FINANCE (No. 2) BILL

HC Deb 30 June 1967 vol 749 cc1104-44

Order for Third Reading read.

11.6 a.m.

The Chief Secretary to the Treasury (Mr. John Diamond)

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

After a rather quiet night, we come now to the really exciting events of the day. Like its predecessors under the Labour Governments, the Bill shows three characteristics. The first is its sensible balance in providing funds for modern and adequate community services—what we tend now to call our public standard of living—without placing an undue burden on the individual or corporate taxpayer and thereby denying an adequate private standard of living. Its second characteristic is its willingness to alter what is really a rather flexible system to meet modern developments in public and private enterprise. The third is imaginative reform to assist any necessary reshaping of our economy.

I take, first, the question of an undue burden of taxation. The Bill fixes the rate of Income Tax, of Surtax and of Corporation Tax, and the question is whether these in total put an undue burden on the taxpayer concerned. At earlier stages, I have demonstrated that the burdens of taxation borne by people and corporations in this country compare reasonably favourably with those borne elsewhere. I wish now to spend a few minutes on the question whether our level of taxation creates a serious deterrent effect on effort, on volume of work, on hours worked and on enterprise.

Although, previously, all academic investigation and careful social study into this aspect of the matter had come to the same conclusion, namely, that there is no evidence that the levels of taxation have a serious deterrent effect on hours worked or on the desire to work, we had on this occasion one apparent piece of new evidence to the contrary, namely, a quotation by the hon. Lady the Member for Finchley (Mrs. Thatcher) from the Canadian Royal Commission on Taxation.

It was understandable that the hon. Lady should quote one of its statements, because it would correspond very much with what I understand to be Conservative thinking. Here is a part of the quotation, which appears on page 128 in Volume 2 of the Commission's Report: … we are convinced that high marginal personal rates of tax do have a negative effect on labour, managerial and professional effort. I imagine that that is a view which represents Conservative opinion. I imagine, also, that it is based on the same reliable evidence upon which Conservatives base their view. I now read the full sentence: Although we have no evidence to support our contention, we are convinced … and then follow the words which I have already read.

That is how the Royal Commissioners thought it appropriate to discharge their duty. Perhaps I may give some other references from the same Report on the vexed question of the effect of taxation on the number of hours worked. The Royal Commission came to the conclusion that the evidence did not indicate that taxes had a substantial effect on average hours worked.

It says in Volume 6, page 78, on the question of disincentive effects: What the evidence there is suggests that taxes have relatively little impact on the size, skill and industriousness of the labour force. It refers, in disagreement, to a recent investigation by the University of Michigan Survey Research Centre.

I therefore referred to that Report, entitled "Economic Behaviour of the Affluent", published by the Brookings Institution, The American researchers say about the various studies that have been carried out: … it is significant that despite diverse methodologies and the diverse nature of the populations studied, these investigations have concluded unanimously that the disincentive effects of progressive taxation are indeed minor. … The present survey does not break the record of unanimity. That is the conclusion reached by the various substantial investigations carried out in this country, which have been referred to many times.

I now turn to the second characteristic to which I referred, our desire to meet modern developments in industry and commerce. One example is the introduction of group relief, introduced because industry complained to us that the previous subvention payment system gave rise to certain difficulties, particularly that which we know well—the need for an actual payment. Therefore, in accordance with the promise I made—I think that it was last year—the general idea of group relief was discussed with representatives of industry before it was introduced.

They indicated their general agreement with the proposals—I put it no higher. The group relief was further extended to cover the case of the consortium, which was represented to us as a particularly valuable form of enterprise in modern conditions. We are anxious to do all we can to foster enterprise in whatever form it takes and to remove any serious barrier presented by difficulties in the tax system.

Another relaxation introduced during the passage of the Bill towards the same end concerned the provisions against dividend stripping regarding inter-company dividends on transfers of assets. In the same connection, I should also refer shortly to the alterations in the stamp duty, which in certain respects has been relaxed so as to meet the objections of industry that certain stamp duty provisions hit legitimate transactions. I therefore hope that it will be agreed that we are really anxious to meet difficulties of this kind sensibly and seriously.

The third characteristic to which I referred was the capacity for imaginative reform, evidenced this year by the introduction of the regional employment premium. I shall speak of only two aspects. I do not think that the House doubts any longer that the need for a major effort to remove the imbalance between the levels of unemployment in the development areas and other areas has been more than fully demonstrated.

The R.E.P. represents a massive effort towards that end, the massiveness of which can best be understood by recalling the statement by my right hon. Friend the Chancellor of the Exchequer that the scope and size of the effort was equal to the sum of all the others so far made in all the policies introduced by the present and previous Governments in dealing with the problem of the development areas.

The first aspect to which I wish to refer shortly, because we have debated it very fully, is the lack of inconsistency between the Government's seven-year guarantee and the need for flexibility in administering the scheme which is incorporated in the powers taken under the Act. Nothing I have said detracts one iota from the firm intention expressed in the White Paper, so that every board and every businessman will know that when they move into a development area on the basis of calculations made now those calculations will not be invalidated.

Equally, it is right that we should take powers to work with reasonable flexibility in circumstances which cannot all necessarily be fully foreseen, but which, for example, have already taken place with regard to comparable powers under the Industrial Development Act where, for instance, higher rates have been proposed for a short period. If we propose higher rates for a short period we may later want to lower them to the previous rate, and so on.

It is certain that it is wiser to take the necessary powers at the start, provided, as has been done in this case, the powers consist of a method of achieving quickly rather than slowly an end which the House decides is desirable. That is the only point that arises on the question of having permissive powers in the Bill, as opposed to leaving them out and allowing the matter to be dealt with by the longer and more tedious process of legislation.

The other aspect of the regional employment premium is what has been generally referred to as the cost. There have been speeches based on a preference for spending £100 million to do other things to help the development areas. Everybody wants to help, and many suggestions have been made of alternative ways in which we can spend £100 million, such as on advance factories. But this misses the essential quality of the proposal. It does not result in cost of that kind, and it is not to be measured in Exchequer cost, which is an inappropriate ruler for the measure of volume of activity of this kind.

R.E.P. does not cost £100 million in the sense that it is not necessary to provide additional taxation to meet the inflationary effect of what we are doing, taxation which would otherwise be necessary. The premium must, of course, be paid for in the sense that the Exchequer will have to provide funds to pay it, whether from taxation or from borrowing, but in deciding whether taxation should be raised we must consider the pressure of demand on domestic resources and on the balance of payments, and not merely the crude relationship between the yield of taxation, on the one hand, and Government expenditure, on the other.

What we must aim at is that yield of taxation which will result in as full a use of our resources as is compatible with avoiding inflation at home and imbalance on external account. The payment of the premium will generate an increase of national output and the argument in the Green Paper is that the whole of the increase, or more, will arise in the development areas. As a result there will be, if anything, some reduction in output in the rest of the country.

The main reason is that the premium will lower the cost of labour in the development areas and so shift some demand for manufactures from the more prosperous parts of the country to places with a labour surplus. It is realised that the larger output in the development areas will increase the demand for goods and services from other parts of the country, but it is estimated that this will be more than offset by the reduction in demand in other parts of the country caused by the greater competitiveness of manufacturing industry in the development areas.

What we must always keep our eye on, and what we frequently experience, is the pressure of demand in the more prosperous areas of the South-East and Midlands setting a limit to the increase in national output that can be accommodated without inflationary pressures. On balance, the pressure in these areas will, if anything, be reduced as a result of the scheme.

Once, as I have explained, one can get past that first stage of restoring the correct balance, increasing economic activity in the less than adequately active areas and reducing it in the more than adequately active areas, it is possible to increase the activity of the whole of the country without running into the difficulties of the South-East, London, the Midlands, and so on, which we so frequently experienced in the past and which put a barrier against development of the kind that was felt desirable. So, in those circumstances, there is no need for a general increase in tax to compensate.

As for the balance of payments, the increase in output in these conditions will make possible an increase in exports in parallel with that in imports, so no deterioration in the balance of payments need be feared. That is the economic theory on which this proposal is based. We very much hope that it will be achieved in the course of time. If so, we shall have discovered a method which has been long sought for of assisting the development areas without at the same time putting an extra demand on the economy.

In conclusion, the Bill, like its predecessors, is progressive in the way that it alters the existing machinery to fit the needs of modern development in industry and commerce. It is imaginative in its reforms, which are directed towards achieving a better balance in our economy, both geographically and industrially, and it is commonsensical in its approach to the competing needs of the community and the individual. All that being so, I hope that it will be given an unopposed Third Reading.

11.22 a.m.

Mr. Iain Macleod (Enfield, West)

The Bill may well be given an unopposed Third Reading, but not for any of the reasons that the Chief Secretary has put before the House.

This Finance Bill, unlike its predecessors of 1965 and 1966, is not particularly controversial, and it is a good thing that we can discuss its Third Reading in the calm of a Friday.

The only really new tax is the regional employment premium in Clause 26, to which the Chief Secretary referred. I understand the case that he makes on economic theory, but I do not accept it. My hon. Friend the Member for Worthing (Mr. Higgins) will probably be dealing with that point at the end of the debate if he catches your eye, Mr. Speaker.

What I am concerned to do is to make clear now that I hold to the two views about R.E.P. which I expressed, inevitably off the cuff, as Conservative Party spokesman when I first saw the Green Paper. The first is that I welcome very much anything that can be done to lessen the disparity in prosperity between different parts of the country, and if R.E.P. succeeds in this, I will undertake to welcome it in the future and say that my misgivings about it were wrong. I very much hope that it will succeed.

The second point is that the tax has been embarked on, rather like its parent S.E.T., with too little research and that what it does is to build on anomalies that already exist. S.E.T. by its nature had something of an anti-regional bias built into it, and I think that R.E.P. is to some extent compounding the anomalies which the Government forced through the House a year ago. That is the only really new—controversial is not the right word—disputed Clause in the Bill.

This Finance Bill was preceded by a number of dark threats of Business Committees, Guillotines and the rest. I voted against these, not because I am against civilised ways of handling Finance Bills or any other Bills but simply because I think it wrong to give undertakings to the House which I cannot be certain of carrying out. So we proceeded this year without any formal agreement. Naturally, I tried to plan where I thought we should get each day, and we got there nearly all the time. I made no secret of my intentions and desires. I marked everybody's card with as much enthusiasm as Prince Monolulu used to do. I did it for the Government Front Bench, for the Opposition Front Bench, for back benchers on both sides of the House, and for the servants of the House. I told everybody where we should get to. I think that this is the right way to handle a Finance Bill.

We are confronted once more for the third year and about the sixth Budget by the same team of three Treasury Ministers. I have a feeling that their life is moving peacefully to its close. I do not think that we shall see their like again.

Mr. Diamond

The right hon. Gentleman is not confusing R.E.P. with R.I.P., is he?

Mr. Macleod

That is not a bad idea, but I was not.

I have a constituent who always writes me an angry letter every time I say anything at all polite about the Chancellor, and I shall get another letter from him, I am afraid, on Monday. We find the Chancellor this year perhaps a little touchier, a little more sensitive. This is not surprising after everything that he has been through. But he has, as always, been extremely easy to deal with, and I think that he has handled this Bill from his side of the House with very considerable skill.

The Chief Secretary's frequent interruptions puzzle us on this side of the House. I do not regard him in the same sense as Cleopatra, but the phrase used about Cleopatra could be used almost in reverse about him: Age has withered him and custom staled his infinite lack of variety. But he is patient. He grants well. He makes some runs. He is a Yorkshireman and ought to remember what happened to Boycott, who did exactly the same thing.

It is customary in most of these Bills for us to acquire a new law to add to our store of economic theory. The Diamond's Law that we have had this year is a refinement of the earlier MacDermot's Law. The Chief Secretary had another go at it today. It would be remarkable if in the six heavy volumes of the Canadian Royal Commission on Taxation one could not find two phrases, which is what the Chief Secretary produced for us today, to fortify any particular conclusion, however absurd. But Diamond's Law is in two parts. Part I says "No British tax can be reduced unless it can be shown that every other country in the world is more severely taxed". Part II says, "Even so, it cannot be reduced".

The Financial Secretary to the Treasury has been excellent throughout. He has been unruffled and courteous. We are very grateful to the Financial Secretary as well as the Chief Secretary. Naturally, the Chief Secretary and the Financial Secretary carry most of the burden and have listened to what we have had to say. Usually, the Opposition do not expect to get much in the year of the Finance Bill. They hope to see some fruits of their labours in the following year. But this year there were some small but useful concessions between the Committee stage and Report.

The House will also understand if I very briefly pay tribute to my own team. My hon. Friend the Member for Finchley (Mrs. Thatcher), who has to be in Manchester today, was invariably well informed and excellent in debate through- out our sittings. Perhaps I might mention one particular short debate, the one on mineral royalties. I thought that her speech on that was a gem of a Parliamentary performance. I was fortified in that by the reflection that I understood only about one word in three of what she was saying. But I need not have worried. It was clear that the Chief Secretary who replied understood only about one word in four. For the rest, my hon. Friends the Members for Worthing, Wanstead and Woodford (Mr. Patrick Jenkin) and Wycombe (Mr. John Hall) have been of enormous assistance to me, and their speeches have been of the highest calibre.

After that somewhat lengthy introduction, the House may be relieved to hear that I am going to say very little about the Bill itself. It is not as irrelevant as it may sound to observe that today is 30th June and tomorrow is 1st July, not just because July brings the end of the period of severe restraint and, therefore, a particular test for the Government's policies, but because July proved disastrous to the Budget judgment in both 1965 and 1966. I hold the view that the Chancellor's Budget judgment—and the whole of this Bill in his Budget judgment—is wrong again, although I do not expect the consequences to be as catastrophic as they were a year ago.

But it may well be that the failure of growth, the worsening of prospects in our balance of payments, the increase in the trend of unemployment, some of which at least were foreseeable, mean in turn a failure of the Budget judgment itself. I do not want to press the Chancellor, but I think it might be helpful, not only inside the House, but outside, if he told us today, as far as he can—and I appreciate that things change pretty quickly—what his July judgment is. There have been lots of statements about whether there will be a mini-package in July again, and I think that it would be a service to the House if he took this opportunity in his winding-up speech to tell us the position as he sees it.

The Bill is the legislative clothing which makes up the Budget judgment, and as we went on through the discussions on the Bill something became clear which puzzled us very much at the time of the Budget itself. The Chancellor finally said to my hon. Friend the Member for Finchley that she ought to understand that estimates made in February could take account of reflationary moves planned, but not announced, for future months. With respect, we understand this very well. This is absolutely clear and sensible, but it makes the Budget speech completely incomprehensible, because all that guff about "steady as she goes" means nothing in the context of what is happening now. I can only think that the sea water got into the Chancellor's veins, and he put in that peroration at the end because the truth is that he refused the moderate reflationary movement which we suggested at the time of the Budget. I said then that no Chancellor ever reflates too soon, and the right hon. Gentleman may well be in danger of reflating now too much, too late.

The Leader of the Opposition yesterday cornered the Prime Minister on an obvious conflict between what was called the "Sunny Jim" speech of Saturday, 3rd June, and the official view of the Treasury which came out yesterday, and was presumably commenting on events up to very recently. It was headed in The Times Business Supplement: Treasury's grim view of economic situation The Prime Minister said that he thought both were right. Both cannot be right. This is the same Ministry, in the same month, on the same set of facts, one producing an extremely exuberant and the other an extremely pessimistic account, and it is this dichotomy which has led to our troubles over the last few years. I am concerned to hold confidence, but how can one if this sort of split goes on?

Perhaps I could remind the Chancellor that at the beginning of our discussions on the Finance Bill, which are now ending, I said two things in my major speech on 12th April. I said, first, that the February trade figures were very warmly greeted. I found them less encouraging the more deeply I looked into them because I came to the conclusion that the propensity to import was still disturbingly high, particularly when we have a low level of activity as at the moment", and Economic Trends yesterday bore this out.

The second is a closer analogy still. I said: Thirdly, and most important, I believe that unemployment is a great deal more serious than it looks. I say that, first, because the mildness of the winter cloaks the real unemployment situation and, second, because the underlying trend is still averse. This is not a question of forecasting. It is a question of knowledge. We all knew that the winter had been mild. After all, I was speaking in April, and it was not a difficult guess to realise that the economic situation from the point of view of unemployment was not as favourable as the Treasury was assuming. I said: In short—and, I believe, with good reason—I am less able than the Chancellor to take a cheerful or even passive view of the economy."—[OFFICIAL REPORT, 12th April, 1967; Vol. 744, c. 1214–16.] With respect, out of his own mouth, or out of the Treasury mouth yesterday, I would have thought that that was confirmed.

Once more we worry about the Ides of July, and I should like the Chancellor to say how he sees the position at the moment, and of course we must remember that in both the last two years his intentions at the beginning of July were quite different from his actions at the end. Even so, it would be good to know what he thinks, but we will not press him because I understand the difficulties. All this is for the future, and perhaps for a future economic debate if we have one.

I think that the passage of the Bill through the House has been as pleasant as a Finance Bill can be. I think that it has been as efficiently planned as any that I can remember, and I am particularly delighted that we—and by that I mean the House of Commons, both sides, front and back benches alike, and all three parties—have been able to show that without formality, and without threats of a Guillotine, it is still possible to hold full discussion on a Finance Bill within a reasonable compass of time, and to have that discussion where in my view it belongs, which is on the Floor of the House.

11.36 a.m.

Mr. Robert Sheldon (Ashton-under-Lyne)

The right hon. Member for Enfield, West (Mr. Iain Macleod) paid his tribute to the Treasury team, and I think that this is something in which we all join. By comparison with present-day practice in these matters, it is not a large team for so important a Ministry and the level of ability—expected of such an important Department—is high even by comparison with certain exacting standards of the past. I think that we can all say that even on those occasions when we on this side disagreed we received the courtesy which we have come to expect from my right hon. Friends.

Although I do not think that the Bill was greeted with wild excitement, nevertheless it introduced some fundamental changes. The most fundamental change which I saw emerge from the Budget was our commitment to the two important figures of 3 per cent. growth, and 2 per cent. unemployment. This has marked a great departure from the way in which the economy had been run for the preceding couple of years.

This was a great change, and although the measures in the Bill are not revolutionary, they embody that fundamental change in thought whereby the hopes for the expansion of the economy are now being placed on the measures to assist industry, in particular through the I.R.C. and the Ministry of Technology, rather than through the overall management of the economy, and this has, of course, been shown in the various Clauses of the Bill.

It is not the kind of Finance Bill that I would have liked. Perhaps I have come to expect too high a number of imaginative measures to be introduced each year, but, clearly, there was room on this occasion for a pause to allow the great value of the recent imaginative measures to sink in, and to be absorbed into the daily professional and industrial life of the country.

But there was one imaginative part, and this is where I found myself rather unhappy, because on this occasion the imaginative Clause was something for which I acquired a considerable distaste as I got to understand it better. My distaste for the R.E.P. was not lessened by the disclosure of a number of the anomalies in it—in particular, the very great anomaly whereby a new firm setting up in a development area can be penalised when the region is descheduled. Because of the assistance, the established firm can employ more and more workers and still get the premium for those workers, whereas a firm starting up young and fresh is unable to compete so effectively.

I agree that one sometimes has to accept anomalies because wider interests are involved. But on this occasion the anomalies appeared to be worse, because the compensating advantages were fewer. The cost of each job may be around £12,000, and the effectiveness of this proposal, which was never conclusively proved, cannot be conclusively proved except in the hearts of all of us when time has passed and we can see how these things have gone. Most important, there is the commitment over such a long period of uncertainty.

I reluctantly found that even a great imaginative measure like this, which aimed to solve a problem of great importance, a problem to which we had to find a solution, was not all that likely to succeed. I may well be proved wrong, and that would delight me, but I must say that I have come to the conclusion that this is not all that likely to be successful.

During the course of the Bill we had the ritual bleating about Surtax. Although this occupies a great part of time and thought of the House it is a pity that we rarely hear a serious case made against very high rates of taxation. A case can be made and it is something which I like to engage in from time to time. However, the point I am making is that one rarely hears the serious case and serious argument that can be made.

Having taken part in the consideration of the Bill, I hope that perhaps next year we might have something a little more exciting which will offer us the prospects of greater growth and greater economic advancement over the years to come.

11.45 a.m.

Mr. Richard Wainwright (Colne Valley)

The Government can count themselves very lucky, or very cunning, or both, to be able to get this Finance Bill out of the way not only on this peculiar morning after the morning before, but before July dawns. They will thus be spared the spectacle of their fluttering rush-light having to be exhibited in this House against the mounting clouds of the economic situation.

The Times Business Supplement described Britain's task, at the head of the Ch of Secretary's recent article, as a man-sized job. The Liberal Party would like to know why the Government did not produce a man-sized Finance Bill, because that is what is needed to deal with the mounting problems which are crowding in now and which will be very manifest to the House before we rise for the Recess.

All that we get from the Government instead is their continual posture of the old-fashioned doctor who refuses to recognise any symptoms, however severe the patient may consider them to be, which do not show up on his own primitive medical tests.

Over and over again we are told that because workmen will not queue up to testify to their psychological reaction to high taxation and because businessmen will not bare their bosoms in public and say, "We have ceased to take risks, we have ceased to bother, we spend our afternoons playing golf", therefore disincentive does not really exist.

I noticed that even the Chief Secretary did not today allege that risk taking has not suffered from continual high taxation. I merely wish to put on record the belief of my hon. Friends and myself that it is certainly not good enough to show, as can be shown to some extent, that this country is not more heavily taxed, so far as direct taxation is concerned, than many other industrial countries. This country, with its dependence on exports and the enormous amount of leeway it has to catch up by way of private investment, needs to be less heavily taxed than its main competitors.

Referring to the regional employment premium, much play has been made of the Government's new technique, which is to be welcomed in principle, of publishing a green Paper so that public discussion may take place in advance. This is a splendid principle and we hope that it will be developed. However, it has been a disappointment to those of us on this bench that the aspect of regional employment premium which concerns G.A.T.T. and our other international obligations has not been more fully aired.

To us, one of the most admirable parts of the R.E.P. scheme is the ingenious way in which it appears to be consonant with our international obligations and yet, in effect, provides a subsidy for certain of our exports. We believe that this is well worth further exploration and we are a little surprised that the Government have seemed so coy about airing their ingenuity.

Nevertheless, taking the Bill as a whole, and after acknowledging the modest reliefs which it provides for certain limited classes of taxpayer, we believe that it wholly fails to match up to the present economic needs of this country. It leaves the Government in the position of a railway employee in a highly modernised signal box with all kinds of levers at his command—investment grants, advance factories, industrial development certificates, regional employment premiums, and all the rest—but with the electric power turned off. Until demand rises, until there is real incentive for private investment to recover, none of these aids, however admirable, will be of real avail. That is the reason for our disappointment with the Bill.

11.49 a.m.

Mr. Joel Barnett (Heywood and Royton)

I am not too sure whether the Liberal Party is arguing that the Royal Commission on the Taxation of Profits and Income was wrong because businessmen did not want to tell the Commission that they played golf every afternoon, but that was the impression I gained from his argument. I could not gather any other impression from what he said.

The Budget which the Bill puts into effect has been described as unexciting. If the measures which we have had since that original Budget day had been included in the Finance Bill at the outset, I doubt whether we would have called it an unexciting Budget. We would have had, as has been said, investment grants brought forward from 18 months to 12 months, and new pensions increases starting in the autumn, lower car deposits, and so on. The right hon. Gentleman the Member for Enfield, West (Mr. Iain Macleod) told us that he wanted some more reflation in the Bill. We have, in fact, got it.

I want to deal with the major Clause in the Bill, which has been referred to by my right hon. Friend and other speakers. This, of course, is Clause 26 which is not a taxation measure, of course, for it gives money away, although even that has been disputed. The case for doing something for the developemnt areas has been well established on both economic and social grounds. Nobody disputes the case for Clause 26. The Government are to be commended on their ingenuity in their genuine attempt to find an answer to the problem of the development areas, but I wonder whether this is the best answer.

In paragraph 7 of the White Paper we are told not only that the proposals of Clause 26 will be self-financing, but that no additional taxation will be required, and this morning we had a further explanation from my right hon. Friend, who rather elaborated upon that issue. He now tells us that we will need to raise taxation to meet this expenditure. We had a dangerous and somewhat tortuous argument, which we had discussed previously and which I do not want to discuss again this morning, about the cost, but even if the cost is £100 million a year, I would not mind if I thought that this method of doing something for the level of unemployment in the development areas would be successful. However, the argument is so involved that, if we are not careful, we shall lose sight of the goal of Clause 26.

I wonder what makes companies go to development areas or to other areas. I put a Question about this matter to the Secretary of State for Economic Affairs yesterday. I asked what research had been done and in reply my hon. Friend the Under-Secretary said that I would be wrong to assume that we have not some knowledge of the matter and that studies are not proceeding."—[OFFICIAL REPORT, 29th June, 1967; Vol. 749, c. 736.] This is a serious matter, because it seems that studies are proceeding, but that before they are concluded we are to commit ourselves to an expenditure of £700 million plus. It seems that the Government have not done any practical research.

I have done a little research on my own into this subject to see whether Clause 26 will be effective. I do not pretend that it is research in depth, or that it goes very wide, but I have asked a number of businessmen why they do not go to development areas, especially when not long ago businessmen were desperately short of labour. One major factor was that they were not sufficiently optimistic about demand or the need for expansion. Another factor was shortage of senior executive and management personnel and the difficulty of getting them in the area in question.

An odd reason was that directors did not fancy travelling to a development area. There was the problem of transportation generally and, of course, there was a general reluctance to make a change into the comparatively unknown. There was ignorance about the type and quality of labour available.

The factor of cheapness of labour came well down the list of considerations. Availability of labour was a major factor, but even without the Clause labour had been cheaper than in the non-development areas anyway; but that was considered to be a minor matter by those with whom I discussed this issue. Despite that and although, I would have thought, the Government must be aware of those factors, they are going ahead with this proposal.

Mr. Iain Macleod

Is there not another reason? Does not one get misled by percentages? Are there not more unemployed available in London and the South-East, for example, than there are in Scotland, and is not the skill structure probably better? It is the percentage difference which makes it seem as though it is the other way round, but in terms of numbers more labour is available in the prosperous areas still than in the development areas.

Mr. Barnett

That may be another factor. It was trying to show that cheapness of labour was far from being the major factor.

We shall never know the extent of the success or faiure of Cause 26 and the reasoning behind it, because it will not be easy to pick out the resulting difference in the unemployment levels in the development areas and the rest of the country. We are told that the target is a 1 per cent. reduction in the difference of unemployment levels, which would be worth having, but Table 2, on page 8 of the Green Paper, shows that between 1963 and 1966 the difference fell from 2.8 per cent. to 1.6 per cent., a fall of 1.2 per cent. It may be argued that the level of unemployment generally fell between 1963 and 1966, but, equally, we hope that it will fall between 1967 and 1970, and we may, therefore, get a similar drop in the difference between the development areas and the rest of the counry, and no doubt it will then be argued that Clause 26 is the reason.

I hope that it will be. I hope that there will be an even greater drop in the difference, but I have not heard anyone claim at best more than a marginal success for the Clause and I am, therefore, bound to ask whether this is the best way to spend £700 million over seven years—or, rather, £700 million plus, because in the years afterwards that will be a smaller amount. The great bulk of the money will go to existing companies in development areas. The target is to reduce unemployment by 50,000 jobs. That depends on how many jobs are eventually provided.

My hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) spoke of the possible figure of £12,000 a job. There have been various calculations, but, even taking £10,000 a job, a figure which has not been disputed on the basis of cost, I would have thought that success would be even more certain if a businessman were told that if he started a company in a development area and had 10 employees he would get £100,000 plus a 45 per cent. investment grant, provided that he stayed in the area for seven years. I would have thought that with that sort of money he would be delighted to set up a company and keep it going.

In the country as a whole the ratio of capital to number of jobs is nothing like that. The total of private industrial and public utility capital employed is £14,100 million and the number of jobs—although some people are outside the United Kingdom—is 19,184,000, which is approximately £750 per job. With market capitalisation at £28,600 million it is still only £1,500 a job, very different from the £10,000 per job which we are providing by this £700 million.

Mr. Sheldon

Will my hon. Friend also bear in mind that the £12,000, or whatever may be the figure, in the development areas is mainly for labour-intensive industries, which, by and large, tend to need a lower capitalisation than other firms which may be considered?

Mr. Barnett

That is possible, but I would not like to go into that at too great length with my hon. Friend, for it may be thought to have been preconceived.

We have been told that there is no alternative to Clause 26, but at least it is worth considering whether we have trying impracticable and largely theoretical methods. If we are to spend £700 million, and it has been conceded that in Exchequer terms that is what we are spending, at least it is worth considering giving it to a Government corporation with the specific task of setting up industries, both private and public—and I hope that there are no doctrinaire arguments against setting up public corporations—in development areas.

In this way we would be trying a direct and more positive method of achieving what I imagine all of us want, as I began by saying, not just for economic reasons but very much for social reasons, to deal with the serious social consequences of the very high level of unemployment in so many regions of the country. This applies not least to regions like my own and that of the hon. Member for Colne Valley (Mr. Richard Wainwright)—the so-called "grey areas". I would have hoped that the Government might give further consideration to this, but now it is, unfortunately, part of the Bill.

It does not come into effect until October and there is still time for second thoughts. The idea of committing ourselves to a figure of £700 million without having done any serious research in depth, as it is admitted by the Government, is a very good argument for reconsideration of this matter.

12 noon.

Mr. Patrick Jenkin (Wanstead and Woodford)

It may seem strange that, having spent most of the last 14 hours in trying to encourage the premature termination of pregnancies, I should now be doing my best to discourage the premature termination of this Bill. There are one or two points which it is right to make. It was significant that both the chairman and vice-chairman of the Parliamentary Labour Party's Economic and Finance Group have been pretty critical about what has turned out to be the major item in the Finance Bill.

The Chancellor of the Exchequer (Mr. James Callaghan) indicated assent.

Mr. Jenkin

I see the Chancellor nodding to my proposition, and I can understand his chagrin, but I must confess that I do not have a great deal of sympathy for him. He has received a great deal of advice about the regional employment premium from a large number of sources, and the Treasury, having no doubt considered it fully, has rejected almost all of it. Apart from the extension from five years to seven years, there was virtually no change in the Bill of the proposal that originally appeared in the Green Paper.

Probably even within the Treasury there is a fairly widespread misconception as to the purpose which this premium can perform. To put the emphasis on encouraging new firms to move into development areas is wrong. The premium could not have that effect. Its ti me-scale, even of seven years, is too short, and I doubt very much whether that sort of labour subsidy is likely to provide an incentive to firms to move where otherwise they would not.

It would not even be a marginal incentive, and in so far as I have conducted inquiries, of the same sort as those referred to by the hon. Member for Heywood and Royton (Mr. Barnett), they confirm entirely what he said, that this is not a factor which businessmen take into account.

The other matter in the Finance Bill to which I want to refer is one which is likely to introduce a note of controversy. There was one Clause in the Finance Bill which was cordially disliked on this side of the House and which was quite unnecessary in relation to the Governments overall strategy, but which nevertheless reflected the pattern which we have now come to expect from the Chancellor with every Finance Bill that he has produced. In each one there has been one piece of spite. We had the entertainment allowances, then one of the measures in last year's Finance Bill came under the same category and this year we have the 10 per cent. surcharge on Surtax.

This was described in the Sunday Telegraph of 24th July—the measure was originally announced in the Prime Minister's speech of 20th July—as a "cheap wrapping" for the very unpleasant bundle of measures which the Prime Minister unfolded on that now celebrated occasion. It is right to recognise exactly what the effect of this is. It is a very strange one. In order to ascertain exactly what is the effect of Clause 15, which carries this proposal into effect, one has to go back to the income earned in 1964–65, back to 5th April, 1964—six months before the Labour Government took over.

The income earned in that year was the basis of assessment for Income Tax for 1965–66 and the standard rate was fixed in the Chancellor's first Budget in the autumn of 1964, instead of more usually the spring Budget of 1965. When finalised, this assessment for 1965–66 determines the liability for Income Tax which was due in 1966 but it also determined the liability to Surtax over the same year, due on 1st January of this year. Normally, because this is paid one year later, the rates do not have to be fixed until one year following the year in which the Income Tax rates are fixed. The Surtax rates for 1965–66 were fixed by Section 18 of the Finance Act, 1966.

It was when that Finance Act was three-quarters of the way through the House, with only a week or two before it had its Third Reading, that the 10 per cent. surcharge on that Surtax was announced. It then gave rise to anger and dismay on the part of many who will have to pay this when it comes due in a couple of months' time. One has to bear in mind that many of these people are already facing, for reasons entirely beyond their control, a substantial additional Surtax burden on 1st January next, by reason of the Government's "spite" measure last year, the exclusion of that one year from the operation of Section 228 of the Income Tax Act, which dealt with Budget bunching of dividend for Surtax purposes. That was excluded, with the result that, owing to the forestalling of dividend paid by companies, this additional Surtax liability will be paid next year. In addition, we have the effect of Clause 15, with an entirely additional extra and unexpected liability to Surtax.

One has to recognise that this was part of the package of 20th July and intended no doubt to be some sort of a sop to the rest of the country, to persuade them that the richest part of the community was contributing something to the general squeeze. It is important to realise how unfair this is. The richest part of the community is already paying substantially for the effects of the squeeze, whether as owners of unearned income or earned income.

Let us deal first with earned income, because it is on this that the surcharge applies just as much as it does to unearned income. There was an interesting article in the magazine Management Today a few months ago, which analysed salaries in different zones of responsibility. One of its first conclusions was that: Between 1964 and 1966, the lower ranks of management received larger increases proportionately than the higher grants. That means that in so far as there has been sacrifice as a result of the changing economic conditions over this period, it has been proportionately greater for those at the higher end of the income scale than for those at the lower end. In addition, it is these people who will pay the Surtax surcharge in Clause 15. Therefore, it should not have been represented as the only contribution paid by these people. This was an additional impost to be paid by those who were already suffering proportionately more than the rest of the community.

On the question of unearned income—and the surcharge will bear substantially harder on unearned income than earned income because of the effect of the earned income reliefs—it is right that we should look at the level of dividends in the period in question. In an article in the Financial Times last March, figures were given for dividends following the period of the squeeze, October to March. A recent estimate showed that during this period 1,171 dividends were maintained, 717 went down and only 133 went up.

This seems to indicate conclusively that, overall, those whose incomes consist of dividends lost quite substantially during that period. In addition, they have to pay the Surtax surcharge. That is why I say that this surcharge, on top of the other effects of the freeze and squeeze, was a gratuitous piece of spite which the Government could well have done without.

Two significant comments were made on this matter in The Times and the Economist immediately following the Prime Minister's announcement last July. On 23rd July the Economist said: Proletarian leers like the increase in surtax have added nothing to the effectiveness of this statement, and Mr. Wilson's elaborate defence to the selfishness of trade unions and the recalcitrance of his own left has subtracted a great deal. The Times of 21st July said: … it is a gratuitous provocation and great disincentive that the Government have decided to impose a 10 per cent. levy on this year's surtax liability. The amount to be collected is derisory. Many surtax payers nowadays are key executives on whom Britain's industrial future specially depends. This tax class is singled out compared with all other income earners for discriminatory treatment. The proposal seems nothing less than a primitive kind of class legislation designed to appease an uncomfortable left wing. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) referred to ritual bleatings about Surtax. He entirely misses the nature of the case. I do not want to go over the elaborate and sometimes misleading figures which were bandied about during our debates, but the Chief Secretary was not disposed to deny that it was at the highest levels of income that the rates of Surtax pressed substantially harder than was the case in every other developed country. Yet it is precisely on these people that the Government have seen fit to impose an additional impost. That is why I say that this is quite irrelevant to the Budget strategy and is a move diametrically in the wrong direction.

What the country needs more than anything else is a revival of the sense of excitement and achievement, of initiative, and enterprise in industry. There is little doubt that the higher ranks of management and among those who are responsible for providing risk-taking capital there is a blanket of high taxation which effectively muffles all the incentives which should operate on this most vital sector of the community. I am convinced that we shall not get the economy moving in the right direction until we are able once again to begin the downward movement of taxation, particularly at those levels.

Clause 15 goes in diametrically the wrong direction. It is the one really bad Clause in an otherwise uneventful and unexciting Bill. Perhaps we should not divide on a Bill which contains merely one bad Clause, but that should not be allowed to mask the dismay felt on this side of the House and in many parts of the country that the Bill should have contained a Clause which was so bad and so generally unhelpful to the progress of the economy.

12.16 p.m.

Mr. R. B. Cant (Stoke-on-Trent, Central)

It has been a hard day's night, and, due to tiredness, the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) was having almost a flood of tears. I do not wish to take up his theme.

I support the Bill, as I did on Second Reading, particularly because the impression has got around that the chairman and vice-chairman of the Economic and Finance Group of the Labour Party, not only are spokesmen, but, in a sense, occupy an official status in that they give Press releases to The Times. This might give the impression that the whole of the Economic and Finance Group thinks as they do.

Mr. Barnett

I am sure that my hon. Friend would not want to do us an injustice. We have never suggested that we are the spokesmen for anybody other than ourselves, and we cannot be held responsible for what newspapers print from time to time.

Mr. Cant

Except that sometimes what they print might be communicated.

I support the Chancellor of the Exchequer because I think that the Budget is right. I know that it has been critised on this side of the House. I came to the House too late in life for ambition to be relevant, and, therefore, I have no ulterior motive, but I think that my right hon. Friend has injected more realism into our economic policies than we have had on this side—let us be frank—for a long time, particularly since the early halcyon days of 4 per cent. growth, and so on. I cannot go into the arithmetic of the Budget which underpins the Bill, but, having looked at the various components, I think that my right hon. Friend was about right, assuming that the measures which have followed would be introduced.

There is one point which should be made in defence of the Chancellor of the Exchequer, although no doubt he can defend himself. Right hon. and hon.

Members opposite have suggested, and certainly the Press have suggested, that my right hon. Friend is sticking to a particular percentage of unemployment because he has been converted to the theories of Professor Paish or has been seduced by the wonderful symmetry of the Phillips curve, or some theory of that kind. I am convinced that what my right hon. Friend envisages is not too easy a winter in terms of unemployment, but certainly a reduction of unemployment in the subsequent period.

I know that right hon. and hon. Gentlemen opposite, and even the one for whom I have the greatest respect—the right hon. Member for Enfield, West (Mr. Iain Macleod)—had great delight when they read The Times Business News and saw that Economic Trends had come out with certain adverse commentaries on the Budget logic and arithmetic. I suspect, however, that the right hon. Gentleman has not read Economic Trends and that the paragraph in The Times Business News was misleading because of its brevity.

If we are to get away from these indicators that keep hopping up, like the indicator of industrial production for this month vis-à-vis last month, to the broader aspects of the situation, if we take the Confederation of British Industry's survey of our economic prospects we get an entirely different impression.

If we look, for example, at the Financial Times index of equities, it is remarkable that although hon. Members opposite have so little confidence in our economic future and the capacity of my right hon. Friend the Chancellor of the Exchequer to guide it, the market is still on the side of the Labour Government. It is amazing, coming to all the threats that the Budget holds for July, that sterling is so strong and that despite the impact of the Middle East situation which could have been immensely serious, we have virtually ridden that storm.

If we want to go to the final authority on economic affairs, the ultimate in economic commentary, the right hon. and learned Member for St. Marylebone (Mr. Hogg) writes in this month's Punch: So much confidence have people in sterling that I am told that the sterling balances when removed from London as a consequence of the Middle East crisis were prudently reinvested there by the international financiers to whom they have confided. I hope that the right hon. and learned Gentleman's confidence will spill over a little to the other members of the Front Bench opposite.

I may be going well beyond the Finance Bill in my final sentences, but let us not forget that the National Opinion Polls are moving very much in Labour's favour and that we have even won a Greenwich by-election. There is, therefore, massive confidence by the country in my right hon. Friend in particular and in the Government in general.

12.22 p.m.

Mr. Terence L. Higgins (Worthing)

If there is one economic indicator which is not likely to be significant, I suspect that it is the Greenwich by-election in the Greater London Council elections.

It is not unusual for economists, like the hon. Member for Stoke-on-Trent, Central (Mr. Cant), to make quotations from "Alice in Wonderland". I was speaking to Professor Paish the other night when he was comparing the Government's Prices and Incomes Bill this year with their Prices and Incomes Bill of last year. He said that it seemed to him rather like the smile on the face of the Cheshire Cat after the cat had disappeared. That same simile applies with considerable relevance to the Finance Bill to which we are now asked to give a Third Reading, in two respects.

First, the Bill is a pale shadow of the Finance Bills of 1965 and 1966. I make no complaint about that, although for one who, like myself, has been in the House only since the 1964 General Election, this year's Finance Bill inevitably seems to be something of an anti-climax. Certainly, it is an extremely unimaginative document. My right hon. Friend the Leader of the Opposition said that it was a Budget and, therefore, a Finance Bill of wasted opportunities, a standstill Budget for a stagnant economy. I see no reason at this stage to withdraw those two strictures.

There is, however, a second respect in which the Bill is only a shadow of the Finance Bill which was introduced on Second Reading. It is not as obsolete as last year's Finance Bill was by the time it came before the House for Third Reading, because that, as we all know, was overtaken by the July measures with extraordinary speed—although my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) is right to say that July is always an ominous month. That is certainly still the case again this year.

The Finance Bill which the Chancellor introduced and which had a Second Reading on 2nd May clearly embodied the Chancellor's Budget judgment. If the Bill now is not obsolete, it is, at the very least, obsolescent. It is, therefore, relevant for us to ask what was the Chancellor's Budget judgment and what it is at the present time.

It is impossible for us to appraise the Bill unless we are clear in what ways the Chancellor's Budget has changed since the date of the Budget speech. It cannot be seriously doubted that it has changed considerably. Even in the Bill we have introduced the regional employment premium, which clearly has a considerable reinflationary short-run effect.

On top of that, we have the hire-purchase restrictions being removed on the motor industry, and investment allowances being put forward, the increase in pensions, and so on. All of those were covered in a Question by one of my hon. Friends to the Chancellor on 20th June, when the Chancellor was asked … what he estimates will be the effect in 1968 on expenditure on the gross domestic product at 1958 prices of the regional employment premium payments, the recent relaxations in hire-purchase controls, and the restoration of the purchasing power of pensions to their level at the time of the last increase, financed by increases in employer and employee contributions. The Chancellor replied: These measures should increase the gross domestic product in 1968 by around one-half of 1 per cent."—[OFFICIAL REPORT, 20th June, 1967; Vol. 748, c. 227–8.] That is in many ways a miraculous statement, because we do not know the assumption on which the Chancellor has based his argument.

Given the fact that the Bill is clearly more reinflationary than when it was introduced, and given the other facts to which I have referred, we need to know definitely what the Chancellor of the Exchequer feels that his objectives are. In particular, are these reinflationary measures intended to reduce the level of unemployment given the expectations which the Chancellor of the Exchequer has in regard to the growths in capacity? Alternatively, are they merely intended to prevent unemployment increasing in the coming months because the Chancellor now foresees that this is more likely than it was when he made his Budget statement? This is the crucial thing which we want to know.

My right hon. Friend the Member for Enfield, West rightly paid tribute to the Chief Secretary's patience. The more interesting question in many ways—we recognise the right hon. Gentleman's patience—is whether the Chancellor's patience is spelt in a rather different sense from the one which is normally employed.

Mr. Robert Cooke (Bristol, West)

Will my hon. Friend please ask the Chancellor whether he will bear in mind that the regional employment premium has a very bad effect on some of those industries which are not in the development areas, such as shipping? Perhaps my hon. Friend can deal with the question of the Bristol shipyard which is threatened with closure because of the unfair competition from elsewhere.

Mr. Higgins

We would be out of order to pursue that, but I shall certainly return to the regional employment premium in general reference to the point which my hon. Friend has made. I fully appreciate his anxiety on the subject.

I was trying to make the point that we clearly need to know what the Chancellor's expectations are, because there has been a very great conflict between the speeches which he has made at weekends and the kind of survey which we now get in Economic Trends for June this year.

Let us look simply at one point in connection which appears on page V of Economic Trends. It concerns the labour situation and it states: The underlying trend of unemployment continues upward. Taking the five months to May together, to eliminate some erratic movements in the series, the numbers wholly unemployed, excluding school-leavers, rose by an average of 11,000 a month, reaching 2.1 per cent. by May. Of the rise since December, some 3,000 a month came from manufacturing; while unemployment among those whose last employment was in construction rose by some 4,000 a month. Further evidence for the continuing fall in the pressure of demand for labour is provided by the steady decline in the number of unfilled vacancies for adults. It is important, therefore, that the Chancellor should tell us this morning what his intentions are and how he sees the pressure of demand changing in the next month or 12 months.

I want to turn secondly to a point which I think has arisen, and it is that there has been a tendency to think that this Bill is rather innocuous and does not really do very much about the level of taxation. Indeed, the Chief Secretary in moving the Second Reading of the Bill said: This Bill achieves many purposes. It lightens the tax burden of many of our fellow citizens, it provides for the payment by every taxpayer of his fair share of taxation".—[OFFICIAL REPORT, 2nd May, 1967; Vol. 746, c. 344.] This is very much in conflict with what my hon. Friend the Member for Finchley (Mrs. Thatcher) said about the Bill: The Finance Bill I am talking about"— and perhaps I should make it clear that it is the same Bill— is certainly one which is historic. It is historic in that it levies on the British people the highest amount of taxation in history and the greatest amount of Government expenditure in history. In addition, it incurs the highest borrowing commitments in history. Those are all records which I am glad no Conservative Chancellor holds."—[OFFICIAL REPORT, 2nd May, 1967; Vol. 746, c. 360.] I think it is very necessary to point out to the House today that the Budget imposed very considerable increases in taxation. First of all, it consolidated the regulator which was imposed last year as, we were told, a temporary measure, and therefore it effectively increased 10 per cent. indirect taxation on the people of this country, and that is something which has not received general publicity and which I think we ought to bring out. I shall be saying a few words more in a moment about Corporation Tax.

The point which is worrying about this kind of Finance Bill was really brought out in a programme on the television which was recorded on 20th June, 1967, and transmitted on 21st June. Mr. Arthur Cockfield, managing director of Boots the Chemists, in this programme asked the Prime Minister: The point I really would like to put to you here, Prime Minister, is this, that since the present Government came into office every single tax one can think of has been increased—Income Tax, Surtax, tax on companies, Purchase Tax, tax on alcohol, tobacco, petrol. We have a whole range of new taxes as well, including S.E.T. Is it really the Government's intention to go on increasing taxes in this way? The Prime Minister replied: I think that is a very fair question. The answer to that is no. Mr. Cockfield: I hope the Prime Minister will tell the Chancellor this. That was not necessary because I happen to know that the Chancellor was watching the programme. Indeed, I am not giving away any State secrets when I say that we were both watching at the same time.

Mr. Callaghan

But cheering different bits.

Mr. Higgins

Yes, we were cheering different bits, but at the time the recording was made the Prime Minister said that he thought it was a very fair question, whether the Government were increasing taxation, and that the answer was no, and yet by the next day when the programme was transmitted we had a significant increase in National Insurance contributions announced, and we also had a clear statement that this would be partially financed out of money raised in other ways. I think it is all wrong when one considers this kind of Finance Bill.

The other detailed point I should like to have an explanation from the Chancellor about is this. We debated the actual rate of Corporation Tax this year, and I am not going to go over that, but the fact remains that it was freely admitted that the explanation given last year was based on a mathematical error. This is something which we understand and appreciate but what we now wish to know is why is it that we have the Corporation Tax rate at 40 per cent. because we have had no reason put forward by the Government to explain why that tax rate should be at a much higher level than one which would have been the equivalent of the old taxation. The fact is that the original argument has fallen to the ground, but we have had no reason why this tax rate should be 40 per cent., other than the reasons which were advanced which were reasons of a purely transitory nature, ones which are no longer valid. I think it is true to say there was an increase effectively in the Bill we are now discussing.

Finally, I want to turn to two points—

Mr. Diamond

I am sorry to interrupt, but everything the hon. Member has said in relation to the rate of Corporation Tax for last year, for this year, is wholly inaccurate and wrong.

Mr. Higgins

I really cannot accept that, but the Chancellor has a very clear opportunity here to give us a clear explanation.

Mr. Diamond

The hon. Member was wrong.

Mr. Higgins

I do not know that it is wrong. The Government have given no clear explanation why the tax rate should be 40 per cent. this year other than for transitory reasons. I am perfectly prepared to be convinced by the Chancellor if he can put forward a reasonable argument, but we on this side, I say with respect to the Chief Secretary, have had no adequate explanation of that as yet.

I want to turn to two points, the Selective Employment Tax, and the regional employment premium. I hope not to take more than a few moments in doing so.

The whole point about Selective Employment Tax, it seemed to us, was that it was riddled with anomalies and was introduced in a hurry, but the Prime Minister, in speaking to the Lobby last year, was reported quite clearly as saying in reference to the introduction of the tax: The Prime Minister said it held out infinite possibilities. It was not intended to be a temporary tax, and he thought it would prove to be a tax of not inconsiderable elasticity in application and yield. The fact is that in this Bill only one anomaly has been removed, that of the part-time workers and, in our view, this has been encouraged by people, being removed out of tax rather than being exempt from tax. But that is only one anomaly, and there are a great many others which we believe ought to be removed.

We have been prevented from debating them at all by the way the Money Resolution has been drafted, and that is something which I think ought to be known, because one receives so many letters from constituents and others complaining of the anomalies in this tax. One example is the question of warehouses. Because of the Money Resolution we have not been able to move a suitable Amendment about that, but where a warehouse is integrated with the manufacturing it gets the premium, but where, because of arbitrary action by the Ministry of Labour, it is operating independently, and probably on a larger scale and more efficiently, it pays tax.

I take this case as one typical example of an anomaly which ought to have been removed and has not been removed by this Bill. This was of course, reflected again in the interesting argument between my hon. Friend the Member for Woking (Mr. Onslow) and the Joint Parliamentary Secretary to the Ministry of Labour regarding the dental profession, and people who were not self-supervising.

Finally, on regional employment tax, I very much agree with the hon. Member for Heywood and Royton (Mr. Barnett) who suggested that an Answer he got to a Question yesterday was not satisfactory. There has not been, so far as one can see, any real, detailed, academic analysis of this matter, and I for one very much hope that we shall see in the near future some serious study of what its effect is likely to be.

In particular, there is the question whether it is self-financing or not. The Chief Secretary has said to us that the fact that it is not self-financing in Exchequer terms is irrelevant; what is important is whether it is self-financing in resource terms. This may be true over the long run of many years, providing the objectives which the Government hope to achieve are in fact achieved by this measure, but we on this side have serious doubts whether they will be achieved. At all events, it cannot be disputed that in the short run the timing question is crucial, and there is the question whether it will be self-financing in Exchequer terms. Therefore, there is bound to be a reinflationary effect during the short run. This is one problem which ought to have been faced.

The crucial question which arises here is, what will be the reaction of manufacturers to the regional employment premium? We do not accept the view put forward on Report by the Government Front Bench that the ordinary manufacturer, considering the effects of the regional employment premium, will actually take it into account if it continues on the basis we have already. The Government have admitted quite clearly in their White Paper that the intention is that payments of this magnitude in respect of manufacturing employment in development areas should continue to be given until their purpose has been achieved and in any case for not less than seven years in the existing development areas.

We had the extraordinary situation the other night in which we were given to understand that these grants are to be varied up or down and although the payment will be of the same magnitude there will be variations in them. I say to the Chancellor in all seriousness that if he expects manufacturers to take into account the regional employment premium when deciding whether or not to go to a development area, they must be certain that they will get this grant and the Government must clarify their position over the seven-year guarantee. At the moment surely the Chancellor knows most manufacturers, considering investment allowances and cash grants, go into development areas quite convinced that they should not take them into account because they are not sure that they will continue.

They say they do not know whether the other concessions will be given and they will take them into account only if they actually receive them. The statements which have been made about the magnitude being maintained but there being variations occurring, require a very clear answer from the Chancellor as to what variation around that magnitude is actually to be made. If he can express it in percentage terms, the right hon. Gentleman may achieve the objective he wishes to achieve. On the basis of the arguments we put forward on 27th May, we do not believe that he is likely to achieve that objective.

We remain convinced that this Finance Bill is a wasted opportunity. It will do nothing to encourage the future growth of the country. It is concentrating on the wrong priorities. It is not likely to achieve an export-led boom or an investment-led boom but merely a continuing period of stagnation in which the prosperity of the country will continue to be jeopardised by the Government's economic policies.

12.42 p.m.

The Chancellor of the Exchequer (Mr. James Callaghan)

I rise to make the final speech on the Third Reading of the Finance Bill and to join with the right hon. Member for Enfield, West (Mr. Iain Macleod) in congratulating those of our teams who have sustained the heat and burden of the day.

The hon. Lady the Member for Finchley (Mrs. Thatcher) combines both charm and erudition in almost unparallelled proportions. The way in which she has conducted the Opposition's case is something which we respect and admire. The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin), who seems to have a twilight existence between the Opposition Front Bench and the back benches, has also managed to combine erudition with comparative brevity. The hon. Member for Worthing (Mr. Higgins), too, is always most patient and penetrating in his criticism. I do not want this to be thought purely formal because there is no doubt, as the right hon. Member for Enfield, West said by implication, that the manner in which we conduct our relations helps us to go forward or to make matters more obtuse.

I hope that we have reached a state in which we can balance arguments without raising unnecessary antagonism. I should like to include the hon. Member for Colne Valley (Mr. Richard Wainwright) who, although he has not intervened very much, has always been cogent in what he has said. The major amount of enthusiastic praise must go to the Chief Secretary and the Financial Secretary, who have carried almost unchanged the whole of the burden. There are only a limited number of Ministers who can do this work. They sit here hour after hour and have to know every Clause, not merely the Clauses in which they choose to specialise, and to be ready to answer any question fired at them from experts of the Opposition.

The enthusiasm of the Chief Secretary remained unabated even this morning and the coolness of the Financial Secretary is proverbial in the House. I express my deep appreciation of the way in which they have carried on. I also express appreciation of the contributions which have been made by my hon. Friends the Members for Heywood and Royton (Mr. Barnett), Ashton-under-Lyne (Mr. Sheldon), Stoke-on-Trent, Central (Mr. Cant) and Chislehurst (Mr. Macdonald).

The right hon. Member for Enfield, West, like me, has taken little part in the debates, but, unlike me, he has sat for a great deal of time in the Chamber. I think of him as a modern version of Simeon stylites sitting brooding in his corner meditating on the follies of mankind, and the Opposition in particular. One thing he said this morning led me to believe that he has the qualifications to become a Chancellor—in, say, 20 years' time. It was that he is ready to say that he does not understand something. That is probably the most important qualification for anyone who goes to the Treasury, and I congratulate him on it.

On the other hand, the right hon. Gentleman is surprisingly old-fashioned and static in his views about Budgets. He seems to believe that what takes place on Budget day should determine what takes place throughout the rest of the year. I do not think that he really believes this, but he thinks it a good way to catch me out in any inconsistency by pretending that he thinks this although he does not really say so. Of course, alterations must be made in our economic judgments as the year goes on, and will continue to be made.

The right hon. Gentleman asked about the so-called "mini-package". I have seen references to it in the Press, but I am not responsible for the Press any more than he is. I have seen both that there is to be a mini-package and a denial that there will be. All I can say is that I know about the course of Government business, that there is to be an announcement on family allowances and that there is every prospect of economies to be effected as a result of the Defence Review. We are at the moment examining the preliminary estimates of expenditure which come from the Departments. I am putting alongside them what I announced in the Budget, that there would be a close scrutiny of public expenditure this year.

That is not to say that it will not go up. It goes up every year. The hon. Lady the Member for Finchley said that Government expenditure is at a record level and that collecting of taxes is at a record level. That is because every year there is an increase. Every Government go on making records in this direction. I do not think that it is a particularly effective stick with which to beat the Government. Because the gross national product increases, and the amount of taxation goes up proportionately, so there is bound to be a record amount collected every year, unless, of course—and this is the argument which every intelligent person has with himself—we intend to cut back on major parts of the infrastructure, the houses, roads, schools, hospitals, this great area where progress has been made, must continue to be made, and will be made.

It is my intention, and the Government's, to keep the balance between progress on the social side of developing the collective standard of life of our people, upon which a great deal of their real standards depend, and, on the other hand, improvement of their personal standards. People are concerned about both. They want to see their personal standards increased and do not believe in having 19th century hospitals or antediluvian roads.

This means that the Government have to strike a continuing balance. It is not unfair to say in this relatively nonpartisan atmosphere that in the late 'fifties and the early 'sixties we neglected the social infrastructure of society—I do not wish to use the word "neglected", but the improvement in personal standards of life were allowed to go ahead faster than improvements in the infrastructure. In the early 'sixties the switch towards developing our public services was started by the previous Conservative Government. We have been passing through a period of that, in which I had inherited a great many programmes.

I do not mind that. This has meant that the collective standard of life has been increasing faster than the personal standard of life over the past three or four years. We have now reached a point where we should consider that position and try to hold a balance between the collective needs of society and the personal needs of the individual. That is the review that I am engaged on in conjunction with my colleagues in the Government.

The most important Clause in the Bill is that which deals with the regional employment premium, so it has been said. I absolutely agree with this. I am disappointed with the attitude of my hon. Friends the Members for Ashton-under-Lyne and for Heywood and Royton. I did not expect to hear Members on the Labour benches attacking this premium, which will bring such tremendous benefits to these areas, in the way they did, calling for delay as though they were Conservatives, calling for more research as though they were Liberals. They are members of the Labour Party and were returned to support active, positive measures.

Mr. Robert Cooke rose—

Mr. Callaghan

The hon. Gentleman is not a member of the Labour Party, nor is he the Member for Ashton-under-Lyne, nor is he the Member for Heywood and Royton. I am addressing my two hon. Friends at the moment. The Government must take positive action in a field where all the actions of the Tory Government and of the Labour Government in relation to the development areas looked unlikely to conquer the structural unemployment problem in these areas.

My two hon. Friends say that we should take longer to think about it, that we should not do it, that we should do it in different ways, and so on. I have heard these arguments advanced so often in the last 22 years by people who want to do nothing that I do not expect two young zealots from my own party to advance them now.

Mr. Robert Cooke

I am grateful, as a young zealot in the Tory Party, to be given way to. The Chancellor wants something done. He spoke about the regional employment premium. My difficulty is that I have a shipyard in Bristol which the Chancellor has savagely discriminated against, because it is not in a development area. It is not getting the premium. Practically every other shipyard in the country is. My people will be put out of work. Will the Chancellor give me an answer on that?

Mr. Callaghan

No; I cannot give the hon. Gentleman the answer on that without notice. I do not know the facts about the shipyard. I know that the Government have, through the Shipbuilding Industry Board, set aside £35 million to encourage the modernisation and rationalisation of shipbuilding. I do not know whether the hon. Gentlemen's shipyard, about which he is rightly concerned, is included in that. If the hon. Gentleman wishes to follow the matter up in a more leisurely way, so that it can be studied in detail, obviously I or my right hon. Friend who is concerned with this matter will be glad to do so.

Generally in relation to the regional employment premium, I will give a practical example of what is likely to happen. The other day I was talking to those who know about the affairs of a company in one of the development areas. From 4th September onwards that firm will be given £5,000 a week—a quarter of a million pounds a year—which will make all the difference to its costs. The firm is already considering how it can cut its costs to improve its market. I have no doubt that, although no one can say finally what the effect of this will be, in development areas this will help employment. It will help to balance the difference between those areas where there is dynamic growth and those areas where we are trying to get it.

On the question of the dullness of the Budget, it was because I agreed that we should publish these proposals a few days before the Budget that it has been described as dull. I have a feeling that, if I had kept the proposals up my sleeve until Budget day, my Budget would have been described as an extremely controversial and far-reaching one. I do not mind that. I do not think that dull Budgets are necessarily out of place, especially if they are doing really important things.

The siren voice of the hon. Member for Colne Valley was raised in the interests of allowing the economy to move ahead—I will not exaggerate, but almost without consequences. It is astonishing that people forget so quickly what happened last time the Conservative Government tried to do this. It would be improvident and foolish to adopt a policy which would enable the economy so to plunge ahead that we should be incurring a substantial balance of payments deficit again within 18 months.

I cannot respond to the tempting invitation extended to me by the hon. Member for Worthing to discuss the economic situation. I have nothing new, nothing different, and nothing further to say about it. I know that at present commentators wish to go on chewing this over time after time. They are welcome to it. I try to distinguish between criticism which is valid and real and criticism which is merely a response to the fact that commentators have to write a column every week. We must try to judge the first on its merits. The second we ignore.

The economy is moving along the course that I had in mind when I made my Budget speech. That is all I wish to say about it. As to whether I have been extremely exuberant and the official Treasury has been extremely gloomy, I only say to the right hon. Member for Enfield, West that I saw the article in draft that it was proposed to publish in Economic Trends and I approved and passed it. I thought that it was exactly in line with what I have been saying, because the extremely exuberant speech that I uttered was this.

As far as I can see, with a growth rate of 3 per cent. per annum, which we are now beginning to achieve, the country will be £1,000 million a year better off in real resources. How this is divided up is a matter for the country, but it will clearly mean that every family can share in it. There have already been indications through the proposals for higher old-age pensions. There is clearly an increase in wage levels about to take place, although this must be kept under control. There cannot be an over-exuberant increase in this field. Increases should be related to increased productivity and efficiency. But in these and other ways there is no doubt that a growth rate of this sort is bound to improve the condition of the people.

That is what I was saying. It has been interpreted as exuberance. If that is exuberance, heaven help me when I really throw my bonnet over the windmill. I promise the House that there really will be something to talk about then. This is the course we embarked upon. This is the course we intend to stick to. I see nothing to make me depart from what I said earlier, namely, that a 3 per cent. growth rate can be combined with a balance of payments surplus, subject to international complications which none of us can foresee when we draw up these things. I do not think that is of undue significance, provided that the underlying economy is sound. These things are bound to come and go. They must be taken in our stride.

That the underlying economy is sound is shown by the degree of confidence those abroad show in the state of our currency at present. I do not believe that at any time during the last three or four years we could have survived a Middle East war in the way that we have survived during the last month. The foreign markets, after an obvious initial period of uncertainty, are now beginning to revive again. That, in itself, is an indication of the position.

The O.E.C.D. Report, which has just been published, is, in fact, a commentary on our position. It says that the measures we took last July have achieved their immediate objective. This is true. I do not see how it can be denied. That being so, it is now for us to build on that foundation.

I have no reason to complain about the overall reception of the Bill. The hon. Member for Wanstead and Woodford took exception to one "spiteful" Clause about Surtax which, he said, was cordially disliked. I listened to him with some dismay to think that he could make a speech like that without referring both to the benefits which have been given in the Bill and to the position of those who are the least well off. The Bill has given some useful help to people facing particular difficulties. There is the dependent relative allowance for single women who are maintaining old or infirm relatives. These are the people who have a very hard struggle. There is the special allowance for widows and widowers and some other people with single-handed responsibility for young children and who do not employ a resident housekeeper.

I agree that Surtax payers have not been treated as well as those, but I beg the hon. Gentleman, when he is considering what he calls relative hardship—he describes it in terms of hardship—not just to apply the legal mind to the question of what is hardship, but also to bring to the consideration of these problems the human compassion which I know he has.

I regard my first responsibility—I wish that I could carry it out better than I do—as being to those in our society who are poorest and who have the least defences in the struggle which they have in their everyday lives. The hon. Member for Wanstead and Woodford must get correspondence about it. I get letters every day. I see, and I hope I know, the way in which our society ought to progress in these matters. Of course, we do not want to discourage initiative. Of course, we do not want to overtax people for the sake of it or out of spite. He should get that silly prejudice out of his mind. But there is a question of social priorities here, and I nail my colours firmly to the mast.

In my view, the priority should go to those who are at the bottom of society today, who still need their conditions of life uplifted, before we give further advances to others who are much better off.

I conclude by thanking the House for the consideration that it has given to the Bill, and I now ask right hon. and hon. Members to give it a Third Reading.

Question put and agreed to.

Bill accordingly read the Third time and passed.