was heartened when the Chancellor intervened and indicated that he, too, did not see this as the main case for his Selective Employment Tax. What the Chancellor will have to realise, and what other hon. Members will have to accept, is that if we wish to get any mileage in terms of higher productivity out of this kind of fiscal vehicle it will have to become, not a Selective Employment Tax, but a general employment tax, bound with drawbacks in some cases.

Even then, we must be careful about imagining that this kind of fiscal manoeuvring can have a decisive influence on business investment decisions. I am not sure that it can. I know that in theory it is possible to argue that moves of this kind will increase productive investment and bring about labour saving. In fact I am convinced that at this stage the main stimulus to productivity must be the stimulus of giving incentives to those whose minds are going to produce the new ideas, those with the imagination, new work methods and inclination to work out new work processes, who are in the firms and who are ready to do the job. If we ignore them and their readiness to undertake this work, we ignore the heart problem of productivity.

Against this background I should like to state two initiatives which I believe it would have been useful for the Chancellor of the Exchequer to have included in the Budget and which would have firmly shown that was allying himself to the central problem of the drive for higher productivity.

First and foremost, if the Chancellor had made the Selective Employment Tax a general employment tax, even at a lower rate than that which he proposes, then for the first time he would have been in a position about which Chancellor's dream. He would have been in a position to have made a substantial cut in Income Tax right across the range and to have produced powerful new earning incentives at every level of the economy. However much lecturing there may be, however many speeches there may be, however many warnings there may be, and however much planning may get done, we are now at the stage in our economic development where the spark will only come from incentives and substantial cuts of this kind.

That is the first point. That would have been the chance to have given inspiration—because that is what is missing in the whole of this economic strategy—to those who are waiting for it and who are ready to get on to the job of moving us into a higher productivity situation.

The second point is that there was an opportunity, and still is, for the Chancellor to have taken a lead in the drive for productivity in the Administration itself. It strikes me as a little bizarre as a newcomer here that the Chancellor should tell the Committee very little about the goals he is setting for savings and economies in Departments within the Administration. Presumably these goals have been set and presumably it will be possible to judge whether they are to be achieved within the different Government Departments. However, it would have been interesting if these had been laid before the Committee so that we too could have judged progress in economy, in cost cutting, and in saving waste, in Government Departments; because this, too, is a central part of the drive for productivity.

If these two proposals alone had been emphasised in the Budget, it would have been possible to have said that this was a Budge: based on a determination and a real enthusiasm to accelerate productivity very sharply and not merely by modest amounts, rather than a Budget based on rather hair-raisingly vague hopes and fears. Until this country has an Administration which is really ready to grasp the central point of the need for incentives, we shall limp along with the very modest productivity targets of the kind outlined in the one-year rolling plan from the Department of Economic Affairs. But when the country has an Administration which grasps this central point, then I believe that the opportunities for this country will be boundless and that the way will at least be open for the British economic miracle which the whole Committee wants to see and of which we are truly capable.

6.15 p.m.

Mr. William Molloy (Ealing North)

I am indeed privileged to be able to offer to the hon. Member for Guildford (Mr. David Howell) the congratulations of the Committee on an admirable maiden speech. We have had several admirable maiden speeches today. Well into the category of the par excellence of previous maiden speeches comes the speech made by the hon. Gentleman. I am sure that the Committee found what he had to say interesting. As time goes on, I feel sure that we shall learn that his subsequent contributions will be equally interesting.

All the maiden speakers this afternoon seem to have been concerned with the economic situation, with the need for industrial progress, with the need for a revaluation of exactly where we are going. This arises from the experience of candidates who have been slogging away in constituencies, because it is probably true to say that much more can be learned in nursing constituencies than can sometimes be learned here. We have had evidence of this point this afternoon from both sides of the Committee. I hope that the Front Bench speakers on both sides will pay true regard to some of the maiden speeches we have heard today and not merely play the good-natured and good-mannered rôle of having to be present because a particular new Member happens to be on his feet. What we have heard said in the maiden speeches on both sides today has been very refreshing and could do all of us the world of good.

I always judge the quality of the Budget of a Labour Chancellor of the Exchequer by noting the reaction of the Tory Party. If the Tories go blind, stark raving mad, I know that the Chancellor has produced a very good Socialist Budget. If it is compounded of social justice, and industrial progress, and outlines a route for decent behaviour, for fair shares, for building a good society, which is all part of what a Socialist Budget should be, then this usually causes great annoyance on the benches opposite, and it is therefore a very good Budget.

On this score my right hon. Friend has not done too badly. The antagonism and fury we have heard from hon. Members opposite, particularly from the Opposition Front Bench, have been a little phoney. The Opposition have been placed in a tricky position. After all, it is their duty to oppose. They were not much of a Government when they held the reins. They are now proving that they are not much of an Opposition either. Therefore, they have been at great pains to try to discover how they can destroy the image the Chancellor has already built up for himself and for the Government in the presentation of this Budget.

The Opposition have fallen into a trap. I do not think that the Chancellor laid it for them, but nevertheless they have fallen into it. The entire tenor of their speeches is that we—that is they—are terribly afraid that the great crime of this Budget is that it will be successful. That is the real reason why they are anxious—they fear that the Budget will be successful. That is what is causing their annoyance.

I did not hear all of the speech made by the right hon. Member for Enfield, West (Mr. Iain Macleod). I will pay him this compliment. I always endeavour to get into the Chamber when I know he is speaking. When I read his speech during the weekend, I found that he was very concerned about a rise in prices in garages for maintenance of cars. Considering that the right hon. Gentleman is one of those sometimes described as "top flight politicians", that outlook seems a very dramatic demotion but he nevertheless sank to it. Apparently the whole British economy is to collapse because of increased prices in the repair of a couple of punctures. But the only thing punctured is the reputation of the right hon. Gentleman.

From one hon. Member we heard a Freudian slip. In advancing quite a number of reasonable ideas about the Budget, he praised my right hon. Friend the Chancellor of the Exchequer by saying that, whilst my right hon. Friend had endeavoured to get out of the old, stale way—away from the old drift—he had not wholly succeeded. It was a backhanded compliment from a Conservative back bencher. He was saying, in effect, that my right hon. Friend was making an effort to get out of the old disastrous Tory routine but had not succeeded yet in getting into a brand new routine which would succeed in getting the country out of its malaise.

Part of that malaise was demonstrated clearly today by the hon. Member for Worcester (Mr. Peter Walker) who, in all seriousness, referred to an industry having 500 administrators and 400 workers. One can understand, in these circumstances, why, after 13 years of Tory rule, the Royal Navy ended up with one admiral for every ship and a half. It is this attitude of right hon. and hon. Members opposite that has caused the trouble we are in.

Right hon. and hon. Members opposite have never had a genuine concern for those who actually work with their hands and brains. They have never had time to understand the ideals of the artificer, the carpenter, the joiner, the electrician and the fitter—all the sort of people who really count. To hon. Members opposite, it is only their "pals" in the City who count. But if these people were to vanish overnight the country would still carry on. If plumbers and miners, however, for some disastrous reason were to vanish overnight, we know what a terrible mess we would be in.

I think that both sides of this Committee acknowledge these facts—but I am bound to say that some of my right hon. Friends still have the lesson to learn, and the sooner and the quicker they learn it the better Socialists they will be and the quicker we will get a better nation. We all agree—even hon. Members opposite, secretly in their hearts, believe this as well—that the Budget was an effort to break away from the dreary routine of deflation and to try and reshape our economy. I welcome the new Selective Employment Tax because it is something new which attempts to share the responsibility of taxation.

Of course, this is one of the bad aspects of the Budget to right hon. and hon. Members opposite. They were used to Budgets encouraging dashing young men on 500 "quid" a week in the City who, if they were not given the opportunity to be dashing, went elsewhere. But this Budget is different. It follows the principle of fair shares and good social behaviour. This is part of the psychological effect of the S.E.T. It will be a spur to efficiency.

No doubt, before long, we shall see an increase in the number of self-service grocery shops. The tax will compel many old-fashioned types of grocers to modernise. It will also assist the computer industry. The good business man, if he is not to pay out money for staff he does not really want, will avoid this by installing a computer or some other efficient machinery. I believe that, in these circumstances, the success of my right hon. Friend's proposals is more or less assured.

From 1951, right hon. Gentlemen opposite attempted to reduce investment and while this has not retarded the growth of productivity—one must acknowledge that it has grown—old-fashioned ideas have shackled industry, holding it back. The S.E.T. will help to put this right. But it is insufficiently discriminating. I am somewhat concerned about its application to the building trade. My right hon. Friend should listen carefully to recommendations from this side, because they are made in a spirit which we hope will be to the advantage of a large majority of people and not the little section that the Opposition have in mind.

Mr. Iain Macleod (Enfield, West)

Rubbish.

Mr. Molloy

It is no good the right hon. Gentleman saying "Rubbish". We are not discussing what is between his ears.

I want my right hon. Friend to look at the possibility of being more discriminating within the building trade. For instance, a firm may be building a hospital or a school or something else that will be part of the social furniture of the nation, among other projects. He should consider allowing rebate of the tax for that project while allowing no such rebate on a project which is not particularly useful, such as a bowling alley or a gambling casino under contract to the same firm.

Again, an employer in a manufacturing industry will, in effect, be getting a subsidy per employee irrespective of whether the firm is contributing to exports or is merely supplying the home market. It may be that there should be differentiation between firms exporting and those which do not. This argument has been advanced by hon. Members opposite and I have some sympathy with it. However, the fact remains that, if this sort of subsidy is to be given to manufacturing industries involved in exports, it should assist them in making their prices keener as compared with overseas competitors. I am convinced that many of our manufacturers will be seized of this and will try to apply it. I hope they do.

The other aspect of which we should take note is the effect of the tax on house building and any form of social building. This gives us concern on both sides of the Committee. I hope that my right hon. Friends the Chancellor of the Exchequer and the Minister of Housing and Local Government will be able to see to it that the tax in no way impairs the rate of progress in house building, whether privately or by local authorities.

It is a grim tragedy that in Great Britain in 1966 the ordinary man in the street should regard it as a massive privilege to be able to afford to buy his own little home. It is a disgraceful commentary on a great nation that we have yet to see the overwhelming majority of our fellow citizens decently housed, and until we can say that, we should all be concerned.

I do not mind whether it is done by council building or private building. In the forefront of all Budgets should be the need to provide aid to the average citizen to buy his own home. I agree with the philosophy of the late Aneurin Bevan who said he was in favour of every family in the country owning its own home—and no one else's. When we have reached that situation, we shall be getting somewhere.

Towards the end of his Budget statement, my right hon. Friend said that the Government would use all the means at their disposal to ensure that during the next five years the longstanding balance of payments problem was finally overcome. I am sure that we should all like that to happen. He said that the centre of his philosophy was the Triple Objective—the strong £, full employment and growing industrial strength. He will not achieve that Triple Crown—Rugby enthusiasts from Wales will forgive that description—unless there is a dramatic reappraisal of the nation's enormous burden of defence. All the clever stunts and all the economists in the world will not solve the problem until we in the House of Commons decide to face realities and to do something drastic about the arms budget. Unless we have the courage to do so, we shall be letting down the nation.

This is no longer a matter between the Tory Party and the Labour Party. I cannot imagine any sensible person, knowing what is involved, who would say that he wanted to keep an enormous defence budget simply because the other party did not. It is time that we dropped that silly attitude. I admit that the problem is enormous, but arms expenditure must be reduced, because it is that expenditure which lies at the root of the nation's trouble. We must also have a reappraisal of our policies in other parts of the world.

It is not fair to blame the Chancellor of the Exchequer for this burden, for we inherited it. However, the Government have not done much about trying to resolve it, and unless they do the Triple Objective will remain a myth. What is more, the position may become dangerous in that a clever tax such as the Selective Employment Tax may aid and abet defence industries and so contribute towards strangling us, and in the end all the good intentions of the Budget will be brought to nought.

I hope that my hon. and learned Friend the Financial Secretary will use all his influence with those members of the Government who are now absent from the Front Bench so that the country can lead the world on the road back to sanity. I am all for being loyal to the Alliance and to allies and being blunt and forthright with allies, because loyalty does not mean being sycophantic. But the first thing we need to do is to get off the treadmill of disaster which is involved in defence expenditure. We must demonstrate a lead and not merely talk about it, so that we cut the enormous and ridiculous responsibilities which we now have, and get sanity back on the agenda in a practical way so that the rest of the world can follow.

6.35 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I do not propose to comment on the remarks of the hon. Member for Ealing, North (Mr. Molloy) about aspects of the Selective Employment Tax. He amused me by speaking attractively about the tax and nominally supporting it and then picking every hole in it which he could find. I am sad only that he lacked the political courage to draw the correct conclusion that not only should the tax be amended in the many, many ways which he suggested, but be extended to many people now outside its scope.

I want to speak about inflation. I ask the Government whether they intend and wish to stop or at least limit inflation; whether they are unable to stop it, or do not wish to do so. The record is depressing. The rate of inflation in the first Socialist Government after the war was twice what it was in the 13 golden years of Tory rule. The moment the Socialists were back in again, it bumped up again to 5 per cent. a year, two or three times the rate which we had during the 13 golden years.

Who benefits from inflation? In a situation such as that of last year, when wages rose by 9 per cent. and costs by 5 per cent., it is clearly the wage earner. He gets 9 per cent. more in wages, although he has to spend 5 per cent. more in increased costs. It was he who voted for the Labour Party opposite in such overwhelming numbers. I do not believe that his wife voted Socialist in nearly such large numbers, because, although the husbands got 9 per cent. more earnings, the wives had to pay the 5 per cent. increase in prices, and husbands are not always quite so good at passing on their increases as they might be.

Mr. Molloy

It is a rather dramatic thing to say that the majority of working men in this country cheat their wives. What evidence has the hon. Gentleman of that?

Mr. Ridley

The hon. Gentleman will see the evidence after another year or two of Socialist inflation, when the by-elections begin to come up.

The Government have boasted of the over-full employment position, but they have shown no concern about the rise in prices which has occurred under their administration. I have yet to hear a Minister express regret, or even shed crocodile tears, about rising prices. There is no evidence that the Government mind about it and in the Triple Objective—the Triple Crown, as the hon. Gentleman called it—there was not one mention of inflation, as my right hon. Friends have already pointed out. It is in that light that I want briefly to consider the Budget.

The Chancellor of the Exchequer has budgeted for a surplus of £1,047 million. When one sees that he is lending £1,334 million in capital, principally to nationalise industries and local authorities one realises that £287 million has to be borrowed. However, the Government cannot borrow. The Government have no credit at all. Last year, they failed to borrow anything at all and they will not borrow anything this year. That £287 million borrowing requirement is actually deficit in terms of the Budget. If they cannot borrow this money the only thing which they can do is to print more money or borrow it abroad. This Budget is not in surplus, it is in deficit.

Last year the Government had £576 million net borrowing requirements, according to the Financial Statement which we have today. They met this by an increase in the floating debt of £409 million and £680 million of interest free notes from the International Monetary Fund. This is £1,100 million worth of borrowed money to meet the lending long of the Government to the public sector. The Chancellor talked about borrowing short and lending long—here is a real example. The net dis-saving in gilt-edged, in Government securities, last year was £267 million. If that same thing happens this year we will probably have a Budget deficit of £500 million.

What we are doing is lending more and more year by year. The increase in loans in capital for the nationalised industries and local authorities has risen over the last ten years from £505 million in 1965 to £1,270 million in this year's estimates, which is an increase of well over twice as much. Yet the Government's credit is diminishing. We have a situation where a Budget has been produced which is highly inflationary. If the Government were able to do something to improve investment, in gilt-edged, or National Savings, then this situation would be reversed and we would get more money in on the capital side of the account to cover capital expenditure.

This brings me to the importance of the interest rate policy and the fact that the Government have not increased the rate which they are prepared to offer for savings and subscriptions to bonds of all kinds. This has meant that people have had to be taxed to the tune of another £1,000 million more than they would necessarily have had to be taxed. If the Government could have borrowed this sum, we would not have had to pay it in tax, and the result of this doctrinaire approach against the interest rate weapon is that we all have to suffer through higher taxation.

We must conclude that the Socialists are the party of high taxation and that they are the party of inflation. Before we inflate, entering into this golden era of Socialism, just after the election, before we begin this inflationary move, let us think a little about those who will suffer. As the Prime Minister said in an election broadcast on television: Because we are all members, one and another, in this great national family, we should make provision together as a family for the hardships and difficulties of any member of that family. Who are they, the people who will suffer—who are the members of this family? They are the pensioners whose increase will be whittled away by inflation. They are the civil pensioners, the overseas pensioners, the Service pensioners, to all of whom pledges were given and broken in the last Parliament. They have suffered more than any other section of the community and are becoming the new poor and the new abused in the society which hon. Gentlemen opposite are creating.

Those on annuities and small fixed incomes, railway superannuitants, and all sorts of people who are not in the position of being able to increase their income by means of industrial action or any other threat will be hurt unless the Government are prepared to face up to the consequences of inflation.

I make no apology for mentioning in addition the managerial group, the better off people, drawing sometimes up into the region where Surtax starts. These people will not just suffer, they will go away. As inflation occurs the rate at which taxes begin to bite gets lower and lower with each year that inflation rises.

The hon. Member for Putney (Mr. Hugh Jenkins), who has left the Chamber, mentioned Surtax. My right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) dealt with Surtax in 1962. But it had been untouched for about 30 years and during that period money had devaluated by three or four times, so that the starting levels of that tax had become three or four times more severe than before. When one has a progressive tax, like Income Tax or Surtax, and has inflation going at 5 per cent. for four or five years, the effect will be to produce a tax bearing much more harshly on the incomes we are considering.

This is the best recipe for a brain drain. We must protect all parts of the population. The days when we were preoccupied with only one sector, the wage earner, are no longer applicable. We must devise machinery, if we are to inflate, so that the levels of tax are raised progressively each year, and the levels of pension are raised equably with inflation.

We must also protect capital. It is quite wrong to allow the savings of people to be eaten into by Capital Gains Tax. Capital Gains Tax should not cover the increment in capital values due to the inflation of the currency by such policies.

It is no good trying to shuffle all of this on to the Prices and Incomes Board. It is very difficult for the First Secretary to try to make his policy work. In running away from deflation the Government have decided to put in its place the incomes policy. When we on this side of of the Committee complain that inflation is hurting people the Government say, "Ah, if you only make the incomes policy work it will be all right." Apart from the fact that a year and a half has gone by, during which time great damage has been done, the incomes policy does not provide a wide enough weapon for defending us from the effects of inflation.

The First Secretary reminds me of Icarus, who, to escape from King Minos, tied a mass of feathers and string on to his arms and cemented them with wax and tried to fly away. To escape from deflation the First Secretary has tied this bundle of boards and declarations of intent, committees and all the rest on to his arms. But the overheating of the economy will melt the wax, as the sun melted the wax on the feathers of Icarus. The First Secretary will fall into the sea and loud will be the splash, and many people will be drowned or seriously wetted by the big waves that will come up.

The Socialist Party attacked the incomes policy of the last Government because they said it was not fair. I attack this Government's incomes policy, together with this Budget, because I do not believe that it is fair either. The Government must either raise interest rates or taxation to balance their Budget properly, with the intention of stopping inflation. Alternatively they must make annual reviews of all those sorts and classes of people, from the very poorest up to the better off, who are to be seriously affected by the annual inflation of the currency. There is no other fair way of dealing with this. Either one faces up to the problem of rising prices or one tries to protect all those who suffer from its effect.

If we inflate at the rate of 5 per cent. every year, we will do so at a faster rate than our competitors overseas and after a certain number of years our currency will be worth less than the currency of our competitors, and it will become progressively more difficult to export and earn a balance of payments surplus on visible trade. Therefore, in the end, we shall be forced to revalue our currency in relation to other people's currency. That is all right provided we face the need to do it and understand that it will come about from time to time.

The Conservative Party prefers to try to maintain a much more stable level of prices so that we cut out the need to have annual reviews for all those who are hurt and cut out the need to have annual revaluations. The serious charge which I bring against the Chancellor's Budget is that he has not thought through the consequences of a policy of deliberate inflation to the point where he is prepared to take the necessary action to make sure that it is stopped.

6.51 p.m.

Mr. E. Rowlands (Cardiff, North)

I am sorry to inflict another maiden speech on the Committee, especially as we have had so many today. I promise to be brief and to the point, because in the short time that I have been here I have become a convert to the desirability of five- or ten-minute speeches by backbench Members.

I represent one-third of the capital city of Wales, but I am the only back-bench Member to represent a constituency in Cardiff. It has a proud history of representation in the House, but it has had no reason in the past to be prouder than it is today, when two of its representatives hold high office in the Government. One of them is the Minister of State for Wales and the other the Chancellor of the Exchequer, the author of the Budget. I have a special interest in the activities of the Chancellor of the Exchequer, because he is my own Member of Parliament. I have to ask him to deal with my personal tax problems as well as those of the nation. I also have a special interest in him because I voted for him at the last election.

I have onerous duties as the Member for Cardiff, North, not merely to represent the many good people who elected me and even those who did not, but because at least three Members—possibly four; another might be moving into the area—live in my constituency. I have to take care of their personal problems and handle any difficulties which they may face in the constituency.

From that, hon. Members will gather that Cardiff, North is the residential part of Cardiff. The chief problems are housing, the high price of housing, the price which has to be paid for building land, dear mortgages and high rates. In particular, the leasehold question has been a burning problem, particularly in South Wales, but all over the country, for so long. I am sure that we shall have the opportunity to discuss these matters in future and, therefore, I do not wish to do more than welcome the proposal concerning the leasehold reform Bill, which, I think, will be greeted with considerable joy in Cardiff and South Wales.

Cardiff is the capital of a nation and is at the heart of one of the major industrial regions of the country. We have heard many new Members like myself speaking during this debate and during the debate on the Queen's Speech about the problems of the regions. It is particularly relevant to this discussion on the economic situation that we should mention regional economic problems. South Wales is, in miniature, representative of many of the difficulties, anxieties and hopes which face the British economy. We have, for example, the problem of modernisation. We have to replace old and declining industries. We want new and diversified industries to take their place.

In South Wales there are concentrated pockets of unemployment which need immediate alleviation. We need a better equipped and faster system of communication with other parts of the country. There have already been improvements in some of these respects as a result of the intensification of regional policies introduced by the Government since they came to power in 1964. But they are at the moment only a successful holding operation. There is still need for essential growth points, not merely to handle the temporary social problems facing South Wales, but to put the Welsh economy on a sound footing for the future.

The potentiality of South Wales should be heard in every house in the country. Many people in the Home Counties might go to South Wales if industry were to move there, but many people who live in the Home Counties have a false impression about what it is like to live in South Wales. Firms and companies do not understand or appreciate the potentiality and possibilities of South Wales. It has an excellent labour force. It has improved communications with the Midlands and London. Now we have the development of the Severn Bridge which will link Wales with the West Country. There is access through its ports to the markets of Europe and beyond. All this makes it more frustrating for people in South Wales to see its potentiality not being used or developed to its fullest extent.

I do not want to make a further plea for South Wales—I am sure that we shall have the chance to discuss the matter when the Industrial Development Bill comes before the House—but it is vitally important that we should get large-scale industrial units to develop and expand the economy of South Wales. When in the past many parts of Britain have prospered there have been occasions when South Wales has not shared this prosperity to the full.

I should like to return to Westminster and discuss the Budget. My right hon. Friend the Chancellor put the Budget in its true perspective when he said it was just one part of the Government's economic programme, just one day in the life of the Government tackling our basic economic problems. But for me it was a very exciting day. It was the first Budget that I had heard and I was grateful for the opportunity of being able to hear it at such a young age.

I enjoyed the very concise history of Budgets which we heard from the hon. Lady the Member for Finchley (Mrs. Thatcher). My political experience does not allow me to remember the two Budgets of 1955—perhaps fortunately so. I barely remember those of 1957 and 1958. But I remember vividly—because this was the time when I became politically conscious—the Budget of 1961. I do not want to open old arguments on this matter, but in 1961 we had the biggest deflationary package in our economic history—10 per cent. increase in Purchase Tax, 7 per cent. Bank Rate and a fierce attack on spending.

I refer to that matter because we read in the Press a week ago, before we heard the Budget, that we were in for the same package. If the Press had had their way, this was what we would have had. There was a deflation lobby which supported a large increase in the pool of unemployment to take the steam out of the economy. It was, therefore, with double pleasure that I heard the Budget. My right hon. Friend should be congratulated on the way in which he resisted the temptation to follow previous courses and tried to seek new methods of dealing with the situation.

It is true that idle hands have not yet produced one dollar's worth of exports. It has been clear over the last 15 years that we have needed new instruments of control of our fiscal policy. Too often over the last 15 years have we had a series of stock responses to a series of surprising recurring situations, The last 15 years of our financial history have been fairly monotonous and unsuccessful.

We should congratulate the Chancellor on the way in which he has tried to adopt a novel approach to the questions facing him. Last year he introduced the Corporation Tax, and this year the Selective Employment Tax. However, he misled the Committee when he claimed, as everybody else has claimed, that the Selective Employment Tax is a new tax. It is a very dangerous thing to say, because those, like myself, who search through the history books, might find an antecedent or predecessor which invalidates the claim of originality. Alas, in my searches, I found that the Chancellor is not the first man to introduce a Selective Employment Tax.

The Chancellor's tax has a very noble, if not quite as worthy, origin in Lord North's tax on services in 1777. That was a tax on manservants. I mention this to show my right hon. Friend that there are some interesting similarities between his present tax and the original one. I do not know whether he had the original tax in mind.

The first comparison that might well be made with the original tax is that Lord North distinguished between what he called people employed in luxuries, such as gamekeeping, and those employed in manufacturing. Those employed in manufacturing were exempt from the tax. I have been surprised to hear hon. Members opposite refer to this distinction as a typical Socialist measure to distinguish between services and manufacturing, but I should have thought that Lord North was the last person who would be called a typical Socialist.

The original tax underwent a large number of amendments, which might please hon. Members opposite. One of the most important amendments was to exempt people working in husbandry and agriculture, which is something for which hon. Members opposite have been pressing. At the same time, I have to tell them that the tax lasted a long time and proved to be quite lucrative.

I have listened with sympathy to the pleading for relief for arts centres and theatres. There are a number of examples of exemptions which one could claim. I would like my right hon. Friend the Chancellor to consider exempting women part-timers. I would like the tax to discriminate in favour of the regions, and I would like my right hon. Friend to discriminate in favour of manufacturing industries which provide exports.

All the suggestions, however, which we have heard, from both sides of the Committee, are strangely, a tribute to the tax itself. They show that it is capable of great flexibility and can become more sophisticated as time goes by. It is, however, essential that my right hon. Friend should provide the framework of the tax and get it going.

The tax is just one other useful addition to the increasing armoury of new economic and fiscal weapons for the Government to tackle Britain's economic problems. It is a continuation of the process which we promised the electorate in 1964 and again this year. We promised the people a radical analysis of the economic problems and that we would forge the weapons with which to tackle them.

This tax is part of those weapons alongside, for example, the Prices and Incomes Board, the Industrial Reorganisation Corporation, the investment incentives and regional economic councils. All these add up to an impressive programme of reform. As a young person who is keen on expansion, I suggest that we need both these methods and others to tackle our problems and to build up the tough-centred economy that we all want.

I would like the Prices and Incomes Board, for example, to extend its scope. It should not only deal with prices and incomes, or even, as some hon. Members suggest, concern itself with productivity, but it should also concern itself with equality. One of the interesting byproducts of the Prices and Incomes Board is an interesting insight into the structure and payment of wages and incomes. It is beginning to show great discrepancies and to publicise the inequality which still exists in our pay and income structure.

I would like to see the Prices and Income Board have a new and important rôle. If there are to be vast price increases, the Board will have an important task in holding down and preventing the worst form of increases which might come from such incitement as we have seen during the last few days in the Press, almost encouraging a rise in prices because of this tax.

Any economic measure inevitably leads to social change, which sometimes can be painful and needs to be helped. In particular, it has been noticeable that references to greater mobility of labour come glibly off our tongues during this debate without realisation in some cases of the full consequences of what these measures involve. In South Wales, for example, they could mean breaking up long-held family ties with communities and, in some instances, the selling of houses in areas where property values are falling and moving to areas where they are rocketing. It is important to remember these things and the need for greater redundancy payments and improved retraining programme which is still woefully inadequate.

It is important to remember the inequalities which still exist in society—for example, to compare the copper handshake for a miner after long service in the mines to the golden handshake on the ending of a short-term contract of a director. It is important to look into the question of giving loans and grants to help people who do not receive this assistance to enable them to move from one part of the country to another, if they have to do so for the sake of their job, and to help them in house purchase and to compensate for these moves. These benefits have been extended to many of the professional classes. It is important now to extend them to all.

This inequality of treatment which still exists between groups within our society is the basic cause of the division within society. It is a division which we are trying to put right in secondary education. It is a division on the workshop floor between management and worker, between the staff status of some and the industrial status of others. It is a basic cause of many restrictive practices and the mutual distrust which is shared on both sides of industry.

Here is a chance for the Government, not, as hon. Members opposite say we should, in industrial relations, to set an example in, say, a new industry over which we will have control, such as the steel industry, to promote healthy industrial democracy that young people like myself hope to see as the future pattern in industrial relations.

I am sorry that I have taken so long—I did not intend to spend even 10 minutes—to describe my initial hopes of this Government and this Parliament. Cynics will tell me that with age I will grow disillusioned, but if this Budget is anything to go by I think that we will confound them.

7.7 p.m.

Mr. John Tilney (Liverpool, Wavertree)

As a representative of the city that likes to consider itself the capital of North Wales, I should like to be the first to congratulate the hon. Member for Cardiff, North (Mr. E. Rowlands). His predecessor, Mr. Donald Box, often took part in these debates and his contributions were listened to with great care on both sides of the Committee. I hope, and I am sure that both sides of the Committee hope, too, that the felicitous phrases of the hon. Member for Cardiff, North, with his national intonation, not always noted for brevity, will be heard frequently in our debates.

I was in agreement with what the hon. Member said about regional government. I believe, although I do not expect my colleagues on this side to agree with me, that we need regional government, not only in Stormont, but in Edinburgh, Cardiff and regions such as the North-West. I also agreed with what the hon. Member said about idle hands never creating exports. But neither do machines that are ill-used, and to this I should like now to turn.

The Chancellor of the Exchequer and the Financial Secretary naturally support a £ which is strong, employment which is full and prices which are stable. That is the aim of every Government, and I personally believe that a payroll tax is a good thing. I only regret that my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd), when he took powers to bring one in, did not implement those powers.

However, I, like my hon. Friend the Member for Guildford (Mr. David Howell), who made a brilliant maiden speech, would have liked to have seen the tax all embracing and not discrimatory. As it is, this tax is not really an incentive to save labour; it is almost an incentive to waste it. Consultants and scientists who are badly needed, and who are offered great salaries in America and elsewhere, are to be taxed. Labour intensive industries are to receive a premium.

There are certain questions which the Financial Secretary should be asking himself. Why is it that in the United States of America the building industry worker works about 35 hours a week and is paid 39s. an hour if he is a craftsman and 32s. an hour if he is a labourer, four times what is paid in the United Kingdom, and yet there is very little difference between the costs of building in this country and the costs of building in America? That seems almost an argument for a discriminatory tax on building. But why, then, put a premium on labour in the steel industry when nearly three men are employed in this country to make a ton of steel and only about one man in the United States of America?

The trouble with this Budget is that there is no method in it of reducing costs. It is much more likely that costs will go the other way. A printer said to a friend of mine last week, "I didn't know, gov'-nor, until the Budget that I was worth an extra 7s. 6d. a week to you. We had better go fifty-fifty." That is the sort of line which, I believe, will be taken in many industries. The Government have not used their great buying powers to make industry modernise itself or do with less labour.

I admire the effort to get away from stop-go policies, but the Chancellor has fallen in to the error of thinking that to make things is good but to sell them is bad. I wonder what the Swiss would feel if there were a discriminatory tax against their bankers. The trouble with the Chancellor of the Exchequer is that he is always dreaming that the gnomes of London are burrowing in his financial bed.

One must accept that invisibles can flourish only when the £ is strong. In the past the £ has been strong because we have been the great exporting nation. We are so no longer. We are up against mammoth competition in many countries of the world, and I believe that the Committee should consider how we are to sell abroad what we make. I am not at all sure that the President of the Board of Trade or his Ministry even know. It is not a question of Whitehall not knowing best: they do not even know how exports are sold, judging from this letter sent to every Member of Parliament on 4th May: The actual business of producing goods and selling hem overseas rests with industry. That is not true. I must declare an interest in being a director of a company which sells British exports throughout West Africa. No manufacturing company, except a major large industry like I.C.I., has a sales service set up overseas. It would be far too expensive and uneconomic to do so. Exports go through an exporting agent or merchant house—called by many different names. This applies just as much to Asia as it does to Africa. Those houses represent many manufacturers here and elsewhere, and those houses have got to attend to the preparations for shipment, the shipping of the exports, insurance, selling, and collection in cash of what those exports are worth, long after the manufacturer here, allowing for credit, has been paid for his product. It would, I believe, be much more sensible to split the export rebate of 1 or 3 per cent. fifty-fifty as some enlightened manufacturers do between the manufacturer and the export house.

The export house has to follow up sales, has to provide after-sales service; it has got to take risks which are not covered by E.C.G.D.; it has got to provide a network of overseas sales, and experts in the overseas country and to undertake market research. Without the experience of these people there will be fewer sales and no follow-up for further ones. All these things require capital, and, possibly, ploughed back profits left in the country where the sale is made. For instance, in West Africa there are no major indigenous garage companies, and yet without those garages financed and organised by expatriate companies the sales of British cars are bound to suffer—and car sales are likely to suffer, anyhow, in coming years from increased competition from Japan, which is becoming an industrial giant in that field as it is in shipbuilding.

Some of the purchases which are ultimately sold in overseas countries are not made in Great Britain; they are bought all over the world. But surely it is a good thing to make a profit? That is beneficial to Great Britain, and both for purchase here and abroad a central eye is required to look after the general organisation. This means, if possible, an establishment in this country, and yet this is the very establishment which the Chancellor is going to tax. I believe that such organisations should be helped by a premium rather than be penalised. I do not believe that the Chancellor of the Exchequer can have considered this problem, and I welcome what he said in the White Paper whereby he prophesies modification of the orders. No doubt the Financial Secretary will have seen a letter in The Times today from Mr. Shields dealing with the woollen exports of this country. This applies generally to the bulk of British exports.

I am a representative of a developing district; 4½ million tons of exports went out last year from the Port of Liverpool, and of course we are pleased to have the increase there has been in employment, but possibly too heavily based on the motor industry, brought into Merseyside by a Conservative Government. Although we are allowed to build new offices on Merseyside, why tax the people who are going to be put into those offices? And are development districts going ultimately to be treated differently from, say, southeast England? That would seem a fairly sensible policy.

Would the Chancellor and the Financial Secretary bear in mind that if office labour is to be taxed exactly the same, whether it be young or old, those who are 50 or over will find it very difficult to find another job? They certainly will not go into manufacturing. They will probably retire as a burden on the State. It will not, therefore, be beneficial to increased production. There should be a much lower charge for them, and no charge at all for the retired person, the old-age pensioner, who goes back to help industry. Also, would the Chancellor, as he has been asked by so many on both sides of the Committee, look into a part charge on those on part time?

It would be wrong only to criticise and not to make one or two suggestions. The export rebate is too small. It does not help the manufacturer enough to achieve what we want to see, which is a 30 hour week with increased wealth for all. Too many companies are too well protected. There are some with their order books full two years ahead, yet who still limit their production. Our exports suffer as a result, and even the Iron Curtain countries are able to get into markets that were formerly ours. I remember that last year there was an order for 120 buses from Ghana, which at that time had the foreign currency; yet, all that we could do was to offer 25 in eight months, and the whole order went to the United States of America.

The Chancellor of the Exchequer should chivvy the occupants of the boardroom by giving them greater incentives. At the moment, export managers are often paid much less than home sales managers because the profit at home is so much greater than the export profit. I hope that the right hon. Gentleman can find a way, as suggested by my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) about rates, to get round the rules of G.A.T.T. by producing a differential taxation. Other countries seem to be able to do it. I am told that France, using the turnover tax, has an incentive of over 20 per cent. on exports. Why cannot we do that, so that we can chivvy lackadaisical managements and unco-operative trade unions alike to get on with the job of greater production?

I wish to make three final points. First of all, would the Financial Secretary remember that, when we use E.C.G.D. credit, what we are doing is to sell what is valuable today for some payments which will be much less valuable in ten or even 15 years' time? It may well be worth doing the calculation to see whether some form of heavy discount cannot be introduced for payment in cash at the time of sale. The sums can well be done by the Treasury.

Secondly, I believe that the only pool of extra work in the country is that of married women. I am very much against the latchkey child. It would mean, therefore, only part-time work, and also the provision of more nursery schools. But the best way of getting more married women into industry is to produce a tax incentive to treat a married woman as a single person. I am convinced that one would get much greater production thereby.

Thirdly, there is a suggestion that if the Financial Secretary believes in a private sector and in made rather than inherited wealth, he should do something to allow the modern executive to save up to, say, £1,000 a year out of his gross income, providing that it is put into non-interest-bearing savings certificates which can only be cashed in, say, seven years' time, which can go to his widow in a trust and will not bear death duty. The savings of interest and the general incentive given to the modern executive to save up to £20,000 would produce the capital-owning democracy which I believe Britain wants to see.

The Chancellor of the Exchequer has not much room for manœuvre. I accept that investment has not been all that wise overseas and that the return even from Canada in equities has not been very good. But he must remember that, quite often, the sales of British exports would have gone, anyhow; and the only means of retaining an interest in a foreign country which was going to put up a tariff barried and provide pioneer status for new industry was to go there ourselves; otherwise we should have lost the entire business. I therefore welcome the fact that the right hon. Gentleman has said that this is only a temporary measure.

But we continue to spend to much. We are building up a Civil Service which is just taking in and paying out, and not producing anything extra. We are not increasing the national cake, and, although my colleagues will not full agree with me, I believe that we have to look very carefully into the fact that we are paying £350 million a year east of Suez, plus our aid, and getting back only about £50 million a year.

I know that we have several commitments, and I hope that our word is still our bond, though often I doubt it in South Arabia. We have commitments towards Malaysia, for example. But what I plead for is that in negotiations with foreign countries—and we are doing the job of Europe and America in the Indian Ocean—they should open their markets to us and not keep out our goods by high tariffs.

The burden of taxation affects prices to the detriment of Great Britain. We want less Government expenditure, more incentive to export and more incentive to reduce costs. I hope that the Financial Secretary will have second thoughts before the Finance Bill makes its appearance.

7.26 p.m.

Mr. Gwilym Roberts (Bedfordshire, South)

I understand that it is the custom for maiden speakers to be non-controversial. I am not quite sure that I can maintain that tradition, although at this stage I shall not try to answer some of the economic arguments put forward from the other side.

What I want to talk about is the very real measures in the Budget, which are designed to stimulate economic growth and productivity. As the first of these, I welcome the Selective Employment Tax.

A great many things have been said from the other side about the place of the Chancellor in history, but I feel quite seriously that this is a new look at taxation. It is a great step forward, and the possibilities which arise from such a form of taxation are immense. I hope that it is only the first of a set of measures of the same type.

Now that we have the Selective Employment Tax, what we want is a double Selective Employment Tax; in other words, a selective Selective Employment Tax. That applies not only to the manufacturing side, but also to the services side.

If we look, first, at the manufacturing side, where the premiums are obtainable, a great deal of selection in the payment of those premiums could be applied. There should be a certain selectivity, so that the premiums are applied to the industries which contribute directly to the export drive; and about 30 per cent. of industry makes such a direct contribution.

There should be selectivity towards the actual production side of industry, rather than the administrative side. In a firm whose management I advised recently, I found that in 1951 there were 1,000 employees, of whom only 50 were employed in administration; in other words, 5 per cent. In 1961, there were 1,200 employees, of whom 100 were employed in administration; in other words, 8.5 per cent. Those are some of the better figures which will be found in industry today. Undoubtedly, there is a tendency to switch over from production to administration. I know that classifications may have changed in the intervening years, but there is no doubt about that prevalent tendency.

The weapon has been provided in the shape of the premiums, and I think that those premiums should be directed at the production side of export industries in particular. In the same way, I feel that there should be selectivity on the payment side. There should be selectivity on the services side.

I think that there are some obvious cases where relief is required. We have heard of most of them in this Committee during the last few days, and I shall not quote them in detail, but perhaps I might touch on two or three. First, there are charities in general. On Thursday morning I had the privilege of attending the opening of the Methodist Synod which was held in Dunstable and covered the northern Home Counties. A resolution was passed unanimously by about 400 clergymen and laymen who are concerned with charities, in the following terms: That this Methodist Synod expresses strong opposition to the inclusion of religious organisations in the proposed Selective Employment Tax on the grounds that the services rendered by churches, voluntary organisations and charitable trusts are on a non-profit basis. I think that all charitable work, whether on a religious basis or otherwise, should get relief from this form of imposition.

One has also to realise that we are faced with the problem of part-time, elderly, and disabled workers. I have already had several approaches from both workers and employers in my constituency who feel that this tax will make the employment of disabled people, part-time workers, and so on, less desirable than hitherto.

There should also be some relief for service industries which are contributing to the export drive. A number of services are making a serious contribution in this respect. What I am suggesting about this tax is that what we really need, and what I hope the Chancellor will go on to introduce, is a selective Selective Employment Tax. This is a realistic economic weapon which can contribute on the manufacturing side and also give relief on the service side.

I think that there is a need to give real financial incentives to industries which are prepared to adopt new machines, new methods, and new techniques. There is an overwhelming need to replace 1926 machines by 1966 ones, to provide computers, to provide automated systems, and so on. There is a growing need for all this in British industry. A saying which became famous during the war was: Give us the tools and we will finish the job. The real need of British industry today is for 20th century tools to enable it to carry out a 20th century job.

But, of course, the tools themselves are not enough. We also require the management and the people who can use them. There should also be considerable incentives for scientific management training. In spite of what has been said by some hon. Gentlemen opposite, the fact is that British management is largely dominated by the old boy idea. It is not what one knows, but who one knows, and who one's father was, which counts all along the line, and there is a real need in British industry for scientific management training.

Those are the needs today if we are to get a substantial level of economic growth. If we are to get the advance in productivity which we all want to see, we must have a vast expansion in industrial equipment, and also a vast expansion on the educational side. It is only if we can couple the twin forces of industry and education that we can hope to see Britain find her economic place in the world.

I thank the Committee for being so indulgent during my speech. I do not know whether I have the assets to be a successful politician, but Teddy Roosevelt once said that the successful politician was the man who expressed what everybody else was saying in the loudest possible voice. I do not always say what everybody else is saying, but I am sure the Committee will have found that I have one of the necessary attributes.

7.35 p.m.

Mr. Charles Fletcher-Cooke (Darwen)

I assure the hon. Member for Bedfordshire, South (Mr. Gwilym Roberts) that he will be a very successful politician, and I have the greatest pleasure in having the opportunity to congratulate him on a maiden speech to which everybody listened with intense interest. The hon. Gentleman clearly knows a great deal about industry. I suspect that he has been into the heart of many different industries in the course of his profession, and we shall listen to him with great interest when he speaks on this subject.

We were particularly glad to hear the hon. Gentleman's plea for exemption for religious and charitable foundations from the effects of the Selective Employment Tax, and as he was making this plea I thought to myself how much his predecessor, Mr. Norman Cole, would have been glad to hear it, because he was a man whose religion was very near to his whole life.

When I heard the first half of the Chancellor's Budget Statement I thought that this must be the dawn of a new era, and a good era, because I thought he was saying something that I have always be-lived in, and that is that, sooner or later, we have to put an end to the illusion that we can get out of our difficulties by the use of the fiscal weapon. I think that it is of very limited use for the purposes of our difficulties, and I think that a great swinging of this weapon usually does more harm than good.

I therefore cheered when I heard the Chancellor say: But when, as at present, there are jobs for all, the Budget's influence can be easily shrugged off by employers who can charge higher prices and workers who can get higher wages"—[OFFICIAL REPORT, 3rd May, 1966; Vol. 727, c. 1430.] We all know from experience that that is absolutely true.

I had deduced from that that the Chancellor would get away from this tradition of the last 10 years, or perhaps even twenty, that one must use the Budget, not for the old, and, I believe, correct purpose of balancing the books, but for the purpose of what is known as "skimming off extra purchasing power". I therefore hoped that when he had produced quite a healthy surplus on current account by fixing Corporation Tax at 40 per cent., and putting on a betting tax which will bring in a tidy sum of money he would leave it at that and say, "Now we are going to use our other weapons, the prices and incomes policy, and the other machinery which we as a Government have taken" for the purpose of raising our productivity and for the other purposes which were so eloquently outlined by my hon. Friend the Member for Guildford (Mr. David Howell) in his moving maiden speech.

But no; this new era was not to dawn. Instead of that we had this enormous new levy, which is to raise something quite unwanted for the purpose of paying public expenditure—a new levy which will net in a full year, about £300 million. I ask, "Why?" I had thought perhaps that we were to have a reduction of direct taxation and thus an increase in incentives. That would have been a good justification. But that has not happened. It is not because the Exchequer needs the money, and apparently it is not because the Chancellor wants to shift labour from the service industries to the manufacturing industries—because today, in a very important intervention, he made it clear that that was not the motive for the imposition of this tax.

I can, therefore, only assume that the purpose is, once again, to return to the tradition that we must "skim off excess purchasing power". If that is so, why are we threatened by the First Secretary with being reported to the Prices and Incomes Board if prices are put up and excess purchasing power is thus skimmed off? If that be the purpose, it would be right to hand on the burden of this tax to the consumer, instead of being told, as the people who have to pay the tax in the first instance are told by the First Secretary, that if they do that they will have to wait behind after prayers and be seen by the headmaster in his study?—which is the ancient equivalent of being reported to the Prices and Incomes Board.

Mr. Kristensen, the Secretary General of O.E.C.D., is right to say that Britain is still headed in the wrong direction in the matter of using the fiscal weapon. We want to get far more into the groove that President Johnson and his Administration got the American economy into, when, instead of increasing the burden of taxation, they remitted it. Admittedly, it might be necessary subsequently to increase the burden of taxation, as the President of the Board of Trade may have to do, not for the purpose of "skimming off excess purchasing power" but because his public expenditure, particularly in Vietnam, is going so high.

Short of that, however, I hope that the first thoughts of the Chancellor, as expressed in the first half hour of his speech, will prevail in the end. Alas, at present the misplaced motive of the pacification of the gnomes, whether at home or abroad, by way of this annual sacrifice or burnt offering of increasing taxation—even if the money is not needed—prevails. I hope that sooner or later we shall be able to break out of it.

How has the Chancellor made this annual burnt offering? He was very much a prisoner of the machinery of taxation. It is common knowledge that the Inland Revenue Department is incapable of dealing with any large increase in taxation—particularly an increase by way of a new form of tax. The right hon. Gentleman's room for manoeuvre was restricted by the machinery to his hand. Indeed, there was no effective machinery to his hand. It is, therefore, a matter of serious argument whether skimming off this purchasing power some time after September, and probably considerably later than September—because it will take some time for the effects to work through to the consumer, if that be the object—is really worth it.

Assuming that the right hon. Gentleman decides that it is worth it, he is limited by the fact that he is now, for the first time in our history, relying on a sort of second tax raising department—no longer the Inland Revenue or the Customs and Excise, but the Ministry of Labour or the Ministry of Pensions. I want to ask some questions about this new machinery.

Will the ordinary appeals through the General and Special Commissioners be available to people who think that they are being unfairly taxed? There will be many issues and disputes as to whether employers are liable for the Selective Employment Tax—many more than in the old days when there was argument whether a sum received was capital or income. That old sort of dispute increased the work of lawyers in the last ten years to a great extent, and I wonder whether this will increase their work even more.

I want to know before what tribunal those who feel that they are being wrongly assessed will appeal. There are many other issues between the subject and the Crown, which, if this were a normal tax, would go before the General or Special Commissioners. To whom will such issues go now—and when?

Many criticisms have been levelled from hon. Members on both sides of the Committee about the method of selection—about this very rough and ready categorisation which nobody in the past has been particularly concerned to dispute. The categories which are shown at the end of the White Paper are no doubt administratively convenient, but the persons concerned have not bothered about them in the past because there has been no financial interest in getting from one to the other.

Will the available machinery really prevent an organisation from moving from, say list-heading No. 499—miscellaneous manufacturing industries—into a different category, or moving from construction industry into a manufacturing category? Will it also be possible to split up the list of headings internally in the time available and with the available machinery? Must the pleas which have been put forward by hon. Members on both sides of the Committee fall on deaf ears, for mechnical reasons, because these headings are sacred? Is it that the most we can hope for is a move en bloc from one to another of three large species?

One's thoughts then go to another question. I have always thought that a payroll tax was a very good instrument for regional rather than functional selection. Is it possible to use this tax on a regional instead of a functional basis? Can it be varied from region to region with the proposed machinery? If not, can the Treasury, at this fairly late hour, seek to amend either the Finance Bill or the Ministry of Labour's Bill in such a way as to make it possible fairly easily in the future to switch from this method of selection—which I do not believe will work—to a regional method of selection, which is very desirable?

Of course, the attack on the services is inexplicable. The question seems to have been decided on the appendix to the White Paper, which shows that, from 1960 to 1965, much more labour has gone into the service industries than into manufacturing industries. The hon. Member for Bedfordshire, South echoed that when he said that in his interesting experience of a firm in recent years it now had a larger proportion of its personnel employed in administration than formerly.

The hon. Member's plea for an automated industry, for more automation and computers, inevitably means that this development, a higher proportion in administration and a smaller proportion in production—in the limited sense of the word "production"—is not only bound to happen, is not only happening, but ought to happen. Therefore, to attack it as something which is somehow undesirable and which ought to be reversed is rather flying in the face of the desirable and taking refuge in the past—

Mr. Gwilym Roberts

I am sorry to interrupt. I wished to suggest that the same automated processes can be applied to administration. Therefore, the application of automation processes should go hand in hand not only on the production side, but also in administration and, therefore, the proportion should not materially change in this respect as between production and administration.

Mr. Fletcher-Cooke

I am obliged to the hon. Member. He knows a great deal about this. I should have thought, however—although I bow to his superior experience in this respect—that automation inevitably goes first into production, because it is far harder to automate the processes of administration than those of production.

At any rate, let us agree on this, that to tax services as such, to say that they somehow must bear a higher proportion of tax, is to personify them, to give them a "fair shares" personification which is a totally false intellectual approach. The question is not whether service industries attract more labour, but whether they waste more labour. It is our experience that they waste not more labour, but less than manufacturing industries as a whole.

Apart from the desirability of the method of selection, the problems connected with the administration of this tax will be great. I am sure that the Financial Secretary will realise that there will be an enormous new service industry, as was pointed out by my hon. Friend the Member for Worcester (Mr. Peter Walker), in advising people how to use their employees as self-employed. There is already a big practice growing up in this respect for other reasons. I think that legislation will be needed to define the word "self-employed" before this matter is finished. I am told that there is already a big industry among Chinese restaurants in London, by which all the waiters are made directors in order to escape the termination of employment liability under the Contracts Act. This will, of course, make even greater inducements for that practice.

I foresee the functional method of selection as leading to endless disputes, which is why we must know how those disputes will be resolved, by whom and how soon. I am afraid that the boast of the Labour Government that they have been a great tax reforming Government is not wholly true. It is true, certainly, that they have invented many new taxes, but novelty and reform are not the same thing. Last year, every single so-called reform imposed new obligations upon the subject and I regard reform as having at least some duty to alleviate the payment of taxes as well as to put new burdens upon the shoulders. There are hundreds of reforms which would have this effect and which have not yet been attempted.

It is true that, this year, some of the worst effects of last year's taxes will be put right, to the benefit of the subject and for that we are grateful. But there is still no sense of reform of some old anomalies and injustices, because that would benefit the subject to the detriment of the Exchequer. But this enormous surplus is being budgeted for and the Treasury can afford it. If not now, then when? For example, there is the joint assessment of husband and wife, which has been mentioned and which is a crying scandal, apart from being economically disincentive.

Secondly, there is the old duty which employs far too many administrators—the Stamp Duty. This duty, as the Financial Secretary will know, is one of our most ancient taxes. It was invented in the reign of William and Mary in its modern form. It was, of course, invented during a period when there was no Inland Revenue authority worth the name. It was necessary, therefore, to tax a transaction on a physical asset, that is to say, the document, which was the only place that the transaction could be caught, because there was no machinery for enforcing the tax on the contract itself, merely on a piece of paper. The physical assets had to be taxed and not the cash flow, to echo the words of my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) last Tuesday. Now however, we do not have to do that, because we are now taxing disposals in a very wide sense of the word in the Capital Gains Tax.

Therefore, to tax such a disposal twice—first of all by means of the stamp and then through the Capital Gains Tax—seems a monstrous dualism in taxation and ought to be resolved by the abolition of the Stamp Duty. It causes a great deal of inconvenience to the trading community, it employs a great number of people, it is thoroughly out of date and any Government who pride themselves on being a tax reforming Government should look at the Duty as a matter of urgency.

My final complaint—it is a serious one—against the multiplication of new taxes is not merely that they raise more money than I believe is necessary, but, since they are unaccustomed taxes, they bear very hardly and capriciously and, worst of all, that they introduce into the population, right through from top to bottom, a feeling that it is better to indulge in what is in some quarters known as "quiet money" rather than simply to work harder in the normal and open way. It creates the atmosphere of tax avoidance and the incentive for avoidance. In that way, it gradually erodes the character of the people.

It is still true to say, I think, that most of the revenue is raised by the voluntary co-operation of the taxpayer. Anything which erodes that voluntary co-operation—it is being eroded more and more—in the end means not only that we have to have more and more machinery, more and more administrators, more and more civil servants: it also means, which is far worse, that we destroy the law-abiding character of our people.

8.0 p.m.

Mr. William Baxter (West Stirlingshire)

We have listened today to many thoughtful and excellent speeches, not only from the older Members of Parliament but from new Members who were making their maiden speeches. This comment applies to both sides of the Committee. I have heartily concurred in many of the sentiments which have been expressed.

The first speech which we heard today was delivered by the President of the Board of Trade, who gave some indications of what the Government propose to do about incentives for industry. I was greatly disturbed that when he was giving us a list of the various places which must be allocated new factories, he seemed to omit a very important part of Scotland—West Stirlingshire, and especially the area of Bannockburn, Cowie, Plean and Fallin. These are entirely mining areas in which all mines but one have been closed.

The great danger is that many people will leave those areas and while the situation is that there is not a high percentage of unemployment meantime this is due to the fact that folk are gradually leaving, and I counsel my right hon. Friend to give further consideration to this important question and to have special regard to the areas which I have mentioned.

A few days ago we had an excellent and forthright speech from the Deputy Prime Minister, who elaborated his prices and incomes policy. It is commendable that we should have this policy in operation and, if possible working to the advantage of the country. But it is not a completely new conception, and we must pay some tribute to a previous Chancellor, the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd), who tried to introduce some scheme like this. It was looked upon with some misgivings by both sides of the House, because he advocated a pay pause or a period in which incomes should be halted to give the country a chance to recuperate. I entered into the Budget discussions at that time. It is only right that we should remember that other Chancellors have made a substantial contribution to the well-being of the nation.

I listened with great interest to the Chancellor's speech, which was delivered in a most eloquent and persuasive manner. He left us for a long while wondering what was in the bag, and when he produced his Selective Employment Tax as the way in which he proposed to rectify the prevailing financial wrongs, I confess that I was a little disappointed. I asked myself the simple question: what was the purpose of putting another tax upon the people of this country—because ultimately the people of the country have to pay? Surely the only purpose in putting on a tax is to bring about a certain degree of deflation or to contain inflation to the extent that the nation can afford it. Whether we like it or not, in the long run the public have to pay the tax. Surely the purpose of taxation is to bring in money, and money does not grow on a tree; it comes from the pay packets and the salaries which people earn.

This is a tax which in its present form does not justify the general approval of the Committee. I will tell hon. Members why I say that. It does not appear to me to be an equitable and fair tax, and any tax which does not appear to be equitable and fair raises a question mark in the minds of many people, because if we have a characteristic in this country, it is to try and be fair to the best of our ability.

It seems to me that to a great extent the tax penalises many efficient industries, and it helps many inefficient industries simply because they happen to be in the manufacturing side of our economy. It is surely not logical or reasonable that the efficient should help subsidise and encourage the inefficient. On that point alone it seems to me to be unfair.

I should like to deal with certain industries in which I have a considerable financial interest, which I had better disclose straight away—the building industry, the hotel industry and agriculture. The tax is to be levied on the old and tried traditional builders, the industry which has given us the houses which we enjoy. It is true that there is a new conception abroad—that industrialised or non-traditional methods of building will be speedier in the long run. At the moment, however, these new methods are neither speedier nor cheaper. We can build a house more cheaply by the old traditional method than by non-traditional methods, and we can build a house more speedily than by non-traditional methods, provided that contractors using the old traditional method have the most up-to-date machinery and the most up-to-date techniques to produce the house. The non-traditional builder seems to be able to pat up the shell of the building a little more quickly than can the old brick builder, but this does not necessarily mean that he will finish the house more quickly for the simple reason that every chain is as strong as its weakest link, and in the building industry we can finish the houses only if we have the finishing labour, such as the joiners, plasterers, plumbers and electricians.

Even if this labour is available, there remains a section of the building industry which gets little or no credit and on which the entire industry depends. I refer to the ordinary labourers, the men who dig the trenches and who put the drainpipes in the trenches. This is one of the major problems of the building industry in getting houses finished reasonably quickly. We have not the number of men we need capable of laying simple drains, for example, in an expert manner, and to a great extent this controls the rate at which we finish houses.

Another factor which has a bearing on the work of both traditional and nontraditional house-builders is the supply of such component parts as lavatory basins and baths. There is a limited supply and we are compelled to import certain of these things from Sweden to get even the very low number of houses completed which are, being built today.

This increase in cost will ultimately have to be put upon the consumer. Who is the consumer? He is the man who is purchasing the house and the local authority which is building the house. The Selective Employment Tax will increase the cost of a house from between £50 and £100 or £130. This is important. Because we are giving preferential treatment to the non-traditional builder we shall ultimately compel the traditional builder, on whom we have depended for so long, more or less to go out of business.

If these men do not go out of business they will certainly hesitate before they take on more apprentices. Apprentices are the backbone of the building industry, and many people have told us that we must increase the number of apprentices being taken into the industry. Who is to train the apprentices? As I have said, the traditional builders train the apprentices. Generally speaking, the nontraditional builder comes into Scotland from England and gets the big Scottish contracts. I do not know how these people get the contracts; they are negotiated and they get a far better price than Scottish builders can get. They then take away our labour force—not only the tradesmen but even the craftsmen apprentices who have by that time served perhaps three or four years at a trade. There are contracts awarded by Government Departments which Scottish contractors do not get because the local contractors are not permitted to compete for them, yet we are supposed to compete in the open market for all our work. I hope that this matter will be investigated by my right hon. Friend.

The Chancellor should also consider the one-man builder. Reference has been made to the way Chinese restaurants operate. We have the same thing in the building industry, with thousands of one-man builders. These people work on the principle that if the customer or main contractor provides the bricks, mortar and machinery, they will provide the labour. They say that they will lay one thousand bricks for a certain amount, they do the job and are paid for it. Their activities are of great concern to trade unionists and others.

I assure the Committee that the activities of these people are recognised as being quite normal in the building industry. As contractors, they come to me and take on a certain job. If I say to one of them, "What is your name?", he may say that he is "Jack Diamond"—and how am I to know that he is not? These one-man contractors often work under assumed names and the Inland Revenue does not receive a penny in tax or anything else from them. They do not put National Insurance stamps on their cards or take any holiday stamps but merely move from one place to another, having no public liability insurance of any kind. This is quite a racket throughout the building industry and I fear that the new Selective Employment Tax will encourage an extension of this practice. As a result, the Inland Revenue will lose even more than it is losing at present, and it is time that something was done about this abuse.

I trust that these matters affecting the building industry will be looked into, particularly the remarks I have made about large firms stationed in England getting contracts in Scotland and the benefit of training of tradesmen done by the traditional, honest, but often small builders in Scotland.

The recent White Paper made out a somewhat persuasive case for taking the steam out of the building industry and a number of percentages were given. We see the mention of a 13 per cent. increase in manpower intake in the construction industry, but figures can prove virtually anything. Have the percentages been broken down to take into account for example, the wastage of labour in the building industry? There is a great deal of wastage and much of it would not be suitable for manufacturing industries.

Many people employed in the building industry go to labour exchanges, are sent to a builder for a job, stay with that builder for two or three weeks and then move on to another builder for another short spell. They go round and around the industry, just like going round the mulberry bush. They do not seem to have any roots in the industry and we get a great deal of labour which would not be suitable for any other industry.

The figures in the White Paper give rise to other questions. What about the considerable number of building workers employed on maintenance work in factories and carrying out work for the nationalised undertakings? How many builders are employed by local authorities or are working on direct works schemes? That is why I ask if the figures have been broken down. As I say, statistics can prove anything or nothing.

Ultimately the Selective Employment Tax will, I believe, increase the cost of house building. The other day my right hon. Friend the Prime Minister said that the country would increase the salaries of doctors, and I have no doubt that that should be done. On the one hand, we increase expenditure in the National Health Service—this is curative medicine, but we have to accept that preventive medicine is of vital importance—while, on the other hand, the Government are placing what I believe will be an obstacle in the way to the building of more houses, and it is accepted by all that the provision of housing is preventive medicine. From the health point of view it is imperative that the building industry is not retarded, because the industry should be encouraged to expand and increase its output of houses because homes make for happiness among the people and save money on curative medicine elsewhere.

I have some interest in the hotel industry and I say straight away that I have no objection to a tax being placed on that industry or on tourism generally. There may be some justification for such an imposition because taxes of this kind are applicable throughout the world, New York included. One pays a tax for the pleasures and enjoyment one gets in those countries and I see no reason why something of the sort should not be applied to the tourist industry here or, for that matter, to people who tour abroad. However, I do not believe that my right hon. Friend's proposal is the right way to levy a tax of this sort on this industry, but I will come to that later.

I also have an interest in, and acquaintance with, the agricultural industry. Horticulture and forestry are in a different category and I therefore cannot understand why they should be included in my right hon. Friend's list of industries which will pay the Selective Employment Tax. After all, those industries have no way of recouping it.

The Chancellor indicated that at the Price Review this matter will be rectified. That can be done only in an unjust manner, because the people who will pay the tax cannot possibly get a fair amount returned. This is due to the fact that many agriculturists will not pay it. Thus, by the operation of the Price Review, the money will go to people who have not paid the tax.

In any case, in view of all the talk about repaying the money, why make them pay it in the first place? This is a wrong tax to place on agriculture, a productive industry which we are seeking to expand due to its effect on our balance of payments. It is a mistake to apply the tax to this industry and I trust that my right hon. Friend will reconsider the matter.

There are more overdrafts in the farming community than in probably any other industry. It would be wrong if we imposed a tax on farmers which resulted in a large number of them ultimately going to the wall. This may apply equally to the building industry, for I fear that the tax may undermine some businesses. Many building contractors have contracts running for the next two years or more. The tenders have been accepted on a set price basis, the contractors not expecting an imposition of this kind. Unless there is some way by which they can recoup this money from the local authority—that is, if they are employed on local authority house building and so on—I fear that many of them will ultimately fail and go to the wall.

The Government have instructed local authorities to say that rise and fall clauses should not be placed in contracts; that if prices increase or decrease that is the responsibility of the contractor. That, of course, is normal contractual procedure in the industry. It is almost tantamount to a breach of faith to impose new conditions of this kind, and I therefore ask my right hon. Friend to reconsider this whole matter.

For too long have we accepted the implications of the General Agreement on Tariffs and Trade, and alteration of that Agreement should have been brought very forcibly before now to the notice of the powers that be. As I understand it, the real purpose behind this Selective Employment Tax is to try to give to the manufacturing industries a hidden subsidy so that exporters can compete much more favourably in world markets. We have put off for far too long asking for a full revision of the General Agreement on Tariffs and Trade. It has hamstrung us for too many years, and has given considerable advantages to other world competitors for international trade.

I agree with hon. Members on both sides who have said that our overseas military commitments must be looked at again with a view to a cut, but I am not concerned only with overseas commitments but with the number of people employed at the Polaris base, at Holy Loch, near Glasgow. There are no fewer than 1,786 men connected with the building industry employed there—electricians, joiners, builders, plumbers, and the rest. Moreover, those who get these contracts at the base seem to be given almost a blank cheque, in that they can take men from any other contractor in the country. That is a ridiculous state of affairs and the Government must be asked to look at the wastage going on there. In my view, it would be in the interests of the nation as a whole to stop this madness at once, to do away with this base, and let the building workers there produce the 2,000 houses a year they could produce if they were working for such contractors as myself.

As one goes about the world one finds the embassies over-burdened with far too elaborate staffs—there can be no question about that. It is time there was a complete review of embassy personnel. I know that they are excellent young men, principally from Oxford—not many come from Scotland, because Scotsmen are more or less barred from that Service. I counsel the Chancellor to look at the staffs of these places—he would find that he could release quite a number of these young men to take a place in industry. They are well educated, as far as I know—or, at least, they are reputed to have been well educated at Oxford.

We have with Canada, New Zealand, Norway and many other countries balance of payments difficulties, but we have not been able to look at the problem in an unbiassed fashion so as to get at its root and work out a method by which we can compel those countries to buy more from us in this difficulty. The same thing applies to Russia. We are most anxious to trade with Russia but our balance of payments there is completely out of joint. I am sure that if we looked at those aspects of our balance of payments difficulties we could rectify some of the wrongs.

I said in regard to the hotel and tourist industry that there should be a tax on visitors to this country, and I would not be against a tax on people going to and from the United Kingdom—just a fair, simple tax of £1, £2 or £3 per head on every one coming in or going out. People coming to this country often get considerable advantages through our National Health Service and our generosity in many other respects, and I would not apologise if I had to ask them to pay such a tax. I would not object to some other form of tax on the distributive trades, especially hotels, restaurants and so on, but I think that a straightforward tax would be best.

We could make considerable savings in Government and local government administration. We should introduce a new incentive scheme not for adding to personnel in national or local government offices but for cutting down the numbers. There is a natural enough tendency when one gets power of any description to bring in one's sister's boy, or an uncle or an aunt—friends and relatives of all descriptions gradually find their way into places in which Members of Parliament have a say and over which members of local authorities have some control.

The whole question of addition Government and local authority staffs should be reviewed, and some incentive bonus scheme introduced to encourage a reduction.

It has been suggested that industry is hoarding labour. That does not happen in my industry, but if it is happening anywhere we should look at it very seriously. We recently laid it down that anyone hoarding gold will be prosecuted, but gold is not as important as human beings. Human beings are very important to our economy, and any firm keeping on people who are not fully employed should be prosecuted and penalised. Any firms not needing to trade in a competitive market and paying people for doing nothing should have a penalty imposed on them. They are doing a considerable disservice to the community.

I have probably overstayed my welcome, but I am not at all happy with the general trend of events in our budgetary methods. I accepted the principle of the last Budget, and complimented my right hon. Friend on it. It was a Budget that had some plans for the future. It was most complicated, however, and the only thing I should have liked to have seen done by this present Budget would have been the introduction of some simplification. I am not happy about this Budget, and especially about this tax on employees, and I hope that the Chancellor will reconsider the whole set-up.

8.28 p.m.

Mr. John Smith (Cities of London and Westminster)

We have had several maiden speeches from the benches opposite: and I am one lesson in front. We have had speeches from Scotsmen, Welshmen, and others. One hon. Member said that he was the only back-bencher from the City of Cardiff. I thought wistfully that, although getting on for 1 million people work in my constituency and pay much of the country's taxes and earn much of its foreign exchange, I am, nevertheless, the City of London's only back bencher.

Most of these maiden speeches were uncontroversial in the new, purposive and pragmatic way; that is to say, the controversy they engendered was mostly between the Front Bench and back benches opposite. I enjoyed them. But I was very disappointed by the speech of my constituent, the Chancellor of the Exchequer. In the first part of his speech he was bending his energies to the bunging up of loopholes instead of trying to simplyfy the tax system.

Surely, in our present stagnant state, it is not so important who makes the money as that the money should get made. For every artful dodger whom the Chancellor succeeds in baffling there are a thousand ordinary manufacturers and exporters who would be better left to get on with earning dollars and pounds rather than diverting their energies, and the energies of their accountants, to poring over complicated Finance Acts.

In the second part of his speech, the Chancellor was trying to cool down the economy and, at the same time, to please the public. As a result, he has chosen a course which is highly dangerous both to the economy and to the balance of payments. The Chancellor is a retired sailor, as I am. He ought to know better; but he has opened the seacocks of the Ship of State in order to cool the stokers. The measures relating to investment and spending abroad are insufficient by themselves and the discriminatory employment tax will act too late, hardly until next year. Autumn is the time when we are in trouble with the balance of payments. Therefore, this tax, which does not come into effect until the autumn, will be in time only for the next crisis but one.

It has objectionable features, many of which have been mentioned. One or two have perhaps not been mentioned fully enough. It will weigh most on small firms. If an employer has 100 men he can do without one of them; but if he employs three men he cannot. It is also a tax on our invisable earnings of foreign exchange—a tax on just those earnings which have baled out the Labour Government in the past. Where this tax falls on banks, insurance companies, exporters, and so forth—and, in fact, it falls on most of the people—getting on for 1 million—who work in my constituency—it will simply reduce their ability to compete with their foreign competitors.

Many firms abroad keep offices in this country. Those offices bring us foreign exchange, both from the business they engender and from the salaries they pay to their staffs. Already I have had letters from English firms representing foreign concerns set up in my constituency, saying that this tax may cause them to close.

It will also withdraw capital from industry. Not enough has been said about this. It is the exact reverse of what the Chancellor wishes to do. My hon. Friend the Member for Worcester (Mr. Peter Walker) pointed out that the gross yield of this tax in a full year is to be £1,133 million. Of this, £374 million will come from so-called service industries. The remaining £760 million, and an unspecified amount to be refunded to agriculture through the annual Price Review, will be refunded at least six months in arrear. This is not only an interest-free loan from industry to the Exchequer, but an actual withdrawal of capital because the tax will be continually refunded in arrear. It seems that approximately £400 million of capital during the life of this tax will be permanently withdrawn from industry and the public sector.

The Chancellor said that he would do something about this. It will be interesting to see just how he does it without stimulating inflation. Even so, the annual interest on this enormous sum will add £30 million a year to the costs of industry and the public sector. My hon. Friend the Member for Worcester calculated that the net benefit of this tax to industry, after allowing for various deductions and taxes, will be £46 million. My hon. Friend did not mention this fact which should be borne in mind, namely, that there is this further £30 million of annual interest to bear on the arrears of unrefunded tax. It is my view, therefore, that in the end this tax will not benefit industry very much.

An additional withdrawal of capital from industry will also be caused by replacing investment allowances by investment grants. The grants are to be paid in arrear—it is not at present clear how much in arrear—after the expenditure has been incurred.

Moreover, this tax is a piece of Grundy-ism. It may be conscious or subconscious. I have gained the impression from listening to the benches opposite that it is subconscious. The service industries are the end product of all industry. They measure the rise in the standard of living, the rise in the rewards of labour. We do not think that a rise in the standards of living is sinful. Man is not one of the raw materials of industry. He is what industry is for. But the Government want to get us all into a hair shirt, and then tax us if we send it to the laundry. This is a tax not only on the standard of living, but on the quality of life.

Further, as drafted this tax will cause part-time workers and pensioners to be sacked; and it will fall on charities and religious bodies. To tax old age, infirmity, charity and religion is a very rum way of broadening the tax base.

I have worked for one charity—the National Trust—for many years. It will have to pay £60,000 a year by way of this tax. This will cripple its work and completely alter its nature. I cannot believe that this is intended. No Government can wish to appear to be so hostile to voluntary effort as to tax charities. It is worth noting that there is another, I hope inadvertent, proposal to tax charities—these two proposals are the first such ever made—in the shape of the levy in the Land Commission Bill. Cannot charity and religion he rated by the Government at least as highly as waterworks, which are to have their tax refunded, although they are not strictly public bodies, just as charities are not strictly public bodies?

As for pensioners and part-time workers, their plight can be alleviated by recasting this tax in the way it should have been put forward, if put forward at all, in the first place, namely, as a true payroll tax, at a percentage of earnings, instead of a flat rate per head.

Next, Corporation Tax. Hon. Members opposite laughed when the rate of Corporation Tax was announced at 40 per cent. I thought of the rhyme— How the dear little children laugh As the drums roll and the lovely lady's sawn in half. The livelihood of those who voted for all of us depends on the firms which pay this tax. We are all absolutely dependent on their prosperity and a 40 per cent. rate of Corporation Tax is hardly calculated to encourage investment by these firms.

All the shortcomings I have voiced could be avoided by a real encouragement of savings. The idea that National Savings simply means lending money to the Government is hoary and out of date. All saving, all non-spending, is national savings in our present plight, and I hope that the Government will give a genuine incentive, on the lines of the phrase used, but not backed up, by the Chancellor, "More savings, less tax". If necessary, I hope that he will see that a national unit trust is started.

Finally, there is the problem of the balance of payments. It is clear, from the Chancellor's talk about trends, of repaying the I.M.F. loan, and from the recent sale of the Amerada shares—at the wrong price—that our debts are not to be repaid by earnings. I am sure that the public, listening to the right hon. Gentleman, imagines that the repayments are to be out of earnings, but in fact they are to be out of capital, out of our past investments abroad which are just the things that this Budget so discourages for the future.

A real encouragement of savings, by reducing home demand would help our balance of payments as much as it would help in other directions. But if we are to pursue the right hon. Gentleman's course and accept restricted investment abroad, then I do ask him to have second thoughts about Australia. The right hon. Gentleman says that Australia is a fully developed country, but I have spent many nights under the Queensland stars and I assure him that most of Australia is about as fully developed as the Garden of Eden.

Half of Australia's new capital comes from this country. Australia is already powerfully drawn towards the United States. Yet we have as great and as valuable an affinity with Australia as with any country in the world. Could we not cut down on some of the vast sums of conscience money that we pay to some of our former dependencies and let money go to Australia instead?

As it stands, the Budget will not reduce home demand in time; it will not lessen inflation; it will not help exports and it will not cure our balance of payments. The motto for this Budget should have been, "Savings, not selective taxes". I hope that we can put some of these matters right now rather than have to tackle them under the shadow of a crisis in an autumn Budget.

8.39 p.m.

Mr. A. H. Macdonald (Chislehurst)

It is proper that my first words in this Committee should be by way of tribute to my predecessor That is one tradition that I do not want to overthrow. Dame Patricia Hornsby-Smith is a most redoubtable lady and although I cannot speak of her standing in the House of Commons I know that she is highly regarded in the constituency, partly because of her zeal in attending to the problems of constituents and partly because of her assiduity in being present on many public occasions.

Indeed, Dame Patricia was able to be present in two places at once. Only last weekend I was invited to be present at two places at once and could not do so. This morning I received a reproachful letter from a young lady to say that Dame Patricia had always attended the function that I was unable to attend. If I am able to emulate her zeal I shall think myself very fortunate.

I have listened with envy and some admiration to other hon. Members making their maiden speeches and rehearsing the assets and qualities of their constituencies. The only natural asset that Chislehurst can boast of is the famous Chislehurst Caves, which have been visited, so it is said, by most of the famous characters in English history, including Julius Caesar and Shakespeare. One can tell that they have been there—they have written their names on the walls, or, at any rate, drawn their pictures. Another famous inhabitant of Chislehurst was the Empress of France, whose stay there is rather curiously commemorated in the name "Imperial" telephone exchange.

Chislehurst is mainly famous, however, not for its assets, but for its people, and I am very proud to stand here to represent them, because I think that they are very shrewd people. What they are looking for from the present Government, as I know well, is not just words but practical deeds to improve the country's economy. I want to mention one item in the Budget which is a practical deed for improving the economy of the country and which is the fruition of something promised before—the replacement of investment allowances by investment grants. This will be a most practical step forward.

Before coming to the House of Commons, I spent my time examining balance sheets. I did this all day and every day, except on those occasions when I had to go out to discuss the balance sheets with the directors or accountants who had prepared them. This led me firmly to the conclusion that the merit of a company cannot always be deduced from a study of its profit and loss account.

I should like the Committee to be quite clear what I am arguing when I say that. I know that it is often said, particularly by my hon. Friends, that in assessing the merits of a company one should also take into account its productive capacity, the fact that it gives employment in a depressed area, or something like that. There is force in those arguments, but I am talking not about that, but solely about money, and I say that the merit of a company cannot necessarily be told from a study of its profit and loss account.

In recent years, there has been considerable development of rental, of companies supplying goods on rental, notably television sets. Perhaps it is not so widely known as it might be that many companies are engaged in supplying earth-moving equipment, office machinery, or machine tools, on a rental basis. This is very satisfactory for the users of this equipment, because they are thus able to carry on their businesses without capital outlay. However, it has not been altogether satisfactory in the past for the firms actually supplying the equipment. Not infrequently, the period taken under the rental contract to recover the capital cost of the goods has been longer than the period taken under the taxation regulations to write off the capital cost.

Therefore, in the early years of such a contract a company is bound to show a loss, at any rate on paper. It is not a real loss. In fact, the company may be doing very well, but on paper there is a significant loss. This is due to a quirk in our accounting system which is well adapted to recording transactions of sales and purchases, but not so well adapted to recording rental transactions. That is why I say that the financial merit of a company is not made clear from a study of its profit and loss account.

On the old basis of investment allowances, a company had to make a profit on paper before it could obtain the benefit of the allowances. I can think of many firms which built up an enormous number of allowances which were no good to them because, on paper, the companies were not making sufficient profits to take full benefit of the allowances. The system of replacing allowances by grants will give particular help to those firms which merit it.

I think, in particular, of a firm which is not very old—it was formed only six or seven years ago—which makes and rents a product. Having established a sound home basis, it has now branched out into the export market and has contracts in the Benelux countries and has recently succeeded in negotiating its first contract in the dollar market of the United States.

This is exactly the kind of firm which ought to have some benefit. Under the old system of investment allowances it was getting very little profit at all, because although it had a claim to these allowances on paper it was not earning sufficient profits to set off against the allowances. Thus the benefit was theoretical rather than real.

A proposal to replace investment allowances by grants will be of particular help to this kind of firm and others like it—firms which deserve well of the economy. My only regret is that the Chancellor of the Exchequer may be taking away with one hand what he is giving with the other. Firms like those I have mentioned will benefit from the introduction of the investment grants, but I deeply fear that they will be severely hit by the introduction of the Selective Employment Tax.

I have been studying the White Paper, and it seems that this kind of firm is one which will not receive benefit. I have noticed that many other speakers have been putting in their oar, claiming exemption for this category and that, and I would like to put in mine and claim exemption for this particular type of firm.

A firm renting out earth-moving equipment, machine tools, or office equipment is contributing something quite substantial to the manufacturing capacity of the country and I would like to believe that the Chancellor would consider whether these firms could not be transferred into a different section so as to claim advantage from the proposed new tax. I should also like to say, in common with other speakers who have preceded me, that I hope that the Chancellor will find it possible to think again on the question of charities. It seems a little hard that these have to suffer.

In conclusion, may I thank the Committee for its indulgence in listening to me?

8.52 p.m.

Sir John Eden (Bournemouth, West)

We listened with a great deal of interest and sympathy to the hon. Gentleman the Member for Chislehurst (Mr. Macdonald), speaking in this Committee for the first time. In the first instance, he paid a warm-hearted tribute to his predecessor, Dame Patricia Hornsby-Smith, who is known, not only to all Members of this House, but to many audiences throughout the world as a most colourful and forthright personality. She is a person of immense courage who enlivened and enlightened the proceedings of this place for many years. I hope that the hon. Gentleman will not take it amiss if I say that all of us miss her a very great deal and look forward to her return in the near future.

I congratulate the hon. Gentleman most generously on his speech. We have listened to some fantastically good maiden speeches and the hon. Gentleman's was no exception. He showed himself to be an accountant of no mean skill and I suspect that the talents which he possesses will be most welcome during the later proceedings of this Committee, when we sit through the complications and complexities of the Committee stage of the Finance Bill.

I am certain that we would benefit from the counsel and advice which he can give to us. Perhaps he can show us some way of getting round the problems with which we are confronted as a result of this Budget. I also suspect that the particular profession which he represents will be very considerably in demand in the months ahead. From what he has said about how one can deduce the standing or position of a company from the state of its balance sheet, it appears that one will be left in even greater obscurity in the future when accountants start advising their clients about how best to present their figures in the light of the new taxation.

In considering the Budget I must admit that my first reaction upon hearing the Chancellor's speech was one of interest, if not excitement, at the novelty of it. This reaction was almost universal. I thought that he was getting away from the age old pattern. But this initial reaction quickly evaporated.

My second reaction will stay with me a little longer. I thought that the Chancellor of the Exchequer, once again, had got away with it. Here is a clever piece of public relations work. It is an achievement that, when taxation is increased by £385 million, people in this country heave a sigh of relief. If that is not skilful public relations, I do not know what is. I suppose it is true that we complain only when we actually feel the pain. But the pain will certainly come in due course. I must admit that, having been in the position in which all of us were placed of being confronted with what looked like immediate and violent death, the prospect of gentle suffocation comes almost as a relief.

I have no doubt that, in view of the great public relations expert which the Chancellor has shown himself to be, we shall have further examples of his art during the proceedings on the Finance Bill and on the Bill to be tabled by the Minister of Labour. Having started by creating the most monumental disturbance and dislocation throughout industry, and having given rise to a vast spate of representations and complaints, he will, I suppose, concede a point here, give in on a point there, and make himself out to be the great saviour, perhaps of charities, I hope, perhaps of schools, I hope, perhaps of the hotel business, I hope. He will smile his benign smile for all people so that they will bless his name for the concessions he has made. People will tend to forget that it was he who initiated this vast dislocation in our industrial life.

My third reaction is also likely to remain with me for some time. It is the reaction I have when I consider the motives which lie behind the proposals in this Budget. I am deeply suspicious and concerned about what is going on in the minds of the Chancellor of the Exchequer and his advisers. I am suspicious of their true motives and I am concerned about the future. I am primarily concerned because of the clear trend towards a vast new bureaucracy. This is not only a question of adding new taxes to existing penal taxation; it is also a question of adding vast numbers of civil servants to an already well overstaffed bureaucratic system.

This is the pattern which has emerged in other Socialist countries. It is typical of the Socialist States, many of them behind the Iron Curtain, which take into their hands as much control over the direction of individual and commercial life as possible, and the new élite of the Socialist States is always the civil servant. That situation appears to be developing in this country.

In the few moments which remain to me at this late stage of the debate, I cannot do justice, even by my own standards, to some of the things I wanted to say, but I ask myself what it is that is most needed in this country. I think that if one were to give an answer in two words probably most hon. Members would join me in saying that "greater efficiency" was most needed. This is what we mean when we call for greater productivity, on the one hand, and for increased effort, on the other. It is not so much that we want greater production or to turn out more goods. We want more efficiency and therefore a more economic use of manpower.

We all know of examples of inefficiency in manufacturing industries caused by over-manning of machines and restrictive practices. We all know the examples of inefficiency in the nationalised industries. Yet this Budget will not help to solve those problems at all. But inefficiency is also apparent in the quality of service. To my mind, poor service is inefficiency. We see this in bad, sloppy and inefficient work. None of these things will be cured by the Budget.

Representing, as I do, a holiday constituency, I am particularly grieved that the hotel industry once again has been singled out for this damaging attack. Surely we must recognise that the quality of service, as distinct from the efficiency of production, is related directly to the manpower that is employed. While I have been sitting in my place throughout this debate, I have received two telegrams, one from my own chamber of trade and one from the Bournemouth branch of the builders.

The builders ask a specific question, which I should be grateful to have answered. What is the position of firms which are committed to fixed-price contracts? If the new tax comes into being before the expiry of their contracts, they will be in a particularly difficult position. The chamber of trade from my constituency, as, I am sure, is the case also with many other constituencies, is calling for a payroll tax to be generally applied rather than this maliciously applied selective tax.

The hotel industry's case has been well argued by many of my hon. Friends and, indeed, by many hon. Members opposite. I will take the opportunity in the later stages of the Finance Bill to press the industry's claims more fully and more thoroughly. I only ask at this stage that the Chancellor of the Exchequer should earnestly consider restoring to the hotel and tourist industry the benefits of the investment grant procedures which were taken away from them in January this year. There seems now to be no case whatever for refusing this small restorative, which would help substantially in assisting the industry to improve the services that it gives to the travelling public.

In my view, the Chancellor with this Budget is moving in exactly the opposite direction to that which is required at this time. We want to see greater encouragement and stimulus to the introduction in manufacturing industry of new automated processes, numerically controlled production lines and new types of machinery to save labour. This is where the efficiency should be found.

What we need to have are vastly improved standards of marketing, salesmanship and service. I do not think that the Budget will help. By adding further to the heavy burden of taxation and by aggravating further the hideous complexity of the taxation system, this Budget is a disincentive and a handicap.

9.3 p.m.

Mr. Anthony Barber (Altrincham and Sale)

We are now coming to the end of one of the most important four-day debates in the Parliamentary calendar, and I hope that the Committee will allow me first to make a few preliminary observations.

The President of the Board of Trade, who opened the debate this afternoon and gave us some welcome news about the Export Credits Guarantee Department's terms, once told me that he had spoken in every Budget or Finance Bill debate since 1945. I cannot rival that, and I am relieved to be able to say this, but I am, I suppose, making progress, because my total is now six, four when I was at the Treasury and two in opposition.

There is, of course, more than one difference between speaking for the Government and the Opposition. When I was at the Treasury, I found that in the weeks which preceded the Budget I hardly dared to speak to any of my friends. I am bound to admit that in the weeks which followed the Budget, many of my friends did not seem to want to speak to me!

This four-day debate has been in some ways an unusual one. In the first place, we have had a very large number of maiden speeches. I have listened to all of them or read them. Although, for a reason which pains me slightly, most of the maiden speeches seem to have come from the Government benches, I must in fairness say that they have been of a refreshingly high order. I confidently expect that we shall have many more contributions from the Government benches in the course of the Finance Bill debates than we had last year.

Of those who made maiden speeches today I should like, at the risk of selection, to add my own particular congratulations to two of them, to the hon. Gentleman the Member for Midlothian (Mr. Eadie), who spoke about the coal mining industry with such conviction and sincerity, and to my hon. Friend the Member for Guildford (Mr. David Howell), who in what, I think, must have been one of the shortest maiden speeches during this four-day debate, concentrated on the need for positive incentives for higher productivity, and who spoke, I think all my hon. Friends who heard him will agree, with remarkable lucidity and logic. I should like to say, on personal grounds, how much I enjoyed the first speech since his return of my old colleague at the Treasury, my hon. Friend the Member for Farnham (Mr. Maurice Macmillan).

Whatever view hon. Members opposite may have of the merits of our contributions on this side of the Committee I am sure that the whole Committee will join with me in congratulating those other "maidens" of both sexes—the first-time speakers from this Front Bench in these Budget debates. As for speakers from the Government Front Bench, there will be one change this year, and in his absence perhaps I can say that we shall miss the delights of debating with the erstwhile Minister without Portfolio who will now be soon relieving you in the Chair, Mr. Grant-Ferris.

The second unusual feature of this debate has been the way in which during the debate, ever since the Chancellor of the Exchequer opened his Budget last Tuesday, public comment on the Selective Employment Tax has day by day both hardened and become more critical. Now I frankly admit that the right hon. Gentleman's proposal took me, and, I think, everybody in the Committee, and, indeed, everybody in the country, by complete surprise, when he announced it. The Chief Secretary says, "Hear, hear". I will answer him in this way. It was, I think, inevitable that he should have taken us by surprise, because, after all, nobody in his right senses has ever before thought of such a harebrained scheme. My right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said that the economic pundits were waiting anxiously to see whether the Chancellor would follow the advice of the hawks, or whether he would follow the advice of the doves. In the event, as far as this tax is concerned, it seems that he has accepted the advice of the cuckoos. Later on, of course, I shall have something a little more stringent to say about this very strange innovation, the Selective Employment Tax.

It is natural that during this debate hon. Members on both sides should have devoted a considerable amount of time to the new tax, but I am sure that the right hon. Gentleman will be the first to agree that this debate is also about the overall economic position of Britain, because it is the Chancellor's judgment of the present and prospective course of the economy which has caused him to burden the British people with a further whacking great increase in taxation amounting to nearly £400 million this year. I would remind the Committee that this is the largest increase in taxation since 1951, when the Labour Party was last in office. Indeed, we can say with truth that we are now back again on the old familiar Socialist road of high and rising taxation.

What has caused the right hon. Gentleman to raise taxation yet again? The answer, as he frankly told us in his Budget speech, is that, in his judgment, demand is too high. But whose fault is that? The right hon. Gentleman seeks to blame the British people for being too demanding. We are told by the Minister of Labour that this is "the age of grab". But who is responsible for creating the situation which has led to this impost on the people? It is the right hon. Gentleman himself, and I will tell the Committee why.

In the speech which the First Secretary of State made last Wednesday, he chose to go back to October, 1964. I will do the same, but only for a moment or two. Within ten days of the right hon. Gentleman taking office as Chancellor of the Exchequer, after he had had time, as he put it, to examine the books, he issued a statement in a White Paper which has rightly been quoted by a number of hon. Members in the course of this debate.

The right hon. Gentleman said in October, 1964: … thee is no undue pressure on resources calling for action. Within a month, he put up Bank Rate to 7 per cent., as he put it, as … a reinforcement of our earlier measures to check the pressure of demand".—[OFFICIAL REPORT, 24th November, 1964; Vol. 702, c. 1103.] A few months later, in the Budget of April last year, he described his proposals as being … to decrease the pressure on our resources, through lower public expenditure and higher taxation, by £250 million."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 244] Now, for the fifth time in 18 months, we have the same old dreary formula, with not a single incentive of any kind to increase initiative and enterprise. Not one.

Last Wednesday, the First Secretary of State departed from his prepared speech as a result of an intervention by my right hon. Friend the Member for Enfield, West, and he said: I suggest to the right hon. Gentleman that he should consider all our measures, all those taken over the past 18 months and now being taken, the fiscal and the physical measures, and consider them together."—[OFFICIAL REPORT, 4th May, 1966; Vol. 727, c. 1658.] I will gladly oblige the right hon. Gentleman for a few minutes, because it is the Government's repeated ineptitude and bad judgment which have now led to the biggest increase in taxation for 14 or 15 years.

What are the several factors which have led the right hon. Gentleman to impose additional taxation on such a massive scale? The right hon. Gentleman used to tell us that his policy was directed to stable prices; but, as my right hon. Friend the Leader of the Opposition pointed out, on the occasion of this Budget, they were not referred to as being one of the Chancellor's objectives. With two exceptions, what has actually happened in every single month since the right hon. Gentleman took over is that the Index of Retail Prices has gone up, and now the right hon. Gentleman is quite deliberately imposing more taxation which, whatever its merits, every commentator in the land will agree is bound to put up prices even more in the autumn.

What about incomes? The Chancellor rightly said in his Budget speech that the wage increases of last year were not justified. Indeed, it is true to say that, if earnings had kept within the First Secretary's limit of a 3½ per cent. increase over the year, there would have been no need at all for these tax increases in the Budget. But it is now more than a year since the First Secretary of State proclaimed to the world that "there is now a prices and incomes policy in existence". Three and a half per cent., he proclaimed; but, while the right hon. Gentleman was flamboyantly acknowledging the cheers, the unions themselves were quietly slipping in the wage claims and getting them, resulting in a 9 per cent. increase in earnings over 12 months.

Why does the right hon. Gentleman the Chancellor not frankly admit that the First Secretary of State's incomes policy, for all the good intentions behind it, has failed, and, what is more, that it has been the failure of that incomes policy, coupled with the reliance on that policy over the past year or so, which has now led to these appalling tax increases?

I would say to the right hon. Gentleman that if he thinks that the gritty accents of reality of the Prime Minister doing the rounds of the trade union conferences will have more than only a marginal effect on wage claims, he will be sorely disillusioned. After all, as a result of this Budget, the Prime Minister will speak with a further handicap. I shall come later to the effect of the new Government taxes on prices and the lever this will give to wage claims.

But what does the Prime Minister really think about the direct effect of an employment tax on wage claims? In 1961, my right hon. and learned Friend the Member for Wirrall (Mr. Selwyn Lloyd) proposed a payroll tax of 4s. per person, but, as right hon. and hon. Gentlemen opposite will remember, it was not a permanent tax such as the Chancellor now proposes. It was a tax of 4s. per head to be imposed only in certain economic circumstances and conditions.

My right hon. and learned Friend said, as the Chancellor now says, and we all agree, that earnings had been increasing too fast, and what, may I ask, was the patriotic response of the present Prime Minister? I was at the Treasury at the time. I remember the remarks of the Prime Minister from this Dispatch Box, and I will remind the Committee, and the Chancellor in particular, of them. He said: We had a half-hour homily yesterday about labour costs being too high, but a tax on wages would make them higher. If the right hon. and learned Gentleman thinks that wages are too low to secure a real economy in the use of manpower the answer is obvious. He should press for higher wages.… That was the present Prime Minister talking, and he went on to say: Has he"— that is, my right hon. and learned Friend, who was then Chancellor— considered the effect that the new proposal will have on industrial relations? Does not he feel that the workers will consider themselves to have been cheated when they think that employers can afford, or can be made to afford, to pay the labour tax to the Government—while, at the same time, those same employers are refusing to give them wage rises?".—[OFFICIAL REPORT, 18th April, 1961; Vol 638, c. 986.] That is what the right hon. Gentleman the Prime Minister said at that time. [HON. MEMBERS: "Where is he?"] I am sorry that he is not here.

The Chancellor began his Budget speech by saying that one of his three objectives was "steadily growing industrial strength", and the President of the Board of Trade made the same point in his speech today. I thought that as an objective they were both right, but I could not help wondering why they were both so coy about telling us what has actually happened. One of the fascinating side lights on the relations between the right hon. Gentleman the Chancellor and the First Secretary of State is the fact that throughout the whole of his Budget speech the Chancellor never once referred to the First Secretary's pride and joy, the National Plan.

There is not one reference to it anywhere in his speech, and I will tell the Committee why. It is because the National Plan is based on an increase in industrial production between 1964 and 1970 of 4.5 per cent. a year, and during the last 12 months the increase in industrial production has been not 4.5 per cent., not 3.5 per cent. not 2.5 per cent., not 1 per cent., not even 0.5 per cent., but precisely nil. I wonder whether the Chancellor remembers those care-free days when he used to proclaim that the Conservative Government's growth rate of 4 per cent. was too low, and that what we needed was 5 to 6 per cent.

What of industrial productivity? I ask hon. Members to cast their minds back only to last Tuesday, to the Chancellor's determined, purposive speech on this aspect. He referred to the quite unobtrusive work of increasing productivity."—[OFFICIAL REPORT, 3rd May, 1966; Vol. 727, c. 1430.] It has been so "quiet" and so "unobtrusive" that during the last year it actually fell by a half per cent. How can the First Secretary seriously pretend, as he did when he spoke during the debate last Wednesday, that the National Plan remains the blueprint for action and the central core of the Government's economic and financial policies."?—[OFFICIAL REPORT, 4th May, 1966; Vol. 727, c. 1659.] There must be some limit to the credulity of the right hon. Gentleman.

I turn next to the fourth factor which has led to this increase in taxation, the deplorable record of savings under this Government. Whatever criticisms the right hon. Gentleman may have of his Conservative predecessors he must surely envy their achievement in maintaining conditions we enable the British people to increase their personal savings over the whole of those 13 years by an average of 13 per cent. a year. Last year the increase was down to 1.6 per cent., and National Savings actually fell. These are the figures which the right hon. Gentleman did not give us in his Budget statement. They really are of crucial importance because, as he said, "More savings, less tax."

It' the average increase in personal savings during the period of the Conservative Government had been maintained throughout this period under Labour the extra amount saved this year would have been greater than the yield in a full year of his new Selective Employment Tax. So that again, on his own reasoning, there would have been no need for this enormous increase in taxation.

I now come to the fifth matter which the Chancellor had to take into account—the balance of payments. The President of the Board of Trade said that we must look at this in perspective. He was right; I quite agree. But let nobody be under any illusion as to the true position. In each year since the right hon. Gentleman took over—and he may well have been justified in doing this—he decided not to pay the normal end-year payment of £62 million on the North American loans which were borrowed in the years immediately following the war. This £124 million will have to be repaid in the future. On top of this we owe £899 million borrowed by this Government, which is due to be repaid within the next four years.

It is true that we have massive reserves behind us—reserves in overseas investment built up assiduously and painstakingly over the years. But what is the true position of our liquid reserves—our gold and foreign exchange reserves? Let no one in this Committee accuse me of "knocking" the £, because the analysis that I wish to make is known to every foreign exchange dealer throughout the world. At the end of April our published reserves stood at £1,257 million. That figure includes £316 million ransferred from the dollar portfolio.

As was pointed out only a few minutes ago by my hon. Friend the Member for the Cities of London and Westminster (Mr. John Smith), whatever the merits, there can be no quarrel about the fact that that was a transfer of capital to finance our current transactions. Without it our reserves would be down to £941 million. If we take into account the debt to be repaid by 1970 our true net liquid reserves at the end of April stood at £42 million. This is the true position which the right hon. Gentleman has to face.

The point that I am making is that there have been no striking changes in the balance of payments since the right hon. Gentleman spoke to the House on 1st March. Last Tuesday, in his Budget Statement, he said: There have been no striking changes in the economic situation since I gave the House a review two months ago. The most recent figures confirm this."—[OFFICIAL REPORT, 3rd May. 1966; Vol. 727, c. 1442.] But if there have been no striking changes since the election why did the right hon. Gentleman not tell the nation the truth before the election?

What the right hon. Gentleman told the nation before the election was that he did "not foresee the need for severe increases in taxation". He now admits that there has been no change over the last two months, yet he proposes in this Budget to increase the taxation this year by an amount greater than in any Budget during the whole 13 years of Conservative administration. If that is not a severe increase in taxation, heaven help this country when he really gets into his stride.

When he now admits—as he does—that there has been no change in the economic situation since the election, to have said before the election that he did not foresee the need for any severe increase in taxation was sheer deception. This is obvious from what he has said since. This increase of £386 million this year comes on top of an increase of £304 million in November, 1964, and £323 million in April, 1965—a grand total of increased taxation in 18 months of Socialism of more than £1,000 million.

I wonder how many people now remember the honeyed words of the Prime Minister which were given on television just before the 1964 General Election, when he said: Over the period of a Parliament, I believe that we can carry out our programme without any general increase in taxation. If that pledge is to be kept, before the next election this Government will have to reduce the burden of taxation by more than £1,000 million. Is that what the right hon. Gentleman proposes to do? Will he renew the pledge in those terms tonight? That is what it means.—[Laughter.] He laughs. This is no laughing matter, when these sort of pledges are given on television at election time. Perhaps he will tell us in a few minutes.

I now want to turn to the new tax on jobs. It is, of course, being freely stated in the Press that this is the brainchild of Dr. Nicolas Kaldor. It does not matter to me whether it comes from that source or was the right hon. Gentleman's own idea. All I would say, after four years at the Treasury, dealing with the Inland Revenue and the Customs and Excise is that I can assure the Committee of one thing—that neither of the Revenue Departments would ever have concocted such a cockeyed scheme as this.

I can list our objections to the new tax under a number of heads. First, the administration which the right hon. Gentleman has devised is ludicrous. The first stage is that the civil servants in the Ministry of Pensions will collect from the employers over £1,000 million. The second stage is that the civil servants in the Ministry of Labour will pay back to the same employers £750 million of the money collected by their colleagues in the Ministry of Pensions. The third stage is that the civil servants in the Inland Revenue will collect from the employers in manufacturing industry tax on the difference between what the Ministry of Pensions collected and what the Ministry of Labour repaid.

This is administrative bedlam. I hope, at any rate, that we shall hear no more from the Prime Minister of those pleas he has been making to industry to improve its managerial efficiency. The Committee should remember that the horde of civil servants who will be recruited to work the scheme are themselves not to be subject to the tax at all. The extra cost of the new administration which is to be set up, we heard this afternoon from the Minister of Labour, is £¾ million a year.

The second objection to the tax is that it is economic nonsense. There is no rational reason whatsoever for dividing the whole of British industry into services and manufacturing on the basis of a classification which was devised purely for statistical purposes and then to proceed to penalise the one and subsidise the other. The nonsensical discrimination which the right hon. Gentleman has been making has been highlighted in the debate again and again and I do not propose to go over the examples.

The sort of case which has been mentioned is the fact that the employer whose company is exclusively concerned with providing export services is penalised, whereas the manufacturer of pin-tables is subsidised. There is now a positive disincentive to employ part-time workers. Again, it is nonsense to pretend that there is a more wasteful use of labour in the service industries than in the manufacturing industries. Indeed, most people would believe that the converse was the case.

The third objection to the tax is that it is grossly unfair. One of my hon. Friends pointed out at some length the sort of consequence which it would have for the independent schools. Almost every hon. Member on this side of the Committee, certainly in the course of the debate, has stressed the plight of the disabled unless the right hon. Gentleman makes a concession. When he intervened in the speech of my right hon. Friend the Member for Enfield, West, who made some comments about the position of the disabled, the right hon. Gentleman the Chancellor at that time did not know what the position was, did not know what he was able to do. Indeed, the words he used were that he was thinking about it. I hope that we shall this evening get a clear statement, because we are certainly expecting a concession for the disabled.

We are told that 18 Co-operative Members of Parliament are to be true to their conscience and oppose this tax. But what I am waiting to see is how many Labour Members of Parliament will go into the Lobby to secure exemption for the charities of this country. What is the purpose of the Labour Government in penalising the Salvation Army? Does the right hon. Gentleman really think—[Laughter.] All right. If I may say so, it will be noted outside the Committee that this is the line which hon. Gentlemen take. [Laughter.] Do hon. Members opposite think it funny that the Imperial Cancer Research League will be set back £20,000 a year as a result of what the Chancellor has done? Do they think it funny that the Church Army will have to pay £40,000 a year as a result of what he has done? Do they laugh because Dr. Barnardo's Homes are to be mulcted for £100,000 a year?

I can tell the Chancellor that his hon. Friends behind him may laugh and they may support him in the Lobby, but we shall fight this in the weeks and months ahead. The Chief Secretary sits there smiling, but I do not think that the charities of this country will be particularly amused by his observation in his speech that 'Pay as you serve' is a brilliant conception."—[OFFICIAL REPORT, 5th May, 1966; Vol. 727, c. 1890.] What about the old-age pensioners? I hope that the Chancellor will listen to me, because I should like to know what reply he intends to send to Mr. Ernest Melling, General Secretary of the National Federation of Old Age Pensions Associations, who wrote to him as follows: If Mr. Callaghan doesn't let us off I think it is almost a certainty that employers will sack us, and that will mean the end of an extra bit of pocket money for half a million old people who prefer to work instead of loaf about. What reply has the Chancellor sent to the old-age pensioners? We shall watch with interest the reaction of hon. and right hon. Gentlemen opposite in the Division Lobby.

There is much more that I wish to say about this tax, but I want to limit myself to 30 minutes as I promised. Tomorrow at 3.30 p.m. we shall have an opportunity of dividing the House on a number of the right hon. Gentleman's proposals. We shall watch what right hon. and hon. Gentlemen opposite do when we consider this matter in the course of the Finance Bill, and in the days and weeks of debating which will follow the right hon. Gentleman will have much to answer for.

9.32 p.m.

The Chancellor of the Exchequer (Mr. James Callaghan)

I agree with the right hon. Member for Altrincham and Sale (Mr. Barber) that there have been a number of maiden speeches of very high quality, including those of my hon. Friends the Members for Midlothian (Mr. Eadie), Berwick and East Lothian (Mr. Mackintosh), Cardiff, North (Mr. E. Rowlands), Bedfordshire, South (Mr. Gwilym Roberts) and Chislehurst (Mr. Macdonald) and the hon. Member for Guildford (Mr. David Howell). I particularly enjoyed the speech of my hon. Friend the Member for Cardiff, North, my constituent. He voted for me last time; and I feel that he may vote for me again. [Laughter.] Some hon. Members did not hear the speech which he made but by all accounts it was a brilliant speech.

We have had a number of speeches in this debate from new speakers from the Opposition Front Bench—from the hon. Member for Worthing (Mr. Higgins), whom I am glad to see there, the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) and the hon. Lady the Member for Finchley (Mrs. Thatcher). The hon. Lady made a vigorous speech. I resented the adjective "toughie" being applied to her. I would have said that there was a certain feminine inconsequentiality at some points in her argument; but it was nonetheless attractive for all that, even though she would not expect us to be convinced by it. We look forward to hearing her in a num of these debates—provided that we do not have to take her arguments too seriously when they seem to be overtaken by other considerations.

The Committee will forgive me if I push ahead. I do not blame the right hon. Member for Altrincham and Sale for overrunning, because others did so.

An interesting thing about the debate is that there has been very little challenge of the general Budget judgment. There have been strictures as to why we should have to make a judgment like this, and a great many inquests into how we could have avoided it had we done other things at earlier times. No doubt that argument may be of interest to historians—and to propagandists. But as to the decision that should be taken now, there has been, I think, no challenge at all. Indeed, the right hon. Member for Orkney and Shetland (Mr. Grimond) went out of his way to say that he accepted the general Budget judgment.

The right hon. Member for Enfield, West (Mr. Iain Macleod) was eloquent on the respective dangers of an over-soft or over-tough Budget and I followed him through the course of his argument very carefully indeed. However, it appeared that his quarrel with me was not so much on what I was doing, but on the timing with which I was doing it. If I understood his argument aright, it was that he would have preferred me to reduce purchasing power in the economy straight away rather than wait until September, when the Selective Employment Tax comes into operation.

It is an arguable case but I think the right hon. Gentleman is neglecting two points which I put forward and adhere to. The first is that, as I explained in my Budget speech, there is likely to be a check in demand over the next few months. There was a good deal of anticipatory buying before the Budget—for example of motor cars—and it is possible that there will now be more of a lull.

Moreover, the full effect of the deferment of certain capital projects in the public sector, which I announced last July, have yet to be felt. It is being felt now. There is also the impact of the tighter hire purchase restrictions which were imposed before the General Election. Although the General Election was in one sense a watershed, the economic effects of these measures should continue. They were restrictive, and they are beginning to have an impact, as is shown in the economic indicators, on the pressure of demand.

As I tried to make clear in my Budget speech, this is a temporary slow-down that we are likely to witness in the second quarter; and I anticipate that the pressure of demand will pick up again later in the year if no further action is taken. So the Selective Employment Tax—and I will return to it later—will come into effect at a time when purchasing power might well need to be withdrawn from the economy.

Thus, although on the question of timing my view would be different from that of the right hon. Member for Enfield, West, even he, as I understand it, does not quarrel with the total judgment I have made. A number of my hon. Friends have also expressed their agreement with my view. There is, therefore, fairly general agreement in the Committee that no matter what the causes, and no matter who was responsible for them, what is being done in terms of the pressure of demand is about right. At any rate, there has been no official Opposition speaker who has said anything to the contrary.

I will now mention one or two particular facets. On fixed investment, one of the reasons why I chose the methods I did, in preference to any others, was that I was most anxious to avoid repeating the catastrophe of 1961–62. There is no doubt—it is well recorded—that, in response to measures that had to be taken on the home economy because of the balance of payments, fixed investment declined calamitously. It slid down the precipice at such a fast rate that it did not recover until late in 1963 or early in 1964. That destroyed confidence in manufacturing industry very thoroughly indeed.

What we have done here what I hope will be the result of the measures I have taken—is to sustain confidence in manufacturing industry. Investment by manufacturing industry, which accounts for about one-fifth of the total, will, in any case, be much the same in 1966 as in 1965. I think it would have been a profound mistake on my part if, by concentrating heavy increases in taxation on manufacturing industry, I had driven it downwards. The latest Board of Trade surveys of companies' intentions indicate that there is not likely to be much change in 1966, but it is a little early to say what will happen in 1967. Without a boost, I think it unlikely that investment by manufacturing industry will rise much in 1967. Hence the need for cash grants, hence the need for me to avoid in this Budget an attack on manufacturing industry that would have destroyed its confidence.

Perhaps I may make a contrast. There may be some hon. Members on both sides of the Committee who say that it is not very good to have manufacturing industry merely maintaining the same level of investment over the next year—and perhaps over the next two years. I agree—it should go up if the National Plan is to be fulfilled—but when I contrast it with 1961 I must say that this shows an immeasurable improvement. From the peak of the third quarter of 1961 to the trough in the first quarter of 1963, the volume of manufacturing investment fell by 22 per cent. Admittedly, it was to some extent because the steel investment programme came to an end; but even neglecting that fact, investment by manufacturing industry declined by 16 per cent. in that period. It may not be regarded as good only to maintain the present level of investment; but everyone must know, without party consideration, that it is far better that we should do this than go through what happened in 1961–62, when there was that calamitous fall of 16 per cent. There is a great deal more I wanted to say on that aspect, Sir Eric, but in view of the time I must push on.

My right hon. Friends and I have been very gratified by the way in which the decision to allow the temporary import surcharge to lapse at the end of November has been received at home and abroad. This is a decision that it is right to take. It has certainly had a substantial impact, and will continue to have a substantial impact, on our relations with other countries. It was a short-term measure. Hon. Members opposite affected to believe that it would never be taken off, but I am glad that they were wrong. They thought that it was to be a protective device; but the prop is being removed and this, with the general stimulus of competition it will afford, should help to keep prices in check.

I agree with the right hon. Member for Enfield, West that it will be a substantial help in the creation of a more competitive economy. That is one of the things we wish to see, and which we are pursuing. I also agree with him that because the announcement now may have some impact upon the flow of imports over the next few months, as may other factors, it would be wrong to take too much notice of individual month-by-month changes. I agree with the right hon. Gentleman, and with the hon. Member for Worcester (Mr. Peter Walker), that too much attention is paid to them. We should take more account of longer term trends; and it is the long-term trend in improvement that will really matter here.

I must mention one matter concerning building societies. I thought the right hon. Gentleman might have asked me about it—he has not, but perhaps I may still mention it. Last week, I saw some references in the newspapers to the prospect that the Building Societies Association, meeting in Harrogate today, might put up lending rates on the grounds (so it was said, at least by some—I do not know that this is the official view of the building societies) that the margin they can accumulate in their reserves is not increasing fast enough.

I therefore wrote a private letter last Friday to the Chairman of the Building Societies Association. I did not seek publicity for it—although I suppose it is too much to hope that one will not get it—saying that I thought that if this was so, the question whether the reserve ratios could be maintained at their present level should be carefully considered before it is concluded that there is no alternative to a general increase in the margin between the societies' borrowing and lending rates. I told him that I should be glad to have the societies' view on this, and to discuss the matter with them together with my right hon. Friend the Minister of Housing and Local Government.

I am glad to say that according to the announcement now on the tape, the building societies have decided to accept the invitation to meet my right hon. Friend and myself to discuss the matter. It will be agreed that it is right that we should try to find every means of ensuring that before interest rates are put up, especially as they are related to conventional factors which need not enter into consideration of an increase in rates, all possibilities are explored. The meeting will therefore take place as soon as it can be arranged.

I pass from that to one or two other considerations. First, I want to emphasise once again the great impact in the Budget of the measures I have taken on the borrowing requirement. Because of the waving of a handkerchief, I think that some of this was lost during the Budget speech. Last year I was expecting to have to borrow £724 million in the course of the year from the market—or through the banking system, with all the inflationary effects which that could have. In fact I did not borrow £724 million because of the effect of the measures I imposed in July, as well as other considerations—under spending, for example, by the Defence Ministry.

The result was that, instead of £724 million, the borrowing requirement was reduced to £576 million, which was a substantial improvement on the Budget estimate. But this year, as a result of the series of decisions which have been taken, the borrowing requirement will be reduced to no more than £287 million. This is a very great improvement indeed, both for the health of the gilt-edged market and the success of our national policies. It cannot be emphasised too much that this is one of the results of the policies followed by the Government and that we are doing this to get a more healthy economy than there would be otherwise.

Of course it is true that this is partly the result of the Selective Employment Tax. I have already indicated the basis on which I have approached it. I thought it important to avoid the old series of tax measures once again; and the general reception that this Budget had had from the public shows that that view is generally acceptable to them. What has happened is that people have felt that whatever criticisms may be made by the nigglers, the cynics or the defeatists—and I do not mention names—here is an attempt to find a new way through a problem which has baffled the country and successive Chancellors ever since the end of the war.

I do not claim that we have necessarily found it, but at least what the country wants is an attempt to find new policies. They did not return us to carry on the policies of do nothing which the right hon. Member used to follow at the Treasury. I quite agree with him: I am sure his relations with the Board of Inland Revenue—I do not want to drag them in any more than he does—were different from mine, because I am asking them to do things. I am trying to use these Departments in order to get—what the right hon. Gentleman mentioned I thought with a touch of a sneer—a purposive direction of the economy. This is what government is about. This is what we are here to do.

It is the easiest thing in the world to sit back and run a laissez faire economy. Of course one can run it for a time; and, if one stokes up the fires, especially on public expenditure, and has completely uncontrolled imports and an uncontrolled economy to win an election, one can do it, but one ends then with a deficit of £750-odd million. The right hon. Gentleman took the figure of our gold reserves and, by adding up our liabilities, even those which do not fall due for another four years, said "Look at the tiny total of liquid reserves". I could with equal truthfulness remind him that when we came to power our liquid reserves in the form of gold and convertible currencies—he will not hold me to a few millions—were about £920 million and we were faced with a balance of payments deficit of over £750 million.

In other words, if the right hon. Gentleman chooses what I regard as a completely artificial way of expressing matters, he must not be surprised if, in turn, I set against the liquid gold and dollar reserves that we inherited the deficit that those reserves had to finance, [Interruption.] It is no good the hon. Gentleman expressing his disagreement. It was the need to finance this deficit which brought about so much of the trouble. The right hon. Member for Enfield, West is as aware of that as anybody in the Committee. Although I do not want to spend any time on this, this is why he pressed for the election in the spring of 1964; and everybody knows it. However, I do not wish to go over that ground again. [Interruption.] I am sorry; I meant the right hon. Member for Barnet (Mr. Maudling). I am sorry if the effect was lost by my saying "Enfield, West" instead of "Barnet". It was the right hon. Member for Barnet who wanted the election, and he wanted it all through the year, because he knew that there were measures which had to be taken; but they were not taken.

I come to some of the details of the Selective Employment Tax, The right hon. Gentleman poked some justifiable fun at the administration of it. I expect his grandfather poked fun at Monsieur Bleriot's aeroplane; but it was the first to fly the Channel. [Interruption.] If the right hon. Gentleman is not as young as all that, perhaps he was the one who poked fun at it.

I am entitled to ask the right hon. Gentleman when he pokes fun of this sort: given that he does not dispute the overall Budget judgment, what would he have done? Would he have increased the Income Tax? Would he have increased the Purchase Tax? Or would he have tried to find a new way around whatever the administrative difficulties were? I have no doubt that the administration of this tax will be refined over the year. I have no doubt that it will, and I shall certainly work to ensure that it is. I am equally certain that it was right to launch the tax this year, given the psychological situation that existed. Everyone was feeling that they were oppressed by heavy taxation and did not want the burden increased. One can wait. I think of the famous French general who reported that the army was ready to the last button on the last gaiter; but I remember that he lost the battle. The question is whether you march when you are ready to advance, or whether you wait until you have perfected everything—and then you probably do not march at all. That at least is my experience.

I come to the general administrative arrangements. On the basis of the arrangements that I propose, namely, the use of the Ministry of Pensions and National Insurance machinery, it will be possible to make no exemptions from payment of the tax, because the sum that will be paid will be included in the National Insurance stamp. The two things will be tied together. Therefore, it is clear that everybody must be subject to payment of the tax. [HON. MEMBERS: Why?] That is a fair question. The answer is that the chances of evasion if there were exemptions from payment would be too substantial to justify. This is a simple administrative point which must be taken and accepted by the Committee.

Mr. Iain Macleod

What the Chancellor has said is very important for the weeks and months ahead. I know that these matters are for the Chair, but do I understand him to say that in his view the Finance Bill will merely concern itself with the collection of money and that therefore, if it is desired to argue special cases, from agriculture to charities, and so on, they are in the Ministry of Labour Bill? If that is so, is it not vital that we see that Bill as soon as possible?

Mr. Callaghan

I was going to deal with that. I have only a few minutes. The machinery of collection will be included in the Finance Bill. The machinery of repayment will be included in the Ministry of Labour Bill. We hope to publish the Finance Bill fairly soon. This year it will not be a long Bill and I am sure that the right hon. Gentleman will be glad to hear that. The publication of the Ministry of Labour Bill is a matter for my right hon. Friend.

Mr. Heath

When?

Mr. Callaghan

It will be published when it is ready.

Mr. Heath

rose—

Mr. Callaghan

I have points of substance to deal with and only five minutes left. I have been asked a number of questions and I have to sit down at ten o'clock.

Mr. Heath

When will it be published?

Mr. Callaghan

The right hon. Gentleman can persist in shouting this now or he can get answers to some of the questions I have been asked. It will be published when it is ready.

Mr. Heath

rose—

Mr. Callaghan

There is time every Thursday for business questions. The right hon. Gentleman knows that perfectly well.

Mr. Heath

rose—

The Chairman

Order. If the Chancellor of the Exchequer does not give way, the Leader of the Opposition must resume his seat.

Mr. Callaghan

I have always been courteous to the right hon. Member for Bexley (Mr. Heath) but he can see how much time is left to me.

For the reasons I have given, it will not be possible to exempt farmers from payment of the Selective Employment Tax. Self-employed farmers will, of course, be exempt in any case, as was made clear in the White Paper. But farmers who employ labour will pay the tax in the normal way.

It is our intention that, for repayment, we should use the machinery of the Annual Price Review but there is nothing sacrosanct about that. If different and better administrative arrangements can be made, as it is suggested that they can be, such arrangements will be made, and my right hon. Friend the Minister of Agriculture will have discussions in due course with the farmers' unions about the best method of repayment.

Sir Douglas Glover (Ormskirk)

rose—

Mr. Callaghan

I come now to the question of charities. This is of great seriousness and significance and I would have liked longer time to deal with it.

Mr. Geoffrey Hirst (Shipley)

It is your fault.

Mr. Callaghan

No, it is not. The right hon. Member for Altrincham and Sale overran his time.

I do not at this moment undertake to exempt charities from payment or to give them repayment. There is a difference here between direct taxation and indirect taxation. The right hon. Gentleman mentioned the Salvation Army and asked how it could be right to tax it. But, for indirect taxation, the Salvation Army already pays taxes like everyone else. Let us take the classic example, raised year after year in the Finance Bill, of the tax on musical instruments. The Salvation Army pays tax on them like everyone else.

Although we shall continue the argument, I cannot say now that charities will be exempted, despite the general desire that they should be, any more than a member of the Salvation Army is exempted from paying Income Tax. The situation is exactly the same. I say this on the basis of the difference between direct and indirect taxation.

No doubt right hon. and hon. Members opposite wish to show that the cost of living will go up by an extraordinary amount. It will not. It is likely to increase at the most by two-thirds of I per cent., spread over a very wide range of goods and services. For this Budget I should prefer to accept, rather than the views of right hon. and hon. Members opposite, the views of the newly appointed Director of the National Economic Development Council, who said: Even if this imposes some burdens on some of us in the short run, it may well have done a great deal to see us off the deflationary spiral once and for all.

Question put and agreed to.

Resolution to be reported.

Report to be received Tomorrow;

Committee to sit again Tomorrow.