FINANCE (NO. 2) BILL

HC Deb 02 May 1967 vol 746 cc344-448

Order for Second Reading read.

4.48 p.m.

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

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

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; it simplifies certain earlier provisions in the taxing Statutes; it makes the necessary provisions consequent upon other developments in our economy and in our fiscal legislation; it assists the development of the economy by removing barriers or impediments to useful and worthwhile commercial and business activity, and it encourages investment and enterprise by continuing those measures and those levels of taxation which promote them.

I would like to deal with each of these purposes in turn. The tax burden is lightened in respect of Income Tax, Capital Gains Tax, Stamp Duty and Excise Duty. Income Tax relief is provided by Clause 16 which increases the maximum dependent relative allowance from £75 to £110, that is by £35, where the relative is maintained by a single woman, a term which includes a widow and a divorced or separated wife.

Clause 16 also increases from £40 to £75, again by £35, the allowance given to widows and widowers and certain other taxpayers who have single-handed responsibility for children but do not have a resident housekeeper. This change in effect adopts a recommendation of the Royal Commission on Taxation and gives the same allowance to those who employ a resident housekeeper to look after the children as those who do not.

Further tax relief is provided under Clause 17 which permits the spreading forward of lump sums received in respect of the sale of copyright in certain circumstances, so that the impact of the tax liability is much reduced

The Bill also provides for relief in respect of Capital Gains Tax. Paragraph 1 of the Thirteenth Schedule allows the losses of a husband or wife to be set against the gains of the other in future years as well as the year in which the loss occurred. This meets a proposal put forward during last year's debate which we promised to consider sympathetically.

There are two Clauses which provide relief from Stamp Duty. Clause 25 increases the exemption limit in respect of transfer duty on houses from £4,500 to £5,500, and the limit for the reduced rate of ½ per cent. from £6,000 to £7,000, and Clause 27 exempts borrowings by local authorities from Stamp Duty on issue and transfer.

The fourth category of relief which I mentioned is that of Excise Duty. Under Clause 5 the Bill abolishes the Excise licences which until now have been required for selling liquor by retail or supplying it in clubs. The requirement to hold a justices' licence or its equivalent will, of course, continue unchanged.

The liquor licensing system is one of great antiquity. The first Statute bringing the retail liquor trade under the control of the local justices was passed in 1552, but over the years the two systems, that is to say the justices' licensing system on the one hand and Excise licences on the other, have become entangled, which explains why the abandonment of the Excise licences, which the Bill proposes, requires three rather lengthy Schedules to the Bill to make the consequential amendments to the law.

In all those four fields the burden of taxation has been reduced. In one case only has it been increased, that is in respect of Stamp Duty on loan capital. Clause 26 provides that the rate of loan capital duty, hitherto 2s. 6d. per cent., shall be the same as share capital duty, namely, 10s. per cent. One of the repercussions of the introduction of Corporation Tax was that many companies which would have raised new money in the form of share capital now prefer to raise it in the form of loan capital. It seems sensible therefore that the level of duty should be equated. So much for the provisions dealing with the relief of taxation.

I turn now to those Clauses whose purpose it is to ensure that every taxpayer bears his appropriate share of the total burden as laid down by Parliament. The general body of taxpayers looks to the Government to ensure that those who pay their taxes promptly and in full, among whom one must put the average wage or salary earner as a shining example, are not called on to pay in addition that extra amount which has been avoided by their fellow taxpayers. Accordingly, the Bill contains a number of Clauses to assist in achieving this purpose.

Clause 7 applies to the Pool Betting Duty a number of provisions which have been found helpful in securing prompt and proper payment of various other duties over a number of years. The main purpose is to extend to this duty the deposit procedure in the case of disputes which has been used for many years for Customs duties generally and also for Purchase Tax. A dispute over the basis of payment may take months or even years to settle, and in this time, with a pool each week, the amount of duty at issue can grow into a very large sum. This sum is received by the promoters as part of the money staked each week by participants in the pool. It is clearly in the public interest, as well as, coincidentally, in the Revenue's interest, that this sum should be held by the Crown and not by the promoter pending settlement of the dispute.

Clauses 11 and 12 deal with the enforcement of Vehicle Excise Duty. Although the amount of evasion here is not nearly so great as has been alleged in some reports——

Mr. Arthur Lewis (West Ham, North)

How does my right hon. Friend know?

Mr. Diamond

Nevertheless, with the current yield of these duties at £255 million a year, we may be losing something over £3 million a year. The answer to my hon. Friend is that tests have been taken.

Mr. Lewis

How can my right hon. Friend carry out a test when there are hundreds of vehicles on the roads without any registration whatsoever and about which the appropriate authorities know nothing?

Mr. Diamond

My hon. Friend must not claim for himself greater knowledge than everybody else put together. He is in the same position as we all are. If it is not possible to examine every vehicle oneself, one has to rely on the normal procedure of intelligent testing. This has been done, and the results are as I have just said, that is to say, something over I per cent. With a total yield of £255 million, something over I per cent. is £3 million. I am grateful to my hon. Friend for the campaign which he has waged to draw attention to this matter, because £3 million is a very useful sum, and I hope he will agree with the proposals we are making under Clause 11 which increases the statutory penalty for unlicensed use from £20 to £50 a year, or, if this is higher, from three times the annual duty to five times the annual duty. Thus the statutory penalty for using a private car without a licence will be increased, at present levels of duty, from £52 10s. to £87 10s., which is more appropriate, and no doubt will prove to be a more effective deterrent to evasion.

There is, however, a further defect in the existing arrangements. As things are, a driver can only be charged with the single act of unlicensed use in which he is detected, however long he may have been using his vehicle without a licence. It may even be that some motorists have calculated that by the time they are caught the penalty they face will be less than the duties they have escaped. Under Clause 12, therefore, a convicted person will have to pay, in addition to the statutory penalty, an amount equivalent to the past duty dating back to the expiry of the last licence, or to the date when he acquired the vehicle.

In the same category, there is the problem of the hobby farmer. The dividing line between those who seek to make a living out of farming and those whose main concern is to carry on a hobby is difficult to draw. Lord Amory, when he was Chancellor in 1960, attempted to deal with this problem, but he was not wholly successful. So long as the hobby farmer can say that he has the intention of making a profit, there is no scope for the refusal of tax relief, however great his losses may be and however remote the possibility of his actually earning a profit. These subjective tests are never completely satisfactory in taxation affairs. Accordingly, we are supplementing the old conditions by new and objective tests, with the result that where a farmer has incurred losses for five years running, no further losses will qualify for tax relief by way of set-off against other income, except in the very special case of the potentially profitable farming venture which, by its very nature, cannot avoid making a series of losses in its opening years.

A further point arises on the liquidation of close companies. Under the present law, the undistributed income of such companies would escape Income Tax and Surtax during liquidation if the company managed to show that it was not carrying on a trade or the business of holding investments. Accordingly paragraph 7 of Schedule 11 ensures that short-fall assessments can always be made on the undistributed income of close companies during liquidation.

Similarly, paragraph 11 of Schedule 13 brings into charge gains and losses arising from exchange fluctuations which may affect the sterling value of money held in a foreign bank account. This provision is necessary because, although Capital Gains Tax applies to foreign currency, if it is in a bank account it is exempt, because technically a bank account is a debt and debts are generally outside Capital Gains Tax.

These Clauses are designed to secure payment of the full amount of tax. Clause 38 is designed to secure that tax should be paid promptly and does this by bringing the rate of interest on arrears more into line with current circumstances by increasing the net rate with effect from 19th April from 3 per cent. to 4 per cent. The Clause also enables the rate of interest to be varied in future by Treasury Order. At the same time, we have taken the opportunity to save work and remove a minor irritation. At present, interest is not payable unless it exceeds £1. Under the Clause, that figure is increased to £5.

So much for those Clauses designed to secure that each one pays his proper share of tax. I now turn to those designed to simplify and clarify the tax code. Clause 20, which is one such, removes doubts arising on certain provisions in order to facilitate consolidation of the law relating to capital allowances.

Clause 22 ensures that where interest on United Kingdom Government securities held in connection with certain businesses carried on in the United Kingdom by non-residents is exempt from United Kingdom tax under the terms of issue, a corresponding disallowance of interest shall be made in computing the profits of the business for taxation. Legislation intended to have this effect has been in force since 1940, but a recent decision of the Special Commissioners has cast doubt on its effectiveness and the Clause restores the previously accepted effect of the existing legislation.

Then there are Amendments to the close company provisions, which are necessary to remove doubts which have arisen about the meaning of the term "the public", as it affects the definition of a close company. Paragraph 5 of Schedule 11 therefore provides broadly that "the public" are all the shareholders other than the five largest. That by itself should bring greater certainty.

In addition, there is a substantial concession, in that shares held by open companies are to be treated as being held by the public whether or not they form part of the five largest holdings. Finally, paragraph 8 makes it clear that a person treated under certain of the close company rules as holding shares and other rights of his associates does not need to hold any of his own. This removes doubts expressed on this point by commentators who have noticed the phrase' "with one or more of his associates" and have misread its intention.

As regards Capital Gains Tax, there is a provision in paragraph 4 of Schedule 13 enabling the tax liability of small cash premiums received on conversion of British Government and other securities to be deferred until the new securities are themselves disposed of. This should make life simpler both for the individuals concerned and for the Revenue. I should perhaps refer also to paragraph (6), which makes clear the position with regard to expenditure incurred in connection with part disposals.

This, like every other Finance Bill, contains a number of provisions which are purely administrative and which perhaps I could deal with shortly. My hon. and learned Friend the Financial Secretary will be glad to answer any question on this or any other Clause in winding up.

Clause 1 ends the Customs and Excise Regulator surcharges introduced last July and replaces them with new substantiverates of duty and Purchase Tax, to which I shall refer later. It also contains what is now a normal provision by renewing the Regulatory powers for a further year from next August.

Clause 10 arises from a decision that the number of probate registries should be widely extended to provide a better service to the public and when that happens, there will be no further need for the limited service provided by Customs officers in respect of small estates.

Clauses 31 and 32 and the Fourteenth Schedule result from the betterment levy provisions of the Land Commission Act and adapt the Capital Gains Tax accordingly. Clauses 39 and 40 meet the recommendations of the Select Committee on Procedure in conection with the abolition of the Committee of Ways and Means. They contain the necessary changes to the provisional collection of taxes legislation which will enable Standing Orders to be amended to this end. Under Clause 41, the quorum of special Commissioners in tax cases is reduced to one in certain circumstances.

An efficient tax code should avoid the creation of any barriers or even impediments to economic progress. It is the Government's duty to search them out and, where possible, to remove them. Accordingly, the Bill contains a number of provisions directed towards that end.

For example, Clause 6 provides for useful modernising of Revenue procedures by abolishing official permits for the movement of spirits and tobacco. At present, about 600,000 permits have to be completed each year by the trades concerned. These were no doubt necessary in years gone by, but are no longer required in present-day circumstances. Although our predecessors hung on to them—quite unnecessarily, in our view—we propose to abolish them and to rely in future on normal commercial documentation. This change will mean particularly an easement of form filling for the export trade in Scotch Whisky.

In Clause 4, we propose to abolish the extra licence duty of £1 a year taken out by makers of vinegar. This licence goes back to the time of Pitt, but is not necessary for modern Revenue control. Again, in order to assist the export of vehicles, we propose under Clause 9 to simplify the arrangements under which manufacturers can supply vehicles free of Purchase Tax for export by visitors from abroad or intending emigrants.

As we all know, many firms find it convenient to organise their commercial activities under separate companies for perfectly good commercial and administrative reasons. So far as reasonably practicable, the resulting groups of companies should not be prejudiced in their tax affairs by this division of activity. In particular, they should not normally be required to pay tax on their profits without getting relief for their trading losses.

Accordingly, we are providing in Clause 19 and Schedule 10 for one company making a trading loss to agree to let another company in the group have relief for it against its Corporation Tax profits. This will allow relief straight away within the group instead of requiring the loss to be carried forward against future profits. This new relief has many advantages and will supersede the subvention payment relief which was carried over into Corporation Tax from Income Tax.

It was also represented to us that the existing charge of Schedule F tax on transfers of assets at less than market value by a subsidiary company to a parent could be an undesirable obstacle to company reconstructions. Accordingly, Schedule 11(3) provides for the removal of that charge. It goes a little further, to deal with the converse case of a transfer by a parent to a subsidiary at more than market value.

The next paragraph in the Schedule removes a difficulty facing the liquidators of companies which are being wound up, which arises from the fact that the rate of Corporation Tax on profits arising in any financial year during the winding up is not known until after the end of the financial year. The new rule will be that the rate on profits arising during liquidation in the final year will be the rate fixed in the previous financial year; this will prevent delays in winding up arising solely out of uncertainty about the proper rate of Corporation Tax.

Clause 29 permits the use of franking machines by banks, thereby dispensing with the need for adhesive postage stamps for marking the duty, for example, on foreign bills of exchange such as travellers' cheques. There is also a pro- vision nuder the Capital Gains Tax code affecting the transfer of assets by a close company at less than market value. Paragraph 5 of the Thirteenth Schedule deals with this point and aims, as does the relief from the Schedule F charge on similar transfers to which I referred at avoiding penalising bona fidebusiness arrangements.

Indeed, the provisions for group treatment of profits and losses, which I have mentioned, provides the third example of the desire of the Government to remove obstacles in the way of bona fide business arrangements. The trouble is that as soon as one provides relieving provisions by legislation in order to assist bona fide business arrangements, some taxpayers become active in the artificial creation of similar conditions so as to take advantage of these provisions. It would be possible, for example, to conceive of a scheme being devised—which, if put into effect, would take advantage of provisions enacted for the convenience of groups of companies—in order to create artificial losses.

This would be blatent avoidance, and one is faced with the dilemma, therefore, of whether to facilitate bona fide business arrangements in the three ways to which I referred, with the attendant risk of some artificial tax avoidance, or to deny these facilities in an attempt to protect the Revenue against exploitation. I am sure the House will agree that the proper course is to include these provisions but to accompany them by a warning as I now do, that if they are abused my right hon. Friend will not hesitate to introduce appropriate legislation, if need be with retrospective effect.

This process of assisting industry is carried one stage further in Clause 3, the provisions of which arise from the need to give more detailed information about imports to assist the efforts of British manufacturers to compete successfully. Information in sufficient detail cannot be made available under existing powers and my right hon. Friend the First Secretary accordingly informed the House on 7th March of the Government's intention to introduce legislation for the purpose.

There is only one further aspect to which I wish to refer, and that is the general level of taxation, which is covered in Clause I affecting Customs and Excise in Clause 13 affecting Income Tax, in Clauses 14 and 15 affecting Surtax and in Clause 18 affecting Corporation Tax. I will then have covered under what I regard as significant categories, all the main provisions in the Bill, with the exception of those which were fully explained during the course of the Budget debates.

These Clauses, with one exception, continue the main direct and indirect taxes at their existing levels—Income Tax at 8s. 3d. in the £, Corporation Tax at 40 per cent., Customs and Excise duties at last year's rates, as increased by the 10 per cent, surcharge, and the one exception is Surtax, to which I shall refer.

To say that the same levels of taxation are continued is not to draw any conclusions. To do that one must first escertain whether the level of taxation is comparatively high, in which case the continuation of the existing level is the continuation of a heavy burden, or whether the level is comparatively low, in which case, as a result of the Finance Bill, we continue to be comparatively well off. That being so, I will attempt the comparison.

Hon. Gentlemen opposite hold the view that we are, by comparison, too heavily taxed.

Sir Gerald Nabarro (Worcestershire, South)

Hear, hear.

Mr. Diamond

Moreover, they explain that the position is made to appear worse because too great a proportion is levied by direct taxation, which is the more painful, albeit the more progressive, way of paying taxes, and far too small a part by indirect taxation, which is the more painless, albeit the less progressive, way. It is claimed in particular that industry, the productive sector of the community, is subject to a continually increasing burden in the form of company taxation, especially under a Labour Government. These are all propositions which have been supported by hon. Gentlemen opposite. Let us examine them.

First, the proposition regarding the general weight of taxation in this country. I have had extracted from O.E.C.D. and E.E.C. sources the figures indicating the total tax yield, including social security contributions—expressed in the normal way as a percentage of the gross national product at factor cost—for the average of the three years 1963, 1964 and 1965 of the United Kingdom and five comparable countries; France, West Germany, the Netherlands, Sweden and the United States.

As was to be expected, the United States shows the smallest figure, with 30 per cent. of their G.N.P. going in taxes. Not only is the U.K. the next lowest, but it is well below the others I have mentioned. In round figures, the percentages are: U.K. 33, Netherlands 36, West Germany 40, Sweden 42, France 46. To repeat the figures in an even more simplified form; United States 30, U.K. 33, the average of those four other comparable West European countries, 41. In short, far from the U.K. being one of the most heavily taxed countries, it is one of the least heavily taxed.

Mr. John M. Temple (City of Chester)

Do those include all forms of local and State taxation in the United States and are they strictly comparable with the figures for Britain?

Mr. Diamond

Yes indeed. They are strictly comparable. I am talking about the total weight of taxation, which therefore includes local taxes and rates.

Mr. John Hall (Wycombe)

I, too, have seen those figures. Would not the right hon. Gentleman agree that we have the most savage and penal rates of direct taxation at the highest levels of income at the marginal rate compared with any other major industrial country?

Mr. Diamond

The hon. Gentleman is interested in the levels of direct taxation, and I will be coming to those. He has made a familiar point, which is that on salaries of above £15,000 a year—I am quoting these figures from memory—the levels of Surtax, added to the levels of Income Tax, produce a higher marginal rate of tax in this country than in most other countries. That is perfectly true—that is, when one considers levels of income in excess of £15,000 a year. If one is considering annual incomes of £20,000, £40,000 or even £80,000, it is true to say that the rates of taxation, including Income Tax and Surtax, are higher in this country than elsewhere. However, when one considers the levels of direct taxation on incomes below those figures, the results are interesting.

The second proposition that is advanced is equally invalid as the first.

The way we are to get increased production, we are told, is to transfer part of the tax burden from direct taxes to indirect taxes, as other countries do. Let us look at the proportion of the total tax yield contributed by indirect taxes for the same five countries for the same three years: Netherlands, 31 per cent. of total taxation produced by indirect taxes; Sweden, West Germany, and the United States, all 34 per cent.; France, 45 per cent.; and the United Kingdom, 47 per cent. In short, we collect a higher proportion of our total taxation in indirect taxes than any of the other countries mentioned.

Now let us look at direct taxation—to answer the hon. Gentleman's question—to see, first, whether the burden of direct taxes, including social security contributions, weighs more heavily on us, as is frequently alleged, than it does on others. In view of the current interest in the affairs of the Common Market, perhaps the House would wish to have the comparative figures. They refer to 1965, the latest year available, and are based on O.E.C.D. accounts. The share of the G.N.P. taken in direct taxation on incomes, including social security contributions, is for the U.K. 18 per cent. as compared with the Common Market average of 23 per cent. That answers the hon. Gentleman's question. That average figure hides nothing, because for each of those countries the percentage is higher than in the United Kingdom.

Similarly, if one measures the amount which these taxes produce as compared with the total yield, our figure for direct taxation, including social security contribution, is 53 per cent. The Common Market average is 60 per cent. Once more, every one of the Six has a higher percentage than ours, so here, again, the conclusion is the same: not only is the U.K. one of the less heavily taxed countries—I might say the least heavily taxed country—but it also bears a lighter burden of direct taxation.

All these figures are not really very surprising. They correspond broadly with the figures published in the Richardson Report for 1962, but, of course, in so many quarters it is not very convenient that the lesson should be learnt——

Mr. William Baxter (West Stirlingshire)

My right hon. Friend has produced some very interesting tables and so on. Can he go further and try to find out the percentage that goes on defence in all those countries as compared with this country?

Mr. Diamond

The hon. Gentleman can put down a Question, or he can drop me a line on the issue and I will try to get the information. His question deals with expenditure, but today we are dealing with what is raised in taxation rather than with the spending of the yield.

As I was saying, the figures are familiar to those who have read the Richardson Report, but the problem is that there is difficulty in getting the conclusion drawn and accepted. And lest any open minds should learn the lesson to be drawn, a propaganda campaign is mounted to the opposite effect. In particular, we have continual complaints about the increasing burden of company taxation, and I should like to examine that complaint also, both in terms of comparison with the five countries I mentioned earlier and also in terms of the trend in this country.

The comparative figures for the average of the same three years—1963, 1964 and 1965—show the percentage of gross national product taken in direct taxation on companies in the United Kingdom to be slightly above that in Sweden and France, somewhat below the Netherlands and West Germany, and substantially below the United States. But perhaps the most illuminating figures are those relating to the trend in this country. They were given to my hon. Friend the Member for Barking (Mr. Driberg) in a Written Answer only yesterday. They show that since the war the proportion of companies' gross trading profits taken in taxes in the United Kingdom has been falling the whole time.

The figures are striking, and I give them in five-yearly averages. From 1950 to 1954 the average of gross trading profits taken in United Kingdom tax was 37 per cent.; in 1955–59, the average was 31 per cent.; in 1960–64, it was 21 per cent., and for the two years 1965 and 1966 it was an average of 16 per cent.—that is less than half the average of the previous decade.

Mr. John Nott (St. Ives)

Will not the Chief Secretary agree that those figures are completely misleading, because Corporation Tax represents an entirely different basis of taxation from the previous system of Income Tax and Profits Tax? We now have a system of double taxation on companies' capital, with this Corporation Tax deduction and standard rate of Income Tax on dividends, and we cannot separate the one from the other.

Mr. Diamond

I do not know whether the hon. Gentleman has listened to the years I quoted or whether he thinks that we have had Corporation Tax all this time. I referred to the years from 1950 onwards, and I finished with the year 1966. I demonstrated that the figures showed an ever-increasing reduction in and lightening of the burden of company taxation as a proportion of gross trading profits from 37 per cent. in 1950–54 to 21 per cent. in 1960–64—long before there was any Corporation Tax.—[Interruption.] I am grateful that interest is shown—it is my desire that these figures should be listened to and that the lesson should be drawn. The lesson is that during the course of the last few years the level of company taxation has been about half what it was, on average in the previous decade.

The hon. Gentleman is interested in the effect of Corporation Tax, so I will be only too glad to give him figures of how Corporation Tax has affected the issue. I explained them last year, when the rate of Corporation Tax was fixed at 40 per cent. We estimated then the likely yield for 1966–67 at that rate, together with the tax on dividends, would be less than would have been produced under the old system of Income Tax and Profits Tax. That estimate has proved to be the case. In fact, it would have required a Corporation Tax rate of more than 45 per cent. to produce the equivalent net yield—although, of course, all figures relating to what would have been the case in different circumstances are admittedly subject to a margin of error. The further one gets from the point of time at which the new circumstances begin to apply the less valid the comparison becomes.

That is why I doubt whether there would be sufficient validity in any calculation on these lines made in future years. But I have asked the Revenue to let me have the most objective estimate it can make of the rate of Corporation Tax required to produce in the current year the same yield of tax as would have arisen under the old system. The answer is that 40 per cent—the existing rate—would produce, when added to the estimated tax for dividends, the same yield as would have been produced under the old system. That answers the hon. Member for St. Ives (Mr. Nott). The trend has been continuing, as I have indicated. The ever-lightening burden of company tax has not in any way been disturbed by the introduction of Corporation Tax.

Sir G. Nabarro

I must say at once that I reject the right hon. Gentleman's figures for the 15 years he quoted——

Mr. Diamond

Obviously.

Sir G. Nabarro

The right hon. Gentleman says "obviously", but if I get a chance to speak later in the debate I will deal with the figures. What does the right hon. Gentleman mean by gross trading profit? Is it calculated before capital allowances or after capital allowances? Is it calculated before depreciation or after depreciation? How, for example, does the Chief Secretary arrive at a figure for direct taxation on companies of 21 per cent. for the quinquennium 1960–64? The standard rate of Income Tax during those years was 38¼ per cent., or 7s. 9d. in the £, and the rate of Profits Tax throughout those years, in addition to Income Tax, rose from 12½ per cent. to 15 per cent., so the minimum in those years would have been 51¼ per cent. and the maximum in those years would have been 53¾ per cent.?

Mr. Diamond

If the hon. Gentleman looks at today's OFFICIAL REPORT he will not only see the figures for each individual year but the notes at the end which answer the very questions he is asking. On a normal definition, gross trading profit is arrived at, of course, before taking into account capital allowances. If he is concerned about the effect of capital allowances let me tell him straight away that the present capital allowances at the rate of 40 per cent. are precisely equivalent to what they would have been under the old system.

The hon. Gentleman still cannot, therefore, wriggle out of the lesson to be drawn from these figures—which is in sharp contradistinction to the strong support he gave me when I suggested at the beginning that there was continual complaint about the increasing level of company taxation—the lesson being that ever since the war the level of taxes on companies, judged in any objective way, has been reducing year by year, throughout every Government, and is today standing at its lowest figure, notwithstanding the fact that we have changed from an Income Tax system to a Corporation Tax system.

I have shown that at present levels the total burden of taxation in this country is less than in most. In this Finance Bill we are continuing those levels. I have shown that at present levels there is a reasonable balance between direct and indirect taxation. We are continuing those levels. I recognise that last year the 10 per cent. increase in Surtax, to which the hon. Member referred, produced some very high marginal rates for those with very substantial incomes. We are accordingly restoring the previous levels.

I have shown that the tax burden on companies grows ever lighter. Corporation Tax at 40 per cent. has done nothing to disturb that. On the contrary, by continuing that level we are continuing to give considerable incentive to companies to plough back their profits in the form of new investment. Let no wage earner, company manager or surtaxpayer ever be heard again to say, "There is no taste in nothing".

5.31 p.m.

Mrs. Margaret Thatcher (Finchley)

The Chief Secretary to the Treasury has just made a very revealing speech, a speech which revealed a complacent attitude towards the level of taxation and towards the system of taxation. Whenever he quotes, time and time again, some of these figures about the burden of taxation, I am reminded of some of the threats which the Chancellor has made about increasing taxation. The Chief Secretary has quoted these figures and the implication is that there is plenty of room for increased taxes by this Government. I disagree with that conclusion very much.

I notice that the Chief Secretary quoted a number of figures from the Richardson Committee's Report. Indeed, he claimed the Richardson Report as the source for his figures. There was a very critical anlysis of the figures in that Report done in a booklet called, "A Tax for our Time", by Anthony Mitton. It took precisely the same figures as the Richardson figures, but allocated them differently as between direct and indirect taxation because the classification of some of the taxes is open to question, and it came to a completely different conclusion. Nothing was said about that by the Chief Secretary. I suspect that the same could be done with some of the other figures he quoted. We shall have a close look at HANSARD tomorrow morning.

There were times when I wondered whether the right hon. Gentleman was describing the same Finance Bill as is before us, particularly when he said that it simplified and clarified the tax system. I turn at once to the current prize piece of jabberwocky in this Finance Bill in Clause 31(6). If this is an example of simplification and clarification, the Chief Secretary will believe anything. It says: Where subsection (1) above is displaced by an election under this section, subsection (5) above shall have effect in substitution for sub-paragraphs (1), (2) and (3) of paragraph 23 of Schedule 6 to the Finance Act 1965 (assumed sale and re-acquisition at market value), but subject to sub-paragraph (4) of that paragraph, construing references to subparagraph (2) of that paragraph as references to subsection (5) above. … etcetera, etcetera. That, of course, is in a part dealing with the betterment levy, a particular group of financial provisions which received more criticism for complexity than any I have ever known, even exceeding the criticism of Corporation Tax and Capital Gains Tax. The Chief Secretary went on to what I can only refer to as a kind of verbal explanatory memorandum which no doubt we shall find useful when we reach the Committee stage of the Bill.

I turn now to some of the more important items of Budget judgment which, of course, are embodied in the Finance Bill. The Finance Bill I am talking about 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.

I turn to the atmosphere surrounding the Budget judgment. I think it was noticeable that it changed a few weeks before the actual Budget Statement. There was a sudden optimism, a sudden kind of euphoria caused, I think, in part by short-term money coming back into the reserves and in part by the fact that we had one or two months of good trading figures which we all welcomed at the time, and also in part by the mild winter which helped employment at home. Suddenly it seemed that everyone was expecting a much easier Budget and was expecting that our external position was now all right and our internal position was through the worst.

When we came to Budget day, the Chancellor produced a sterile Budget but coupled it with some rather optimistic forecasts. I want to question the view that both the external and internal positions are now perfectly all right.

Let us look first at the external position. On the reserves, it seems that the money flowing in is largely "hot" money which could move out as fast as it comes in. The underlying position of the reserves is that they are bolstered by second-line reserves, that is to say by some £316 million worth of liquefied dollar stocks. They are also bolstered by third-line reserves which arose from the disinvestment of dollar stocks, a part of the proceeds of which has gone straight into the reserves. So the true reserve figure is swollen by second-line and third-line reserves, namely, part of the Government portfolio, and part of encashment of the private portfolio. When one takes away the short-term money flowing in, the underlying position still gives rise to a certain amount of concern.

Against this background one must look at some of the Chancellor's forecasts. On exports we heard a lot about having an export-led boom. It was one of the favourite phrases in this House at one time, but what we are getting now by way of reflation is a public spending boom. Exports, I am the first to admit, did better last year and that we all welcome. They should have done so because the terms of trade were with us and world trade was expanding. If they could not do better at that time they are unlikely to do better at a time when world trade is expanding less fast and the terms of trade may not be in our favour in future as much as in the past.

The Chancellor's estimate was that exports would be up 3 per cent. or 4 per cent. for the second half of 1967 compared with the second half of 1966, but others are already doubting his forecast. For example, in The Guardian on 20th April, 1967, it was reported that the C.B.I. had some doubt about the rate of increase in exports looked for by the Budget. The Financial Times of 21st April, in an article by Samuel Brittan, Economics Editor, says that although for the moment the National Institute and the Chancellor's forecasts about export performance agree the Institute is however already thinking of reducing its export forecast in view of the worsened outlook in the U.S. and Germany. One turns to this week's Board of Trade Journal and sees in an article on "Orders, deliveries, production and exports in the engineering industries ", that comparing the three-months' period December to February in the preceding three months: new export orders fell 5 per cent. producing a further drop in order books at the end of February and continuing the declining trend throughout 1966. There is a similar rather pessimistic forecast about commercial vehicle exports. It seems, therefore, that other people are beginning to revise the judgment of export performance. Incidentally, there was another revision in this month's Economic Trends, which reached me yesterday, pointing out that we are not likely to do so well in the United States market this coming year compared with the past two years because of the decline in aircraft deliveries.

On the imports side, one notices that the Chancellor gave no forecast of what the stock position would be in the future, although stocks at the moment are rather low. It seems, therefore, that the underlying external position is unchanged and that the freeze and squeeze have done litle, if anything, to improve it.

I turn now to the internal position. The Chancellor's optimistic forecast about growth towards the end of this year has already received enough comment. Within a few days of his announcement, other people were once again doubting whether the 3 per cent. growth rate could be or would be reached or was the right assessment for this year. One of the right hon. Gentleman's forecasts which interests me greatly, and will interest everyone else, too, was his incomes forecast. This also is crucial. He forecast a 6 per cent. increase in wage rates over the 18 months from July last to December next. If, however, we look back to the comparable pay pause period and the figures of wage rates for all industries and services from July, 1961, to December, 1962, we find that, in the identical period, under a voluntary pay pause, wage rates rose by 5½ per cent.

It seems that compulsion has achieved nothing and, in fact, was almost completely unnecessary, as we on this side have always asserted. What we were able to achieve voluntarily the Chancellor has been able to achieve only by compulsion, embittering relations a great deal in the process. Perhaps his speech at The Hague about a compulsory incomes policy being a bonus was one of the true flashes which he had at the time and one which may have turned out to be true because it was the financial stringencies which led to the present incomes position and not the compulsory wage freeze itself. But the spurt, even on the Chancellor's forecasts, will come at a time later this year, very late in the year, when there will, on his forecast, be a considerable upsurge.

Over the last two years, the underlying structure has remained unchanged and, after two and a half years, the external position is still difficult. As regards the internal position, we have learned since the Budget that the index of production has fallen by one point and that the underlying problem of unemployment is even more difficult than we thought at the time of the Budget.

The Chief Secretary devoted some of his time to giving us his attitude to taxation and to taxpayers. As he knows, there have already been large increases in taxation under the present Chancellor. The increases in rates alone have led to increases of about £1,000 million in tax charges. The largest increases are now falling inevitably on the broad middle-income groups. The day seems to have gone—I doubt that it was ever here—when the Labour Party could say that we could have increased taxation and increased expenditure but "they"—someone else—would pay.

The lesson we have learned over the past two years is that public expenditure has risen so much that it is the middle-income groups who pay the price of Socialism through constantly increasing taxation. We have threats of further increases, which the Chief Secretary did a certain amount to encourage.

Every action produces a reaction of some kind. In face of these increases in tax rates, some people will prefer more leisure to more work. Others will look for ways of minimising the growing tax burden. Some ways are permissible. The Chancellor gave one in his Budget speech; he wants to encourage people to buy more National Savings Certificates. That is all right. There are other permissible ways of minimising the tax burden, specific life assurance reliefs and mortgage reliefs, for example.

I do not quite know what the Chancellor meant in his Budget speech when he talked about looking at all tax avoidance, but it is worth mentioning that the present high rates of tax on high incomes are bearable only because there are specific reliefs within which people can legitimately put themselves to reduce the burden of taxation. This tax avoidance is not wrong in any way.

One of the significant features of the Chief Secretary's approach and the Chancellor's approach is that they concentrate above all on the enforcement provisions. It seems to me that the Chancellor protects the revenue and the taxpayer can jolly well look after himself.

Mr. Diamond

Himself?

Mrs. Thatcher

I happen to be speaking at the moment, but I am referring to the ordinary citizen.

Mr. Joel Bamett (Heywood and Royton)

He is on P.A.Y.E.

Mrs. Thatcher

It applies to the P.A.Y.E. man, too. The Chancellor has threatened increases in taxation. He threatened them in his Budget speech. I understand also, from the Financial Times, that he threatened them in a meeting which took place upstairs afterwards. I am speaking of the person who is on the receiving end of the Chancellor's threats. This is why I refer to the middle-income groups who bear the increases in taxes. They always do. They pay the greatest price of Socialism. It always seems to be the Inland Revenue versus the citizen, with the Chancellor concentrating everything on trying to get after the comparatively few people who do not co-operate in paying their taxes. The Chief Secretary said that the vast majority of people comply voluntarily and readily in paying their taxes.

It is significant that the Inland Revenue, according to the last Report, the 109th Report, collects in gross receipts over £5,261 million a year in Inland Revenue receipts. Another significant fact emerging from the same Report is that back tax assessments over the last years have not varied very much. These are the results of the enforcement policies, of course, and the amount is approximately £15 million a year, or three-tenths per cent. of the total collected.

It seems that the Chancellor, the Chief Secretary and the Inland Revenue concentrate their efforts on going after the three-tenths of 1 per cent.—or, perhaps, a few more—when it would be better if they took a completely different attitude for a few years and concentrated——

Mr. Harnett

Would the hon. Lady do without enforcement?

Mrs. Thatcher

Enforcement is always part of the work of the Inland Revenue. What I am suggesting is a change of emphasis from a great concentration on enforcement to a concentration on effort on enabling co-operative taxpayers to calculate and discharge their tax liabilities more easily. This would be a great change of approach. Instead of hounding the 1 per cent. with all their effort, some of the effort should be devoted to helping the 99 per cent.

This would call for a fairly extensive programme. For example, the tax forms would have to be redesigned. This has already been done in the United States, where those with incomes of less than 10,000 dollars a year earned income—which would cover most people in this country—and not more than 200 dollars a year investment income fill in a tax form like the one I hold in my hand, which is about the size of a panoramic picture postcard. The forms have been designed by industrial consultants, and there is a great effort directed towards helping the taxpayer to understand and to comply with his tax requirements, helping him instead of hounding him. I believe that it has been extremely successful.

Another part of the programme would mean looking at Government legislation to reduce anomalies and not bringing forward pernickerty legislation designed to increase the anomalies already present in the taxation system. It would also mean, if one is to help the taxpayer, redrafting and redesigning some of those arrogant, dictatorial form letters. It would also mean, if one is to secure the co-operation of the taxpayer, paying as much attention to getting quick refunds of over-payments of tax as the Chancellor pays to getting in back tax. I notice that, in any one year, repayments of tax due to the taxpayer are of the order of some £500 million. Most of us know that it takes far longer to get money out of the Inland Revenue which has been overpaid to it than it takes the Inland Revenue to get money out of a taxpayer on which the taxpayer has been under-assessed——

Mr. Barnett

I assume that the hon. Lady is making a constructive comment, but, naturally, she understands that most repayments arise because tax has been deducted at source—on dividends, for example. Does she suggest that we should not deduct tax in that way?

Mrs. Thatcher

I do not suggest that at all. I am quite aware of it, and the hon. Gentleman and I share some taxation experience. Where the taxpayer is entitled to a refund the Inland Revenue should see that it gets there quickly. The hon. Gentleman knows quite well that people have to wait a very long time now for a refund. The Chancellor is now directing all his effort towards enforcement, and it would be better if he directed some of it towards helping the large number of people entitled to refunds.

If the Chancellor were to embark on a campaign to help the taxpayer, it would also mean that he should be prepared to give advance rulings. We are very much behind in this aspect compared with other countries, judging by the papers presented to the 19th International Congress on Financial and Fiscal Law.

The Chief Secretary spent some time on miscellaneous points in the Finance Bill itself. The more one learns about the Selective Employment Tax, the more absurd the tax seems to become. There are enormous cash flows created all for £180 million of tax. There is an enormous cash flow into the Treasury and an enormous cash flow out, largely back to the same people from whom it comes. We have understood for quite a long time that the Selective Employment Tax system is undergoing a review, and a small part of the results of the review appear to be in the Bill.

It would seem that the only major change in the Bill is the one about part-timers, and it is really only a grudging half-relief. It is noticeable that it does not begin to operate until 4th September. That is not really of much help to the hotel industry in the seaside towns or to the tourist industry in Scotland. Just after the hotel industry has its greatest need for part-timers, so the relief will begin to operate. Why does the Chancellor not put forward the relief to help the tourist industry in the development areas and to help the hotel industry, particularly in seaside towns?

The relief was one for which we asked as a compromise a year ago. On that occasion, we were told by the Financial Secretary: Now we are being asked whether some machinery is possible by which we could devise a repayment system which would be discriminatory and selective within the sphere of part-timers. We are discussing, in particular, an Amendment, and other Amendments grouped with it which are variations on it. suggesting that there should be a refund in relation to people who are employed between 8 and 21 hours a week. I must tell the Committee that we are unable to find no practical way whatever of devising a refund system on the basis of part-timers."—[OFFICIAL REPORT, 20th July, 1966; Vol. 732. cc. 806–7.] He then went into a long explanation of why he could not do it.

We are grateful that the Financial Secretary has admitted that he was wrong. It would have been better had it been incorporated in the Bill last year. It would be better now if it came soon enough to help the people whom I have mentioned. On the legislation on betterment levy, it appears to be allowed as a cost instead of as a credit, and that means a certain amount of double taxation.

I come now to the main taxes. I disagree with the Chief Secretary on his exposition about taxes. We have still too many, and they are still too high.

In a recent article in the Financial Times shortly before the Budget, my right hon. Friend gave his assessment of what we should do. In fact, people are so used to being hard hit by the Chancellor in successive Budgets that it seemed as if they were almost relieved not to be hit again too hard this year. However, the Chancellor could have given a certain amount of encouragement and relief to taxpayers who have had precious little of either during the period of Socialist Government.

Towards the end of the Budget debate last time, the Chancellor wound up and had something to say about Budget judgments and about the 1963 Budget of my right hon. Friend the Member for Barnet (Mr. Maudling). He will recollect that he quoted what he said about the 1963 Budget in November. What he did not put was what he said about the 1963 Budget during the Budget debate. There is a note in HANSARD that there was an interruption at that time. I know what the interruption was, because I happened to be sitting next to my right hon. Friend. He pointed out that, at the time, the Chancellor said that the Budget was too cautious. That is perfectly correct. What the Chancellor actually said about that Budget was: In my view, the Chancellor has been too cautious. I believe that there is a need for greater incentives if we are to get industry running full out. I do not believe that we can maintain it, but I think that there would be a case for arguing economically that we should have a relatively sudden spurt for a period of twelve months before we settle down to a steady rate of growth of about…4 per cent.—[OFFICIAL REPORT, 4th April, 1963; Vol. 675, c. 642.] I quote that to put the record right. I was looking back for some Budget judgment of the Chancellor's which would be accurate at the time that it was given. In fact, I found none. On my right hon. Friend's Budget, he said: This is the same old stuff again, and the Chancellor knows it."—[OFFICIAL REPORT, 4th April, 1963; Vol. 675, c. 636.] That was a Budget which gave a large number of incentives. We are not suggesting that this Budget could give as many incentives at this time as that one gave at that time. But we are suggesting that it is time to give a number of incentives to ordinary taxpayers, at the standard rate, at the reduced rate and at Surtax levels. In accordance with my right hon. Friend's own Budget judgment, therefore, we shall move Amendments during the Finance Bill to reduce the direct rate of Income Tax by 6d. and the reduced rates by 3d., and to reduce the Corporation Tax.

My right hon. Friend has indicated how he would pay for this and, once again we note that in the Financial Statement there is plenty of scope for reduction in public expenditure. For example, there is £75 million for the nationalisation of steel which would not have been there had steel not been nationalised. There are still the premiums from the Selective Employment Tax. We believe that Income Tax-payers, both those living on earned income and those living on saved income, deserve and need some encouragement. It is clear that the taxpayer can no longer look to the Chancellor to give him a square deal. He can look to my right hon. and hon. Friends, and we shall not fail.

5.59 p.m.

Mr. Robert Sheldon (Ashton-under-Lyne)

The hon. Member for Finchley (Mrs. Thatcher) says that the Chancellor should have given incentives in this present Budget. I am not sure what right hon. and hon. Members opposite mean by "incentives". I suspect that they really mean reductions in taxation, particularly in Surtax, and that incentives are a euphemism for reductions in Surtax. However, I shall deal with that later at some length, because it is an important point which needs to be established.

When the present taxes have settled down, my right hon. Friend the Chancellor will become known as one of the great reformers of our taxation system. I accept that there has been an upheaval in the laws of taxation. More important, there has been an upheaval in the understanding of them, particularly in the established attitudes taken by so many people. When those laws have settled down—and they are beginning to do so—we will be able to achieve the benefits of the great reforms.

One of the important aspects of the reforms which my right hon. Friend initiated has been the introduction of varieties of taxation. In particular, we must be grateful that he has extended the range of taxes by means of the Corporation Tax. Capital Gains Tax and Selective Employment Tax, although there are many details of the Selective Employment Tax that still need to be settled. Those taxes have been added to the Excise Duties, Purchase Tax, Income Tax and Stamp Duty, to which I hope he will turn his attention in due course.

Before my right hon. Friend set to work on our taxation system, there was very great difficulty in the act of raising sufficient revenue. Each tax was somewhere near the limit to which it could reasonably be put. It is hard to define the limit of each individual tax, but the House will understand what we mean when we talk of approaching the limit of any particular tax. For example, I believe that the Income Tax is very near the maximum practicable rate, not because we have the feeling that taxation, being the evil it is so often held to be, is somewhere near the maximum endurable, but because we have had experience of higher rates and can make a comparison between some of the bad effects of taxation at the higher rates and some of the more acceptable effects at present.

Similarly, one can hold Purchase Tax to be somewhere near the limits of the rates at which it can be put. This is for a different reason, because here the Government are directly distorting the consumer's choice. This can be tolerable up to a certain level, but there comes a point where this kind of distortion becomes equivalent to laying down from on high what the consumer should desire. It distorts the choice between the desirability of the heavily taxed labour saving equipment for the wife who wants to go out to work and the low taxed fancy clothing on sale in the shops today. It distorts the choice between the highly taxed sports equipment and the untaxed luxury foods.

This level of distortion of consumer choice can be tolerable only given a limited level of Purchase Tax. The Excise Duties have at long last reached an area where they are incurring the consequences of the law of diminishing returns. On top of these taxes we have now had added the potentially very heavy revenue raisers of the Corporation Tax and Selective Employment Tax, which will obviously be used and expanded in the years to come.

As my right hon. Friend the Chancellor of the Exchequer has been building up this variety of taxation, he must now start to consider the way in which these taxes can be used and related to each other. Relating the various taxes to each other, and the consequences of doing so, are particularly important. For example, the relationship between the Corporation Tax and Income Tax is very interesting. As Corporation Tax can be increased to increase the revenue it can lead to a reduction of Income Tax in order to increase incentives, which I will refer to later.

Similarly, the relationship between the Selective Employment Tax and Income Tax is also interesting. Selective Employment Tax offers the possibility of eventually doing away with the manufacturing refund in certain cases, and if this were done, and it were adapted in the way I might like to see, it could lead to incentives to modernisation; the revenue coming from the Selective Employment Tax could be offset against reductions in Income Tax and the overtime and shift working of those working the machines concerned could be encouraged by reductions in their Income Tax.

The other relationship to which I wish to draw the attention of the House is that of the Selective Employment Tax and the Corporation Tax. With Selective Employment Tax used in the way I have described to assist modernisation, the money from it can be used for a reduction in Corporation Tax thus increasing the cash flow of those companies which are able to obtain the funds for the necessary modernisation.

These are only ideas but there is a field of great interest for the relating of these various taxes in the way I have described, which I think will be well worth tilling in the years to come. We have come a long way from the time when taxation was merely the raising of revenue and from when it began to be used in order to control the economy, because control through incentives from taxation is beginning to find its part.

The incentives that the Government try to use in order to achieve not the direction of individuals but the encouragement of their actions in certain ways, the manipulation of the economy through taxation, is one of the tools the Chancellor of the Exchequer must use. We have seen the incentive to plough back given by the Corporation Tax and the incentive to invest by the investment grants.

If we accept that taxation provides such incentives we must also accept that taxation of effort may be a disincentive to that effort. Hon. Members opposite have always made a great deal of this, frequently rather too much. But there is something in it and the question we must ask ourselves is how much. The great incentive of our economic system lies in its financial rewards, but as they make the economy work so taxation to a certain extent tends to blunt the incentive of the individual. But also blunting it, as the hon. Member for Finchley said, are the difficulties of certain kinds of work such as overtime and shift work.

The case is not quite as simple as might be considered. The individual very largely considers his own marginal rate of taxation, despite all that we have said here, and every individual paying tax is aware in one way or another approximately what his own marginal rate of taxation is. The overtime worker and the shift worker have a higher marginal rate of taxation, which is increased just at the period when their conditions are most difficult. Ideally, from the economic standpoint, a person should pay less tax in order to overcome his disinclination to marginal activities. In other words, the period when he will deprive himself of seeing his family in the evening is the period when, according to the economic argument, he should be paying less tax. In fact, that is the time when he is paying the most tax.

Sir G. Nabarro

That nostrum has been canvassed in the House for 30 years. The Inland Revenue has never found a means, nor has any combination of industrialists and trade unions, of giving effect to it. It is utterly impracticable. Would not men slack in their normal standard working hours, or work short of their normal hours, in order to get greater lengths of overtime and higher pay for their overtime? How does the hon. Gentleman answer that?

Mr. Sheldon

I was not coming to conclusions, but was merely stating the case as it is, and I am glad to see that the hon. Gentleman accepts it.

Sir G. Nabarro

Utterly impracticable.

Mr. Sheldon

I do not know what the hon. Gentleman means by that. I have not suggested a solution.

Industry and the trade unions have always understood the relationship between disinclination to work and the need to pay more, and that is why overtime rales and shift work rates are higher. But the dilemma is, of course, the joining together of the disincentive offered by the higher marginal rates of taxation and the disincentive to work under difficult conditions. This difficulty is with us so long as taxation is used for the necessary redistribution of wealth and to promote greater equality. What we finally achieve in some: sort of compromise.

The light hon. Gentleman the Leader of the Opposition said in Manchester on 29th March that taxation is a disincentive to responsibility. I do not believe that this is so. I believe that there are very few who refuse promotion and the prestige and the pay that promotion brings. But Income Tax can be a disincentive to risk and it is necessary to distinguish between the risk of the firm affected by Corporation Tax and the risk of the individual affected by Income Tax.

When discussing this question of the disincentive of high taxation, we need some sense of proportion. The Government affect the profitability of a company far more by the economic conditions they bring about than by the level of taxation they place upon the organisation. Any company would far prefer higher taxation and good economic conditions than low rates of taxation and poor economic conditions. For any company, an increase of 2½ per cent. in Corporation Tax is far more acceptable than a 5 per cent. fall in production, with a greater fall in profitability as the operations become uneconomic.

Similarly, the economic situation is far more important in encouraging a firm to take advantage of investment grants. No one is going to produce at a loss even if the machinery is offered free. No one will accept a gift from the Government in order to lose money. What the investment grants can do is offset partially the amount of risk. Although there are other considerations—the cost of the factory in expanding, the maintenance of the labour force, long-term investment and so on—this partial offset is of some consideration.

But if we accept that economic conditions are more important than an increase in Corporation Tax, then an increase in Corporation Tax does provide some disincentive. I do not believe that, when Corporation Tax is increased, the managers of a company work less hard or less long hours. What it does provide is the disincentive to risk, which must be overcome because it affects investment decisions. But these investment decisions can be partially offset, as I have tried to show, by investment grants and even more so if they were more widely available and promptly paid. So, to a considerable extent, the incentive to risk could be maintained.

What is required is a lower rate of Income Tax paid for, if necessary for the purposes of increasing the revenue, by a higher Corporation Tax, which would itself be offset by investment grants. This lower Income Tax could provide a marginally higher degree of incentive for individuals and at the same time the investment of industry would be maintained by the use of the investment grants.

But all this is only marginal to the problem. It could have a small and useful effect and would be proceeding in the right sort of direction. But what I find in this whole question of incentives is the surprising point that the Inland Revenue, which is so well suited to do so, does very little research into taxation. What we need to know and what the Inland Revenue should be obtaining—or, if not, the Inland Revenue then the D.E.A.—is the incentive and disincentive effects which come from changing rates of taxation.

We need to know, for example, first, whether industry does its sums properly when the rates of taxation are changed. The Report on Investment Appraisal suggested that in that particular case, industry did not. How does industry anticipate future changes in taxation rates? For example, what about possible changes in the Selective Employment Tax? Does industry assume that the rebate will be paid for many years ahead? We do not know. How important is the level of taxation in the expansion of activities?

Most important of all and most difficult to obtain is an understanding of the psychological factors—the margin of effort that people put in because of the level of Income Tax at the margin. If we are to manipulate the economy through taxation, as to a large extent we do, these are matters we must know more about. When we discuss incentives during proceedings on the Finance Bill we do so with little of this sort of information. The Government need to take charge of this activity and provide us with information so that we may discuss these matters more adequately in the years ahead.

6.15 p.m.

Mr. Nigel Birch (Flint, West)

With very much of the speech of the hon. Member for Ashton-under-Lyne (Mr. Sheldon) I agree and I am sure that most of my hon. Friends agree too. After a short further period of purgatory on the benches opposite, perhaps the hon. Gentleman may cross over to these benches. We have large hearts and we should welcome him. He does not seem to share the enthusiasm of the Chief Secretary to the Treasury for higher taxation. He thinks that Corporation Tax, Purchase Tax and Income Tax are as high as they can be pushed. He is perfectly right on all those points.

I want to turn back to some of the main themes of the Budget debate. The first side issue, made in many speeches, was the effort to devalue the Budget and to say that too much fuss is made about it. It was said that there was nothing magical about the first half of April and that the Chancellor should do what he thought right from time to time.

What the advocates of this course appeared to be saying was that the Chancellor this time should have turned up and said, "I haven't a clue. Anything can happen. You watch it." Had he made that speech we would have been bound to concede at once that it had the unusual merits of brevity, clarity and truth and contained the only sensible advice available in the circumstances. But would it really be progress? Would it really be planning?

This idea of devaluing the Budget comes from that extraordinary series of mismanagements when the Chancellor was trying to deflate our economy. I tried to add up the number of times that the right hon. Gentleman has announced deflationary actions. He only finally got deflation on 20th July last. That was about the 24th bite of the cherry.

There is nothing natural about that. In all the golden years of Tory rule it never happened. Indeed, there never has been such a long series of misjudgments in our history. It might or it might not have been better for economic planning if God had decided that the earth should take a longer or shorter period to go round the sun, but that is not worth discussing.

It is certain that every civilised country has an annual Budget. It is essential for the planning of ordinary people. It is the main item in the fiscal policy of a Government. It is a main and legitimate part of Government planning. Everyone else is affected. For example, the family deciding to buy a washing machine will be affected by what it will have to pay in taxation. The largest company deciding its investment plans, which mature over a long period, must be affected by cash flow in the current year. These decisions can only be made on the basis of a firm Budget. It may sometimes be necessary to have a supplementary Budget but if it has to be introduced it is not a sign of progress but of bad judgment.

I ask hon. Members, particularly hon. Members opposite, who try to devalue the Budget, to think again. Surely they are reversing rather too rapidly. After all, it was only a few months ago when the present Foreign Secretary could tell us how many plastic mackintoshes we would export in 1970. Now we do not know what is to happen even a year ahead. This Gadarene flight down a steep place to Government-induced chaos is inelegant as well as foolish.

Much of the debate has been dominated by the august figure of Professor Paish. I think that he is enjoying his apotheosis. I was much moved by a photograph of him sitting in his garden with his grandchildren. No doubt he was telling them of his glorious victory. I have always had a great respect for Professor Paish. I judge economists by a very simple test. Economics is a dismal science, without grace, or beauty, or fun, and the only excuse for the economist is that he should sometimes be right about what will happen next.

In academic circles this test is considered to be very unsporting. The people who get on there are those who can think of ingenious reasons for being wrong. Balogh and Kaldor have never been right about anything, and they have done rather well academically. Balogh predicted total disaster at the start of Professor Erhard's economic miracle in Germany.

Professor Paish has often been right, not always, but often. I think that he must be right when he says that we cannot run the economy permanently absolutely flat out. Not only does that lead to crises in our balance of payments and to inflation and rising prices, but it does not lead to growth. It is worth noticing that in 1965, when the economy was grossly overheated throughout and consistently there was a labour shortage, with unemployment being much exceeded by unfilled vacancies, there was no economic growth at all.

Now he has converted the Prime Minister. The Prime Minister was certainly not a Paish man. Anyone who still takes the Prime Minister seriously as an economist—I do not know whether there is such a person, but supposing there is—I advise to reread all the right hon. Gentleman's speeches on economic affairs when he was in opposition. It is a hideous penance, but it is salutary. Anyway, the Prime Minister has come round; he has gone to Canossa, but he has gone rather late.

As I have said before, we are in a trap, and the trap is caused by a rise in expenditure far exceeding any small rise in growth which there may have been. Expenditure was too high when the Government got in, but as a proportion of national income it has sailed up and is still sailing up. It is not very much good the Prime Minister, as he often does, blaming it on the Tories. In fact, the estimates of expenditure this year are higher than those in the Government's own National Plan, produced after a year's study. And there has been no growth.

At the beginning of the Budget debate, my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) quoted the key remark of the Prime Minister in the last election. My right hon. Friend the Leader of the Opposition asked in a broadcast, "How does Mr. Wilson expect to pay for his programme, which is based on a 4 per cent. growth rate, when it is completely apparent that we shall not get that growth?". The Prime Minister replied, "It is only apparent to Mr. Heath; it is not apparent to us. We shall pay for our programme out of the provision in the National Plan for a 4 per cent. growth rate." That was his Hardy Spicer for the election of 1966. It was not only my right hon. Friend the Leader of the Opposition who knew that we had not had a 4 per cent. growth rate, were not getting it, and were not going to get it. Every Tory, every economist, every newspaper, and every hon. Member opposite, including the Prime Minister, knew it. The Labour Party must like this sort of thing. When the Prime Minister, through counsel, had to confess that he had invented the Hardy Spicer story, the Labour Party paid his legal expenses. We will have plenty of such stories at the next election. He has come round, but he has come round rather late, and as he stands bare-footed in the snow outside the Castle of Canossa, he would do well to read some words written by the sage himself in the Financial Times which appeared just before the Budget.

In that article he said that unless we could get our expenditure down to a level commensurate with any likely rate of growth, if private investment recovered, taxation would have to go up. He thought that if investment recovered this year, which is not very likely, taxation would have to go up this year, and certainly next year if it recovered. The same point was made by Professor Hicks in a very distinguished pamphlet called "After the Boom", written after the July measures, but before the last astronomical rise in the Estimates, and making the point that we could maintain a balance in our balance of payments only if private investment fell and stayed down.

An increase in private investment cannot be allowed without getting into trouble again if we have this level of public expenditure. That is a bad position to be in, because, unless we can control expenditure, we shall be committed to stagnation from now on. The Chancellor himself has perfectly well realised that this is true, and in his Budget speech he spent some time talking about what he described as an exercise in trying to keep Government expenditure down to a level commensurate with his 3 per cent. growth rate, a growth rate which I doubt he will get.

Whenever one talks about expenditure, someone asks, "What would you cut?". My right hon. Friend the Member for Enfield, West gave a good list and I have given lists in the past. But if the Chancellor of the Exchequer says that it is absolutely essential to the country to cut expenditure, then it is quite reasonable to ask, "What would you cut?". After all, he is supposed to be running the show.

The only other comment I want to make about expenditure concerns military expenditure. Of course it is easy to say that we should come back from east of Suez and cut forces and cut down. This is the first thing which occurs to anybody and particularly to hon. Members opposite. But it is not quite as easy as it looks. Let us take the example of Malta. We do not know the end of that story yet, but my own guess is that it is probably more likely than not that we shall spend more money as a result of having to help Malta because we have taken the troops away than we would have had to spend if we had left them there.

Take the position east of Suez. We have vast financial interests in the Gulf, and we have vast financial interests in Malaysia and Australasia, and most of those countries have very large sterling balances here. Is it to be supposed that if we were completely to abandon our military position east of Suez, everything else would remain equal? Surely that is not logical. They will not remain equal and, acting with ill-judgment and lack of consideration, we could easily land ourselves in a position in which we were making not a saving, but a large financial loss. I beg hon. Members, particularly hon. Members opposite, to be rather careful about this and to have some consideration for those, particularly the Foreign Secretary, who do not want to run right out.

I feel desperately strongly about another matter. One of the most dangerous things which the Government have been doing recently is to cut down on our conventional forces, our Army, Navy and Air Force, and to say, as they do in the Defence White Paper, that this is compensated for by the deterrent, to say that it does not matter that we are cutting down our conventional forces, because we still have the power to murder a couple of hundred million people with our bombs. I think that this is desperate. In his defence debate speech, the Secretary of State for Defence went out of his way to say that a strategic nuclear exchange was preferable to a prolonged conventional war. This is ghastly, it is wicked, and it is swinishly stupid. I hope that if we do cut down our conventional forces too much we shall not pretend that reduction in conventional forces can be compensated for by our having hydrogen bombs.

My last point is on the monetary policy. The Chancellor was rather worried about this. He said, "I shall have to be careful that too much of my necessary borrowing this year does not come from the banking system." He had to be careful, because we are budgeting for the largest overall deficit that we have ever budgeted for, an overall deficit of £950 million. We had an overall deficit of about £750 million last year. There is £560 million or so of steel compensation stock to come in addition. So the increase in the National Debt and in Government securities on the market in two years is getting on for £2,300 million.

It will not be an easy thing to find buyers for all this. One can do this sort of thing provided that one gets genuine buyers for the securities. It is true, as the Chancellor said, that at the moment he is doing quite well. He has sold a lot of stock. One always does well if one induces a depression and cuts down on private investment, because the money is available. In addition to that, he has done a sort of "mini-Dalton" in talking up his market. That means that he has got a great deal of speculative money in the gilt-edged market, which will leave it in due course.

He is right to be extremely nervous about the position. It could easily and quickly turn sour. In this connection I doubt the wisdom of his encouraging the trustee savings banks to start unit trusts. Unit trusts are something of which we are not short. There are hundreds of them under the most respectable auspices. At least two of the Big Five have started unit trusts and people can buy units over the counter. What the Chancellor is saying to those in the trustee savings bank who used to buy Government stocks is, "I have clone everything that I can to make the life of shareholders uncomfortable. I have put in Corporation Tax and Capital Gains Tax; I have induced deflation and reduced profits, shares look very high compared with earnings at the moment. Even so it would probably be better to buy ordinary shares than the muck that I am trying to sell." That is not a lesson that the Chancellor ought to teach.

That is all that I have to say. When one comes to one's peroration of these finance debates, they are always the same. One always hopes that things will go right far the Chancellor but no one quite believes it. One gives him some credit for his courage—he has certainly shown the reckless courage of a mouse at bay. In the end one feels that his report would be: Jim tries hard but he will not get an 'O' level. So, though I deeply pray that he will get himself out of this mess, I feel far from confident that my prayer will be answered.

6.35 p.m.

Mr. Joel Barnett (Heywood and Royton)

The right hon. Gentleman the Member for Flint, West (Mr. Birch) always honours the House with a witty speech, and he did so again today. Generally there is nothing of substance in it, but today he made two important points. One of them was that we should go back to the old method of running the economy with one major Budget a year. I gather from the right hon. Gentleman the Member for Enfield, West (Mr. Iain Macleod) that he does not altogether agree with this. The other point made was that Paish was right. Paish, or any other economist, can always be right if one sets one's sights low enough and strives for little enough. Then it is not a difficult achievement.

Mr. Birch

What I said was that Paish was quite often right about what would happen. That was the point.

Mr. Barnett

It is easy to forecast this. He was right in that, and I thought that the right hon. Gentleman was implying that Paish was likely to be right in future. I should like to deal with some of the points made by' the hon. Lady the Member for Finchley (Mrs. Thatcher) on the question of disincentives, and the tax system.

The Finance Bill mainly deals with Committee points, and no doubt we will have plenty of time to discuss them. I am sympathetic to the suggestion of reducing the level of direct taxation. But, because of the general assumptions that are usually made, including the claim that incentives are the answer to all our economic problems, and our problems of increasing productivity, it is important to destroy a few myths. The first is that the direct tax system is a major disincentive to increased productivity and production, and the second, that the value added tax is some sort of new panacea, some new answer to our problems.

Let me take first of all the direct tax system, and deal with incomes above £5,000 a year. At the lower end of the £15,000 to £5,000 level, persons earnings £6,000 a year, pay, Surtax at about £112 a year. If we reduce that Surtax level altogether, there would be a reduction of about £2 a week. It may be that that is some sort of incentive, and I am not here talking about rewards and redistribution of wealth. I find it hard to believe that a person of the calibre sufficient to earn this sort of figure would find it much of an incentive to have a reduction in tax equivalent to an extra net income, of £2 a week.

It is possible that the older man in this range would be reluctant to move. But I cannot help feeling that that is not only because of the smallness of the net extra income after tax. There are many other reasons. There are the disincentives to an older person to move his job, in not wanting increased responsibility. There is the question of a settled home, social life and the proximity of friends and family, and, of course, pressure from a wife. But pressure from a wife can work both ways as well, so it does not necessarily follow, and it has certainly never been proved by any survey that I have seen, that taxation is the major disincentive in this type of case.

They take the very highest figure, about which we hear quite a lot from hon. and right hon. Gentlemen opposite. On the highest level above £15,000 a year, the marginal tax rate, apart from one year, is 18s. 3d. I find it very hard to believe that the Doctor Beechings of this world would work harder, or more conscientiously, were we to reduce the level of surtax upon them. It may be that this category will lose interest in working at all. But, again, tax is not the only consideration. The sheer pressure of work on this sort of executive must have some serious effect. In the United States and Japan, and in some companies in this country, they are already starting to retire men in such categories very much earlier.

Why, one might ask, does the tax at this level not affect executives of companies which are highly efficient, whose executives are paying no less tax than similar executives in other companies? Why are these companies so efficient despite the fact that their executives are paying a very high level of taxation?

But, of course, the main group of people paying tax are those earning between £500 and £5,000 a year. These are the people who do the actual producing of the wealth of the country, the people on whom we depend for increased productivity, and for whom we depend for increased total production. They are presumably the people whom the party opposite have in mind when they talk about general incentives as being the answer to all of our economic problems.

The right hon. Gentleman the Member for Enfield, West told us that in his budget this year, if he had had one, he would have taken 6d. off the standard rate, and 3d. off the reduced rate, at a cost, incidentally, of £200 million. I would have applauded such a move, because I felt that it would have created a mood which might have been very useful. But the right hon. Gentleman had something much more ambitious in mind. He implied that this, and further moves in this direction would be the answer, and would solve all of our economic problems. [Interruption.] Well, that it would be a major argument in solving our problems.

The Opposition have made great play about incentives being the major argument for solving our problems. If it is true, it is worthy of consideration. But is it true? Take the person at the higher end of the middle scale, a married man on £5,000 a year with two children. On the right hon. Gentleman's proposals, he would be affected to the extent of about £100—£2 a week. I find it hard to believe that that would provide a great incentive to him to work harder, to in- crease his productivity and to be more efficient. It might well be true, but I should want a lot more evidence before believing it, and I have not seen such evidence.

On the other hand, I have always felt that workers at the lower end of the scale are affected when it comes to working overtime, and, therefore, direct taxation has an effect on total production. It is more psychological than real, but I have felt it was present. We must remember that the marginal rate of take-home pay, even if a person is paying the standard rate of tax, is 6s. 5d. For many average industrial workers, the marginal rate is only about 4s. 8d. Taking an average industrial worker who is married with two children and earns £20 a week—I am ignoring the fact that many such workers probably have mortgages—his tax would be reduced under the right hon. Gentleman's proposals by slightly over 50s. a year—under 1s. a week. Suppose that we quadruple it and make it 4s. a week. This may be a great incentive and the major answer to our problems. I do not know but it does not seem likely. However, I may be biased, like right hon. and hon. Members opposite, but in a different direction.

So I tried to discover what objective research had been carried out in this matter. The most recent has been done by the Graduate Appointments Register. In the April issue, the director said that of the people he had interviewed only 4 per cent. were affected, and then only to the extent that they would not take a second job. He concluded: No evidence whatever was produced to show that Income Tax inhibited people from giving their best in their main occupations". The most documented research is to be found in the Second Report of the Royal Commission on the Taxation of Profits and Income, which came out in April, 1954. A social survey was carried out and 4,000 people were interviewed. They were operatives and supervisory grades who could and did work overtime and were paid incentives. There is some very interesting information in paragraph 41 of the Report, which reads: … the marginal rate seems to have little significance in affecting the behaviour of workers". This went directly against all that I had felt to be the case.

Paragraph 10 in Appendix 1 stated: There was no evidence from this enquiry of productive effort being inhibited by the income tax structure within its present limits". The standard rate of tax then was 9s. 6d. in the £.

Some even much more interesting information is to be found in Table 20 of the same Appendix. Questions had been asked about deterrents to productivity. One would think, listening to right hon. and hon. Members opposite, that direct taxation was a major deterrent.

Sir G. Nabarro

What year is this?

Mr. Barnett

The Report came out in 1954.

Sir G. Nabarro

Twelve years ago.

Mr. Barnett

The hon. Gentleman says "Twelve years ago", but it is the only objective Report which there has been, and it is directly relevant to what we are arguing about. The first deterrent to productivity which was given was not tax, as was thought by the people asking the questions, but first, lack of materials, secondly, poor working conditions, and, thirdly, poor management.

It appears from Table 23 that 30 per cent. of the males who were asked thought that Income Tax was a deterrent and 25 per cent. of the females said that it was a deterrent. On the other hand, 27 per cent. of the males who were asked thought that Income Tax was an incentive to work harder and 22 per cent. of the females thought that it was an incentive to work harder. These are very interesting pieces of information.

Some vital questions were asked in this survey. One was how many people would or would not work overtime because of the level of taxation. Only 5 per cent. said that they would not do so. On the question which many people make a lot about, namely, whether a man would refuse promotion because of the level of taxation, none said that he would. None said that he would refuse to change his job because of the level of taxation.

I therefore came to the inevitable conclusion from this research that, while a reduction in direct taxation is desirable and may have a marginal effect on individual effort, in the light of the evidence which I have seen I must describe as a myth the idea that a reduction in the level of direct taxation would be so great an incentive that it would transform levels of productivity.

The next myth about which we have heard a lot recently is that the value-added tax is the answer. This is supposed to be the panacea. Apparently, it has some magical qualities. It is put forward as a new painless tax. I have no objection to it in principle. If we get into Europe, we may well have to use it. But I object to the manner in which it is being treated. We are being told that the Richardson Report should be reexamined, the implication being that opinions and time have changed, not facts.

It is worth recalling some of the facts produced in the Richardson Report, which came out in March, 1964. The Committee was set up by the Conservative Party. The Report was never debated in the House. The conclusions which were arrived at were very interesting. In paragraph 298 the Report says: The argument about the substitution of a value-added tax for the purchase tax is thus essentially an argument about which of two methods of imposing and collecting a tax on consumers' expenditure is more suitable to our particular circumstances—the multi-stage method or the single-stage method". In paragraph 299 the Committee says: The multi-stage method would involve the establishment of extensive new machinery. ߖ etc. Indeed it would. I am surprised that right hon. and hon. Members opposite should want to set up the enormous new machinery which would be necessary for a multi-stage tax of the description of the value added tax. The Committee concluded in paragraph 300: If it is desired to retain the present coverage the purchase tax is plainly more economical and efficient". The right hon. Member for Barnet (Mr. Maudling), when he spoke in the Budget debate, said that we should consider the value-added tax again, with the implications I have referred to. I think that it is important that we should kill the myth which is building up that the value added tax is a panacea, because, as I hope I have shown, it is nothing of the sort.

On any reasonable analysis, it seems to me that no great incentive is possible making attainable reductions in the level of direct taxation. But it is important to ask whether there is anything to be said for a major dramatic switch from direct taxation to indirect taxation. I must admit that I was prone to dismiss such an idea out of hand, because it would naturally be a terribly regressive move.

However, there was a very interesting article in the August, 1966, issue of the Bulletin of the Oxford University Institute of Economics and Statistics by A. J. Merritt and D. A. G. Monk. It was very interesting, because it showed clearly that, in the range of incomes between £500 and £5,000, the level of total taxation, direct and indirect, paid by all in this group is about the same. It is not as progressive as we thought. All work out at about one-third of the total income, including National Insurance stamps and rates.

Professor Merritt concludes in his article that we could abolish all direct taxes and replace them with a 30 per cent. sales tax which would result in no less a progressive system than we have today, with the enormous advantages of a very simplified system. Anyone with experience of it knows that, for all that we say about trying to simplify the direct tax system, any form of direct taxation has an enormous number of anomalies, and that to get it reasonably progressive is bound to have difficulties and problems. The only way to get a true simplification would be to abolish the lot.

It is a very interesting article, but what the writers have overlooked in their great over-simplification is that there are many fallacies. Inside that range of taxpayers, there are enormous variations between married men, people with children, people with mortgages, dependent relatives, and so on. If one wanted a reasonably progressive system, one would be in danger if substituting for a complicated method of collecting tax a complicated method of paying benefits in order to make the system progressive. It seems to me that it would be better to do something about National Insurance stamps and the rates, which are the items which make our total taxation more regressive.

One point which emerges from any examination of our system of direct and indirect taxation is that, despite the various Committees and Royal Commis- sions which have studied it, it is not certain that the right balance between taxing spending and taxing incomes, with all that that means to savings, incentives and growth, has been achieved. I first thought to suggest to my right hon. Friend the Chancellor that this might be an opportunity for a specialist Select Committee to take a longer look at the problem than the Chancellor can with his vast day-to-day and year-to-year problems of managing the economy. However, it is clear from the writings and speeches of right hon. and hon. Gentlemen opposite that it would be impossible to have a specialist Select Committee which could look objectively at the problem. Therefore, I should prefer the Chancellor to set up a permanent Standing Committee. That could do a very useful job in looking at the tax system generally and seeing that we get the right sort of balance.

Finally, may I suggest that we abolish the earned income relief and have a new standard rate for earned income, which would be the present rate of 6s. 5d. As we reduced the level of direct taxation a bit, as I hope we could, we could get it down to under 6s. I should not expect a massive increase in productivity to result, but it would and could have an important psychological effect.

6.54 p.m.

Sir Gerald Nabarro (Worcestershire, South)

This is a puny Finance Bill, as one would expect, deriving from a colourless Budget which absolutely fails to satisfy the needs of the economy today.

Let me say at once that I have no intention of following the hon. Member for Heywood and Royton (Mr. Barnett), but from time to time I shall allude to many of the fallacies which crept into his speech. It was an informed speech from a chartered accountant, but one of poor judgment, in my opinion.

When I went to the Brierley Hill by-election to support the Tory candidate, now my hon. Friend the Member for Brierley Hill (Mr. Montgomery), I made widespread inquiries as to the cause of dissatisfaction with the policies of the Government. The Brierley Hill constituency is largely industrial. It was held by Labour until 1959, when it was won by my very old friend the late Alderman John Talbot, M.P., an alderman of the Borough of Kidderminster where for 19 years I was in the political field, by 4,000 plus votes. It was held in 1964 by 4,000 plus votes. In 1966 it was held by Labour by 1,567 votes, and now there has been a massive swing to more than a 10,000 Tory majority. I questioned a number of electors as to the principal cause for their dissatisfaction with the policies of the present Government. Overwhelmingly, they replied, "Taxation and interference".

The Chief Secretary devoted his speech today to trying to demonstrate to the House of Commons that taxation in this country is uncomplicated and light, which was the tenor of his speech, and his speech seemed to me to be not only utterly disingenuous but bordering upon the dishonest. I believe that the sentiments of the electors in Brierley Hill are felt all over the country today and that a principal cause of the decline in popularity of the Labour Government has been their continuous increases in every form of taxation, direct and indirect.

The present Finance Bill is no exception. The Chief Secretary tried to represent it to us as an exercise in the reduction and simplification of taxes. Overall, there may be a £1 million or £2 million reduction in taxes if the out-turn estimated by the Chancellor proves to be correct, which is highly unlikely. But the fact is that this Finance Bill perpetuates and consolidates increases in taxation in almost every aspect of it.

I turn, then, to the shortcomings of the Bill, and I deal first with direct taxes and the punitive levels of direct taxation continued in Clauses 13, 14 and 15. I was delighted to hear my hon. Friend the Member for Finchley (Mrs. Thatcher) stating in her speech that there would be amendments to reduce the standard rate of Income Tax and to reduce Surtax. My hon. Friend the Member for Yeovil (Mr. Peyton) and I will have parallel Amendments. No doubt they will be taken together, as they are similar in principle, though differing in amount. Within the Tory Party, there is always room for minor differences of opinion, though we are consistent in our adherence to fiscal principles.

I attack, first, the punitive levels of direct taxation. I attack, second, the excessive levels of public expenditure. No doubt the Chancellor is now beginning to see a red warning light. Public expenditure as budgeted is increasing in 1967–68 by £660 million, after Supplementary Estimates for last year's record expenditure of a further £86 million. So, by one means or another, mostly by borrowing, we have to raise an additional £746 million. My right hon. Friend the Member for Flint, West (Mr. Birch), who is very correct in his judgment, drew attention to the apprehensions which that causes in the minds of those of us who are interested in the purity of monetary policy.

It involves a record level of borrowing during the year 1967–8, all of which will be deeply aggravated not just by the £75 million below the line for the capital expenditure programme of yet one more nationalised industry—the steel industry—but also the effect on the gilt-edged and other money markets by the issue in the course of the next 12 to 18 months of something above £600 million of steel compensation stock.

These are dreadful considerations. I sit in this House to contain public expenditure and to reduce taxation. Right hon. and hon. Gentlemen opposite sit in this House to expand public expenditure and to increase taxation. I deplore their habits. I believe that their practices are inimical to the interests of this country, and we need here far more men behaving in the spirit of the late Sir John Anderson than those who revel and glory in the size of our annual Budget.

Thirdly, I deplore in the Bill the lost opportunity for the harmonisation of various forms of indirect taxation. In Clause I we are promised energetic, and no doubt lengthy debates on Purchase Tax. This is the first time in many years that we have been able to debate Purchase Tax in detail. In Clause 1(4) it is proposed to consolidate the regulator and make the previous three rates of Purchase Tax, which were 10 per cent., 15 per cent., and 25 per cent., into the monstrously complicated rates of 11 per cent., 16½ per cent., and 27½ per cent.

I remember saying to the Chancellor of the Exchequer in 1960, then the right hon. Derek Heathcote Amory, that he would do well to go away and read again Adam Smith's "Wealth of Nations" and write at the head of all his documents during the Committee stage on the Bill that an essential canon of good taxation is simplicity. Yet, he chose to reduce the standard rate of Income Tax from 8s. 6d. to 7s. 9d. which was very difficult to order and manipulate in accounting processes. He brought in a gradation of 3d. for the first time. Successive Chancellors have continued this bad habit. Income Tax at the standard rate today is 8s. 3d. How much easier it would be for everybody to calculate if it were 8s. in the £ or two-fifths.

For years I fought to get the rate per cent. of Purchase Tax readily divisible into our currency, 16⅔ per cent. to be divided into 1s. wholesale and get an answer of 2d. Now we have gone to 11 per cent., which is utterly indivisible into the currency. We have gone to 16½ per cent., which is utterly indivisible into the currency, and made thereby all commercial and trading processes infinitely more difficult.

I hope that in the context of what I am saying the Financial Secretary will consider, some time in Committee, why it is necessary to have earned income allowance for Surtax at two-ninths, and then at one-ninth, both utterly indivisible into the currency. Why is the Treasury so persistent in selecting tax rates which lead to additional burdens in computation?

But the lost opportunity is not the complexity of the rates. It is to perpetuate three rates of indirect taxation in Purchase Tax. The hon. Member for Heywood and Royton seemed to impute to my party an overwhelming desire to go over to a form of taxation analagous to the indirect taxation in France today, called T.V.A. There is no overwhelming desire to do so, but there is a good economic reason for it, and I propose to devote one or two moments to it.

Mr. Speaker, you said that today was an historic occasion, not because of the Second Reading of the Finance Bill, but because of the application to join the European Economic Community. In Europe they have made a good deal of progress during 10 years towards what they are pleased to call—and I shall not translate it into the five European languages—the "harmonisation Of indirect taxation". The fact is that the E.E.C. has published its plans, and this is a considerable achievement. It reports that at a meeting of 9th February, 1967: the Council of Ministers adopted the two directives proposed by the Commission with a view to harmonising turnover taxes in the six Member States. I shall not read the precise details, but conclude by quoting from the Press statement which said: This aim can only be fully achieved when the T.V.A. rates in the various Member States have been harmonised; this will be the object of a future directive. The Council will, if possible, take its decisions on the proposals before 1st January, 1970. The common T.V.A. system will come into force on 1st January, 1970.… That is two and a half years hence. I do not suppose any hon. Gentleman opposite will contradict me when I say that the unrelated jungle of rates of indirect taxation among the principal exporting nations of the world represents a major problem in international trade.

Let us consider Western Europe on the one hand, and the United Kingdom on the other. In Western Europe they had broadly two systems. One was the German turnover system, the "cascade" system, whereby approximately 4 per cent. was added at each process through each manufacturing firm, finally to wholesale and to retail, but was rebated on exports. This system was widely practised by other members of the E.E.C, with the sole exception of France. Now all the turnover taxes for members of the E.E.C, whether of a T.V.A. character, as in France, or a purer turnover tax of the other members, are standardised as T.V.A. and we ought to do the same at the earliest moment.

I agree that our Purchase Tax is easier to collect, is simpler to understand, and is less complicated in computing, but the fact remains that we are the greatest exporting nation in the world. Because of the conditions of G.A.T.T., we cannot give direct financial and fiscal incentives to our exporters, but the best incentive within the system of indirect taxation that is permitted by the rules of G.A.T.T. is the French turnover system or T.V.A.

Mr. Barnett

Can the hon. Gentleman explain precisely how it would stimulate exports if we introduced the T.V.A. system instead of Purchase Tax? How would our manufacturers be better off than they are at the present time?

Sir G. Nabarro

I suggest that the hon. Gentleman studies some of my Amendments which will appear on the Notice Paper tomorrow.

Mr. Burnett

Give the facts and stop being rude.

Sir G. Nabarro

Really! I shall give way if the hon. Gentleman will repeat that.

Mr. Barnett

I get sick of the hon. Gentleman being rude.

Sir G. Nabarro

I was not aware that I was being rude to anybody. I merely said that the hon. Gentleman should study his Notice Paper tomorrow morning. On it he will find a number of Amendments in my name and that of my hon. Friend the Member for Yeovil. One is related to Purchase Tax, and it will undoubtedly be selected. It is simple in character. It reduces one of the rates of Purchase Tax. It is an artifice on my part to get a major debate on indirect taxation such as T.V.A. and means of rebating it for exporters. I do not wish on Second Reading to go into minute detail of that kind. I am at least as informed on the Richardson Committee's Report as the hon. Gentleman.

My fourth criticism of this Bill is that there is no investment help at all. A grave feature of our national economy is not only the stagnation of production but the fact that private investment is bumping along the bottom. The C.B.I. estimate for 1967 is 15 per cent. below the 1966 level. The reason that investment is so low is not far to seek. Businessmen generally have little confidence in this Socialist Government, who are anti-business and anti-profits. Businessmen are in business to earn profits. For myself, I love profits. I am heavily taxed on them and they are mighty difficult to earn in a competitive society.

I notice that for the first time this year there was a modest recognition of their value in the Budget speech. The Chancellor had the sauciness to say that he "would not kill the goose that laid the golden eggs." He has been taken up by many great industrialists since that speech—by Sir Stanley Paul Chambers, by Lord MacFadzean and by Sir George Harriman and many more—for that tardy recognition of the value of profits. But businessmen do not foresee a good year of profits. They are cast down by Government interference and the weight of taxation. If they do not foresee good profits in the early future, they are not likely to raise their level of investment. There is nothing in the Bill to encourage the belief that profits will improve in the near future and therefore nothing to encourage industrial investment in the private sector.

Finally—this is probably the worst indictment of all—there is nothing in the Bill to stimulate industrial efficiency. Of course, wearing my cap as humanitarian and social worker, I am delighted at the Chancellor's generosity in assisting widows by increasing the Income Tax allowance from £75 to £110 a year. Those are crumbs of comfort in our society. But we must create national wealth, which can come only from productive industry, to furnish the financial sinews for the masive public expenditure of £11,000 million in the coming year.

Because there is nothing in the Bill to increase industrial efficiency—I now return to the hon. Gentleman and his hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon)—I shall advocate in Committee and on later stages of the Bill modest reductions in the level of direct taxation, which I believe contributes to industrial efficiency. The hon. Member for Heywood and Royton has spent his entire working life in the cloistered atmosphere of chartered accountancy. Mine has been spent in industrial workshops. I know by contact and working with men at every level—from labourer to managing director and chairmen of companies—that incentives in the form of reduced taxation play an important part in the efforts which men are likely to make and the vigour with which they conduct their day-to-day work.

It is not everything, as the hon. Gentleman tried to suggest I believe. It does not apply in all cases through every stratum in industry, but it applies in most cases. Most men at every level will take the view that they will make no greater effort or work more overtime if something between 40 per cent. and 90 per cent. of their additional earnings is stripped from them by excessive direct taxation.

I am not afraid to move the reduction of the rates of Surtax. In the Surtax ranks—I talk of earned and not unearned income—are the nation's best brains. They do not earn over £5,000 a year and up to £50,000 a year because they are not worth the money. They are the best brains, without which British industry cannot prosper and expand. Has the hon. Gentleman, in his accountancy activities, ever come across a top industrial executive paid £20,000 a year gratuitously and because he was not worth it? Of course not—

Mr. Barnett

Will the hon. Gentleman give way?

Sir G. Nabarro

I will give way in a moment.

In a competitive society, there must be a few men at the top who are highly paid. If the Government tax them, as this year, at 19s. 3d. in the £ and leave them 9d., I hope that we will hear no more tommyrot, as last year, from the Chancellor of the Exchequer when he started arguing across the Committee with me that what he was concerned with was the effective and not the marginal rate. He tried to climb out of my argument and then the Chief Whip came in and closured the debate.

I am not concerned with whether it is effective or marginal. I am saying that, above £15,000 a year, the top men in industry and the professions are taxed as to 96¼ per cent. this year, or 19s. 3d. in the £. Although we may not like the American industrial economy very much, we must at least recognise that it is generally extremely efficient. The highest paid American—in terms of earned income—for example, the President of General Motors, is taxed at 70 cents on the last dollar which he earns, or 14s. in the £. We think we know better and tax the equivalent man at 19s. 3d. in the £.

I do not suggest that is the sole reason for the brain drain. As with the incentives argument, I could put it as powerfully from both sides. But it is a factor in the brain drain, as I shall bring out in Committee. Once again, I shall be delighted to be associated with my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod). My hon. Friend the Member for Yeovil and I will move a complete recasting of the Surtax scale—not a 10 per cent. reduction—with an eye on incentives for those in higher and onerously responsible positions in industry, for the poor cannot survive without them. I will not quote Abraham Lincoln on the Second Reading of the Finance Bill. For these six reasons, this is, I repeat, a puny Bill, deriving from an insipid and colourless Budget. I am sorry that my Party is not to vote against Second Reading, but I shall urge my Party to vote often in Committee on all the principles which I have sought to enunciate tonight.

7.20 p.m.

Mr. A. H. Macdonald (Chislehurst)

It is necessary to begin by commenting on the curious remarks just made by the hon. Member for Worcestershire, South (Sir G Nabarro) about cloistered chartered accountants and practical tycoons who know about incentives. I am not a chartered accountant but rather wish that I were, because I admire them. But if some of these tycoons paid more attention to the advice of cloistered chartered accountants they might know more about the practical effect of incentives.

I vividly remember the occasion when I had to discuss a particular item with a certain tycoon. He was offering, or thought he was, a certain kind of incentive. It was not very difficult to point out that the incentive he was offering meant that he was losing over £3,000 a year and that he could handle the business more profitably by doing something slightly different. I take no credit for that. It was simple to see. This was a tycoon who thought that he knew all about incentives but in fact knew nothing.

At the beginning of the debate, I wondered whether the Bill in possession of the two Front Benches was the same as that distributed to back benchers. My right hon. Friend the Chief Secretary to the Treasury is obviously a man who likes a "bang" opening. He started with a shower of gifts—it may have been gratifying to hear, but I thought he possibly slightly over-stated—the list of the admirable items in this relatively modest Bill. The hon. Lady the Member for Finchley (Mrs. Thatcher) is always worth listening to. She attacked the Bill by suggesting, though not actually saying, that it included some increase in taxation. It must be very charming to sit opposite and be scolded by her, but I wondered whether she had ever read a quotation from Richard III: What dost thou scorn me for my gentle counsel, And woo the devil that I warn thee from? O, but remember this another day, And say, poor Margaret was a prophetess. I thought of that when she talked of forecasts made and the forecasts she looked for in vain and her allegations of speculation on the future of the economy.

I ventured upon a little forecast, rather rashly, a week before the Budget. I wrote a little article saying what I thought it should be like. I was highly relieved to find that the Chancellor had taken my advice and had got it almost exactly right, except for the bit about hire-purchase on motor cycles. He is on his own there. I did not advise him on that. For the rest, I think that his judgment is correct and I was gratified to hear his remark, which at other times might have sounded a little odd, that this was an off-year.

I hold strongly to the view that the disincentive to industry is not the high taxation to which the hon. Member for Worcestershire, South was referring but the constant tinkering that takes place. I am sure that one of the ways to promote expansion is to introduce a measure of stability and avoid the changes which seem so constantly to take place. So often year by year alterations, both big and small, are introduced in the Finance Bill with the most plausible of reasons and it is impossible to disagree with any particular individual alteration. Yet the whole thing amounts to a measure of tinkering.

It must be difficult for industrialists to plan ahead in these circumstances. I was rather surprised to find myself agreeing in some measure with remarks made by the right hon. Member for Flint, West (Mr. Birch) when he, too, called for some measure of stability. It is fashionable on this side of the House to argue that financial changes should be spread over the whole year instead of being concentrated abruptly in the Budget. I am not arguing against that but against frequent changes. I would be willing to accept the continuation of some anomalies and loopholes in order to obtain some stability.

I thought that the hon. Lady—perhaps I misunderstood—suggested the abolition of the Selective Employment Tax and that she was criticising in particular the payment of premiums to manufacturers. If these were abolished with the abruptness her speech seemed to suggest, manufacturers who are no doubt preparing their budgets for several months ahead would be considerably taken aback by so harsh a change as the sudden withdrawal of money they have come reasonably to expect.

Therefore, I think that the Budget judgment was right in this instance—right also because I myself did not judge that the time was ripe to increase the spending power in the pockets of the people. Rather I thought it was right to encourage expansion not by the conventional means of increased spending power but by the method of promoting stability. I was glad that there were no major changes.

One thing made me a little uneasy in my right hon. Friend's Budget speech. This was the reference he made to the vigilance with which in future he will seek to plug loopholes. I cannot agree with him on this. In this I am in agreement with the hon. Lady. I cannot see why, the tax structure being what it is, a man should not make an effort to put himself into a position lawfully in which he pays less tax than he would otherwise. I cannot see that this is an offence either moral or legal.

The taxation structure is what it is, and I do not see why a business should not lawfully take advantage of that. If it be thought advisable to amend the taxation structure, by all means do so, but do not let us pretend that we should plug loopholes by implying that people who lawfully take advantage of the existing structure are doing anything morally improper. I cannot see that they are.

However, if we are to have the tinkering, which I regret, I am sorry that one piece of tinkering in the Bill does not go further. I refer to Clause 38, in particular, where the interest chargeable on unpaid tax is proposed to be raised from 3 to 4 per cent. If we are to have this kind of tinkering, I cannot see why it should not be raised immediately to 5 per cent.—in which case it would be in conformity with the rate proposed in Clause 26—or, indeed, to 6 per cent., which would be a more realistic rate.

I hope that it will not be said that the answer is that the Clause also gives provision to make subsequent alterations if these be thought necessary because this is the very thing I am objecting to—constant tinkering. If we are to have an amendment, I would rather have a whole hog amendment and get the thing settled and fixed and have no proposal in subsequent years for further alterations.

In my general opinion, the Budget and the Bill are right in not proposing major alterations. Indeed, there should not be major alterations until we have had more thought than appears to have been given so far into the question of the taxation of betting and gambling generally.

It has been well argued that direct taxes are disincentive. I think that they are more of a disincentive to people who might otherwise work overtime than to highly-paid industrialists but, undoubtedly, they must to some extent be a disincentive. Indirect taxes are manifestly regressive and unfair in their incidence. I should have thought that the advantages of raising revenue by taxing gambling were quite substantial. A tax on gambling is, by very definition, a tax on money that can be spared. Another advantage is that such a tax cannot be passed on, whereas every other kind of tax may be passed on, in some way, in whole or in part. These are weighty arguments in favour of the taxation of betting.

I am aware that there is already a betting tax, but what a miserable, puny tax it is. It would have been reasonable to have thought instead in terms of about 10 per cent. Nor can I understand the objection to and the delicacy that seems to be felt in some quarters about taxing gambling. We are not now entering into an argument on whether gambling is morally desirable or undesirable. The fact is that it is lawful—at any rate, it is not unlawful. That is right, because if a man wishes to dispose of his own money on gambling, after making proper provision for his wife and family, why should he not? It is his business, and it is not for the rest of us, even though we may disapprove of gambling, to impose any legal restraint on his right to do that. There is no need to encourage him, perhaps, but, if it be lawful to gamble, we have no right to forbid him to do so.

It must therefore be realistic to think much more seriously than we have done of the proposition that we should tax gambling quite substantially. Why should honourable, virtuous and productive enterprises bear a relatively heavy rate of tax while gambling bears only this miserable 2½ per cent.? I think that during the next year we should think more about that subject with reality and seriousness.

The last Finance Act put a tax on fruit machines and on places where gambling takes place, but the flat rate that was imposed did not seem very equitable to me. The tax on the fruit machines did not seem to have any relation to the use made of them. Some sort of tax on the turnover would be a more equitable way of raising revenue. I therefore advocate that while we should not rush too easily into alterations in taxation—and, indeed, should accept some measure of anomaly for the sake of stability—when that stability is in operation, if stability can be in operation, we should give thought to taxing gambling rather more heavily than we have done up to now.

I do not think that such a step would be unpopular. The effect on the odds or on the chance of winning something on the pools would not be significant and certainly would not be so marked as to have any deleterious effect on people who would otherwise indulge in this way. It is a reasonable—and, what is more, a painless—method of raising revenue without having the disadvantages that attach to other methods. I like to think that before we consider our next Finance Bill, more serious thought than has been given up to now will be directed to this topic.

7.34 p.m.

Mr. Richard Wainwright (Colne Valley)

I follow the hon. Member for Chislehurst (Mr. Macdonald) in his advocacy of a tax on gambling, but I ask: is it not very largely a wretched inhibition in this country, and in this Parliament, which prevents us from stiffening up taxes of this sort unless we can be satisfied in our rather perverse and perfectionist way that every little "i" is dotted and every "t" is crossed and that it will be totally fair in its incidence. That cannot be achieved with a heavy tax on gambling, but I do not think that the lack of a comprehensive system should prevent us from tightening things up on gambling.

It has been heartening to find that every Government supporter of this Bill has, without exception, worked very hard to try to dissipate the extraordinary, bland complacency with which the Chief Secretary opened the debate. That is partly, perhaps, because that those who spoke from the benches opposite represent people who are very largely in the rough and tumble of international trade, whereas I am always tempted to think of the right hon. Gentleman, the Chief Secretary, as the "Member for never-never land" where people bask gratefully in the continuous and unending bounties of the Government.

I was particularly astonished that the Chief Secretary made no gesture of admission that this year his Finance Bill is very largely occupied with correcting the mistakes and omissions of previous years. I reckon that of the 100-odd pages of this Bill, about one-third are occupied in trying to do again work that has been ill done in previous years. In particular, there is the attempt to correct Selective Employment Tax for part-timers, and the fresh assault on the structure of Corporation Tax, reflecting troubles in previous Finance Acts.

This, together with the increased complexity of the Finance Bill this year leads me to plead, as Liberals often have before, that it is more than high time that pre-legislative consultation with expert and informed opinion should now characterise each Finance Bill. Never has the lack of pre-legislative consultation been more amply illustrated than in the Measure on which we are now condemned to spend time this year. Added to that, we have an unexampled complexity to cope with, and citizens will shortly have the same burden.

I say quite plainly that in my view this country, at any rate in its present phase, just cannot afford many of the complexities that are put into our fiscal legislation. It is not reasonable or fair to blame the drafting. It is not reasonable or fair to chide countries like the United States which can afford the resources of skilled manpower to have extremely sophisticated tax statutes in order to try to achieve the ultimate in fairness. I just do not believe that this country should, at the present time, devote the amount of manpower that is required to interpret and administer highly complex tax legislation.

I do not think that we should in this Bill ask all these able people to spend their time on, for instance, … the apportionment under paragraph 7 of Schedule 6 to the Finance Act, 1965 …. being made: … by attributing the fraction V(l)-V(2)/V(1) of the apportionable expenditure to what is disposed of. That is admirable, no doubt, in richer countries endowed with a greater proportion of skilled people, but it is not for us at the present time.

It seems particularly tragic that both major parties should until now have set their faces so much against pre-legislative consultation when they are faced with the extraordinary gift of professions connected with taxation just longing for a simplification. What a contrast that is to the attitude of professional men in previous generations. The profession of law has, at any rate until now, consciously thrived on the complexity and sometimes on the confusion created by Parliament, and has not done very much in the past to offer to remedy that situation.

Now, we have the leaders of the professions that are most intimately concerned with taxation clamouring for simplification and offering their help. Of course, that is not done simply out of sheer philanthropy and undiluted public spirit, but because they cannot in their professional offices get the capable young men with the necessary experience willing to devote their lives to the and pursuit of interpreting" V(1)-V(2)/V(1)"Lt is a simple fact of life that as a practising chartered accountant one cannot, and I think rightly, persuade many young men of the necessary ability to concentrate as specialists purely on the more sophisticated realms of tax matters—and a good thing, too. Mainly for that reason the Government could enjoy this boon simply by unlocking the door and asking professional people to come for consultation and pre-legislative discussion. If that had been done we could have been spared many of the difficulties of this Bill and could have considered some useful measures of tax reform instead.

There has been talk today of an added value tax. I was glad that the hon. Member for Worcestershire, South (Sir G. Nabarro) reminded the House that members of the Common Market have now pledged themselves to adopt the French system, which is a tribute indeed to any country's system of taxation. The danger about an added value tax is that far too many commentators are concentrating, quite incorrectly, on the marginal advantage it has over our Purchase Tax system as an incentive to exports. A rebate on an added-value tav on exports must have a marginal advantage over our tax system because it would include a wider range of things. It would include machinery and equipment which are not covered by Purchase Tax and on which there is no rebate for export; but that is marginal and to labour, as many commentators do, the export incentive advantage of added-value tax is a perverse way of considering this very successful French tax.

The advantages which we should be watching with envy and with determination to emulate are that a tax of this kind, which has an extremely powerful yield, falls far less than our direct taxation does on efficiency and success, and falls far more on the social costs from which each employer is benefiting. An added value tax is in effect a tax almost entirely upon the pay-roll and the profits. To the extent that it is a tax on the pay-roll it would at long last mean that the employer of labour was asked to return to the community pro rata a great part of the social costs which have provided him with his labour force; the cost of educating, looking after the health, welfare and housing and training of his labour force.

To put a serious tax at long last on the basis of the employer paying for benefits received, but with a rebate for export, would surely be a major tax reform. I regret very much that even this year, when I admit that public tolerance for tax changes is very strained, there was not even a hint of this change in the Budget. An added-value tax could have been administered by the Customs and Excise and I have no evidence that the Customs and Excise Division is unduly overburdened today.

In contrast to the announcement of the Prime Minister on the Common Market this afternoon before this debate began, the Measure we are now discussing is a miserable and dreary thing. What a lift to the spirit it would have been if we could have had his announcement followed by the debate of a measure which at least contained some hint of harmonisation of British taxes with those which have proved successful in the Common Market and which would give the British taxpayer some hope that there was to be a change of system in future. In Liberal opinion this Bill is a monument to missed opportunity.

7.45 p.m.

Mr. Gerry Fowler (The Wrekin)

I hope that I shall please the hon. Member for Colne Valley (Mr. Richard Wain-wright) if I, too, indulge in a little dissipating of complacency. I do not find that this Finance Bill sets my pulse racing. I find it a very dull Measure indeed, and I shall be a little critical of it, but before that I wish to allude briefly to the speech of the hon. Member for Worcestershire, South (Sir G. Nabarro).

I noticed in passing that he gave a list of businessmen who recently criticised the policies of the present Government. I was a little surprised that as a West Midlander he omitted from that list the name of Sir Alfred Owen. Perhaps he did not see Sir Alfred's speech a few days ago in which he said that although he was a life-long Tory he thought the economic policies of the present Government were splendid and the only fault was that no Government had had the courage to pursue them before.

Sir G. Nabarro

I have not seen Sir Alfred G. B. Owen's speech. The speech I referred to particularly was that of Sir George Harriman, Chairman and Managing Director of the British Motor Corporation, who announced the loss of £7½ million in six months, which he attributed most directly to the fiscal and economic policies of the present Government.

Mr. Fowler

I shall not join in an argument about the losses of the British Motor Corporation. I find it a little odd that that was only one of the big five motor car firms which made a loss in that period while some of the others seem to be doing extremely well.

The hon. Member also said that he visited Brierley Hill and found that the electors there complained that what they thought wrong with the Government was "taxation and interference". I was there too and not only did I not find any electors who claimed that they had been interfered with by my hon. and right hon. Friends, either singly or collectively, but not one complained of high taxation either.

Sir G. Nabarro

The difference between us is that the hon. Member's side lost and my side won, which underlines the veracity of the point I put to the House earlier.

Mr. Fowler

I wondered earlier in the debate whether the other side might have won by 15,000 had it not been for the visit of the hon. Member.

Sir G. Nabarro

The hon. Member's side would have lost by 20,000 had the Foreign Secretary gone there again.

Mr. Fowler

I found no criticism of the level of taxation.

I come to the more serious point made by the hon. Lady the Member for Finchley (Mrs. Thatcher), who pointed out that the present system of direct taxation seemed to be a burden on the middle income groups in particular. I am not sure who exactly are the "middle income groups". They certainly cannot be the poor chaps we have heard about today who are earning over £15,000 a year. I suppose that I was and am a member of a middle income group. I cannot say that I have ever felt particularly over-taxed or significantly more heavily taxed since my right hon. Friend has been Chancellor of the Exchequer. I certainly do not object to paying, as the hon. Lady put it, for Socialist schemes.

One of the criticisms I have of this Budget is that there was a place in it for a particular Socialist scheme which I do not find in it, nor in the Finance Bill. That is for some action to remedy child poverty. No alteration is proposed in the Finance Bill to the present system of tax allowances. We were told in a past debate that the Government would have had to decide to make such a change by November of last year. I appreciate that to have included something in the Bill about tax allowances would have meant making a decision some time ago, but surely we knew of the problem of child poverty before then, and I therefore regret that the Government have not taken action along these lines.

There is a certain lack of courage—or a failure on the part of the Government to adapt to the implications of a lower rate of growth than we had hoped and expected to achieve two years ago. A low rate of growth implies that if one is to take action to remedy child poverty, and other matters, there must be either cuts in expenditure in other directions or the risk of offending the more comfortably off and middle-class voter by indulging in still more redistributive taxation. I regret that the Government have not had the courage to take either of those choices, certainly not firmly enough.

Naturally, a much better answer would be to get a higher rate of growth, and it is this aspect to which I wish to direct my remarks. The most worrying thing in our present economic situation is the lower rate of industrial investment. Perhaps, in this connection, we have missed some opportunities offered by the Finance Bill. Consider, for example, Selective Employment Tax. The Amendment made by Clause 24 to S.E.T. is overdue but welcome. However, S.E.T. could be a potent and subtle weapon to help us out of our economic troubles—that is, if we were prepared to make it a more complex weapon. We were told a year ago that the Amendment to S.E.T. made by Clause 24 would be difficult to operate because, by its nature, it would be complex. That being so, I make no apology for proposing even further complexities.

In addition to considering the development areas, let us consider what are now referred to as the grey areas—parts of the country where there are declining industries but where there may not be a high rate of unemployment; although there is usually an above average iow activity rate which itself usually means a certain amount of concealed unemployment. The proposal in the recent Green Paper was to ignore these areas completely and to give additional help to the manufacturing industries only in the development areas.

I have been disappointed since that proposal was brought forward that nothing more imaginative has been suggested. It is true that growth in the service industries normally follows because of the accumulator effect of growth in manufacturing industries, but this occurs most rapidly where population and incomes are rising quite sharply; and that is why we have seen rapid growth in service industries in the South-East since the war.

Consider, though, an area where incomes have not been rising rapidly. In the north-west employment from 1953 to 1963 in construction and services grew by only 10 per cent. whereas the national rate of growth was 15 per cent. Since 1959, although there had previously been a rather faster rate of growth in that area, the rate of growth in distributive trades has been below the national average. In north-east Lancashire the service sector provides only 35 per cent. of total employment, which is lower than the national average.

Why is this the case? It normally occurs because of a lack of demand, partly occasioned by low average family incomes. This means not only that men earn less and must keep their families on less, but that the families tend to be larger because of the age distribution in the more depressed regions. This means that the average family income is lower still; and there is in consequence the lack of demand to which I referred. In fact, this state of affairs does not only encourage migration but discourages immigration.

Because of the poverty of the service sector in these regions there occurs a variety of phenomena which tend to depress such areas. For example, when a man moves to the area with his family, his wife finds it difficult, perhaps impossible, to get a job. There is, in addition to the poor physical environment, a poor social environment as a result of the bad services and this acts as a deterrent to key workers immigrating into these areas. Such key workers have become used to the standard of living which exists in the south-east and West Midlands. They do not want to give up their more comfortable style of life. We also forget, when we talk about services in a blanket way, that they cover part of the infrastructure of manufacturing, and this also detracts from the potential of these regions.

It is not sensible simply to propose help for manufacturing industries, since to encourage services is indirectly also to encourage manufacturing. I agree that our principle aim must be to encourage manufacturing industries, but in encouraging services by, for example, remitting S.E.T. in such areas, we will, at the same time, be attracting manufacturing concerns to these areas.

The proposal to amend S.E.T. in defined areas should also be extended to many of the grey and overspill areas which we are attempting to develop, in addition to the development areas. In short, I am asking for more subtlety in the use of S.E.T., but I regret that I do not find it in the Finance Bill. If we had more subtlety in the use of this tax—if we used it in a regional way—I believe that we would be able to deal with residual unemployment in these areas and stimulate industrial investment, as well as investment in service industries, in these areas. I am, therefore, asking for more imagination to be shown.

Let me give one more example. Before my right hon. Friend the Chancellor came to office he talked quite a lot about the introduction of a wealth tax. I will not discuss this at length since I dealt with it fully in a speech I made some months ago. I regret that my right hon. Friend appears to have abandoned that idea because it is possible to design a wealth tax to replace—and here I am arguing, as other hon. Members have done, for a simplification of the tax structure—many of the existing taxes, including Capital Gains Tax and Estate Duty, with its notorious weaknesses; this so called voluntary tax. We could thereby also obviate the need for gifts inter vivos.

In addition we might replace by it many of the taxes on income—including Income Tax, Surtax, Supertax and probably Corporation Tax. The Chancellor could have fixed a rate of equivalence between income and capital. In other words, income would be multiplied by a certain notional figure to give the equivalent amount of capital on which the person would be taxed.

If the rate of equivalence was fixed in the right way, such a tax could be used to do what we need to do more than anything else with our tax structure in our present economic situation, and that is to encourage high risk investment. It could be used as a disincentive to hoarding or storing capital which was earning a low rate of interest and as an incentive to making risky investments producing a high income.

Mr. Patrick Jenkin (Wanstead and Woodford)

If he is going to assess the value of the capital by reference to equivalence to income, how does the hon. Gentleman think that it would operate as a disincentive to investing in low yielding assets? I accept the desirability of encouraging investment in high yielding assets, but unless he goes for the actual capital value as the means of assessment, such a wealth tax would not achieve his objective.

Mr. Fowler

There seems to be some misunderstanding here. This is exactly what I was suggesting. The tax is on the capital value, and the income is translated into capital by multiplication by a certain figure. I am suggesting that, if one chose the right figure, there would then be an incentive to the earning of high income. It is possible to translate it in all sorts of ways, of course, and, if one chose the wrong figure, the incentive would work the other way. It all depends or the figure chosen. It depends on whether one tries to put the main burden Of taxation upon capital or upon income and, by choosing the right figure, it would be possible to encourage investment giving a high yield.

I give that merely as an example because, while I have no quarrel with any provisions of the Bill, what I miss and would like to have seen in it is a little more imagination, and courage in propounding imaginative solutions, at this time of economic difficulty. More of both imagination and courage will be needed if we are to secure what must be the principal objectives in the domestic sector for this Government over the three and a half or four years remaining to them.

Clearly, these objectives are to secure more rapid expansion and to have a comprehensive revision and improvement of the social services. The two are interlinked. I am pleading for some imagination in the handling of the tax structure to enable us to solve both problems simultaneously.

8.2 p.m.

Mr. John Nott (St. Ives)

In a short speech, I wish to devote attention to an aspect of financial management which is seldom debated in the House, doing so with reference to Part V of the Bill which is concerned with Stamp Duty. I hope later to say a few words about the control of credit and the emphasis which is now being placed by this Government, and was placed by latter-day Conservative administrations, on fiscal policy as opposed to monetary policy.

I realise that, in selecting Part V, I may be thought to have chosen the most technical and uninteresting section of this year's Finance Bill. However, the Stamp Duty provisions show the aptitude of successive Chancellors, Conservative and Labour, to tinker with our tax laws and Stamp Duty and to intervene unnecessarily in the market mechanism by fiscal control, when the time is long overdue to cut through the whole jungle of Stamp Duty law and much of our fiscal legislation, thus allowing the market to operate freely.

The theory of intervention, if there be such an economic theory—the concept that the expert knows best or, anyhow, that the expert knows better than the market—has brought us to a sorry state, and, more particularly, to a situation in which markets are now even more imperfect than before. This results largely from the efforts which have been made to bring about their perfection. The situation is now such that we are in danger of destroying the market mechanism altogether with the result that the whole problem of financial management. monetary policy and fiscal policy, will become exceedingly difficult.

First, as regards credit policy, the method of fiscal intervention and selective control now being used can be dated back, I think, to the Radcliffe Committee, which produced a thoroughly brilliant but, I thought, unfortunate Report. Secondly, in what is, perhaps, the more important field, that of investment choice—this is the other aspect I shall discuss—the energies of individuals and businessmen have been constantly restricted and hampered by unnecessary fiscal intervention in their daily affairs and in the factors which go to the making of investment decisions.

Here is one example, which, I think, has become a piece of conventional wisdom on the part of both parties. I refer to the approach to the whole question of investment incentives. No one, so far as I know, has ever proved that tax allowances for capital investment or cash grants for capital investment do in fact persuade efficient, go-ahead and well managed firms to invest. The go-ahead, efficient, and well managed firm will invest in capital equipment anyhow in order to maintain its profitability. The monstrous edifice which we now have of investment incentives, previously tax allowances and now cash grants, to persuade industrialists to invest in more capital equipment does not, in practice, encourage the efficient company to do so. Such a company would do it anyhow in order to maintain its profits and to improve its productivity. What the system does is to make a marginal difference for those companies which might not otherwise invest in new capital equipment, were the tax concessions not available. I should like to see us moving in due course to a situation in which all tax incentives for investment by industry outside the development areas were abolished and the saving used to reduce Corporation Tax. I see the Chief Secretary scribbling on his pad. If he is thinking of doing me the honour of comment here, I hope that he will take the point that I am suggesting that Corporation Tax should be reduced by a commensurate amount following the abolition of investment incentives outside development areas.

This is but one field in which we have brought upon ourselves more and more fiscal intervention, to the extent that the market is being hampered and people are no longer able to come to rational investment decisions because the Government are deciding for them what they should do.

Part V of the Bill contains some of the very few positive provisions in what I regard as a thoroughly negative Finance Bill. Naturally, I am delighted by Clauses 27 and 28. Clause 27 abolishes Stamp Duty on local authority borrowing, a thoroughly positive step which I welcome. Clause 28 abolishes Stamp Duty on overseas bearer bonds. The Financial Secretary and the Chief Secretary will know that I have pressed for these changes for some time, and I proposed an Amendment to last year's Finance Bill to institute one of them.

Stamp Duty on local authority borrowing was always an anomaly. It was no more than a transfer of tax from one part of the public sector to another. Moreover, as the Stamp Duty was levied only on the longer end of local authority borrowing, it was an incentive to local authorities to borrow short, which was contrary to the Government's policy anyway. Here was one example, therefore—I am glad that the Government have now recognised it—of a Stamp Duty which was actually working against the policy which the Government had advanced for local authority borrowing. It merely added to the cost of public sector borrowing by imposing a tax on itself.

I make one plea here to the Financial Secretary who, I understand, is responsible for local authority borrowing. In his Budget statement, with reference to the whole future of local government finance, the Chancellor indicated that he was considering some sort of method for centralised borrowing, and I assumed from his statement that he was thinking of some sort of centralised loan bureau system, or the Public Works Loan Board going out and itself borrowing on behalf of all local authorities on the open market.

At this early stage, I enter the plea that we should not have a system of centralised borrowing for local authorities. The independence of local government, with which local authority borrowing is very much bound up, is of fundamental importance in this country, and, if we have centralised borrowing for local authorities, we shall lose it. I should like to see the development of the regional loans bureaux which are now operated by the local authorities throughout the country, because regional loans bureaux would fit into a new pattern of local government structure. That is the plea I make in connection with local authority borrowing.

I welcome also the removal of Stamp Duty on overseas bearer bonds, together with Clause 29, the Clause allowing the composition of duty on foreign bills. Both these Clauses are positive, and they will set the financial community much more free to go out in the international market and increase this country's invisible earnings. Similarly, I welcome Clause 25(2), which will facilitate company reorganisations. It enables subsidiaries to be transferred to fellow subsidiaries without going up to the parent and down again. It is a constructive Clause, and these three Clauses are the few really constructive ones in the Bill.

The main burden of my complaint is to ask why it is that successive Governments have been so reluctant to abolish Stamp Duty altogether. There was an excellent speech from an hon. Member opposite earlier saying that if only the betting duty could be increased it could replace Stamp Duty, which now yields the Government about £75 million a year. I wholly agree. Surely it would be possible to free markets by abolishing Stamp Duty, perhaps increasing the betting tax or using some other method of that nature, which I am sure would more than replace the £75 million that would be lost?

Having made a welcome move to reduce the Stamp Duty on house conveyancing, it is worth pointing out that for an extra £23 million, the Government could have completely wiped out Stamp Duty on conveyancing houses altogether. The mortgage option scheme which the Government have introduced will require far more financing than the £23 million which would be lost to the Exchequer by the abolition of Stamp Duty on house conveyancing.

This tinkering around with Stamp Duties has been going on ever since 1891. Why are the Government now increasing the duty from 2s. 6d. to 10s. per cent. on loan capital duty? The Chief Secretary referred to this and said—we realised it before he said it—that companies are resorting more and more to debt financing as a result of the Corporation Tax. That is not a good enough reason to change the tax. The increased yield to the Exchequer will be perhaps £600,000 to £1 million. It is very little. The best answer would have been to reduce the Stamp Duty on shares from 10s. to 2s. 6d. per cent. or, even better, to have abolished it altogether.

The Financial Secretary laughs, but we are talking of £1 million and I could have found £30 million out of a betting tax. That would have been much more constructive than tinkering with Stamp Duties, which were first set out in 1891.

The reason why I think this subject to be important is that in our economic system saving and investment are very infrequently carried out by the same people. There is a division between those who save and those who invest, and the translation of saving into productive investment is one of the most vital functions of the private sector. It provides no answer to take the savings out of people's pockets in taxation and get the State to invest it. What happens then is that people cease to save, and the Chancellor is finding this sort of problem developing now. Savings are going down.

If resources are to be efficiently allocated, it is important that savers and investors should easily and effectively communicate with one another, and Stamp Duty stands directly between them. The small savers on the one hand are the depositors with the banks, unit trust holders and the person who takes out a mortgage on his house or a small life policy. Stamp Duty stands between them and the investor, who might be the pension fund manager, the property developer and the insurance company.

Stamp Duty is not a large item, but it is there and it is obstructing the working of markets. It stands between those who save and those who invest, and it yields very little. It is one of the most illogical imposts the British taxpayer must bear; it is very complicated; it is one of the most difficult branches of the law. It is levied only on transactions where documents are involved. If there is no document there is no Stamp Duty and therefore people spend a great deal of time trying to bring transactions into effect without any documents. It is the most expensive tax to collect, costing 4.9d. in the £, compared with Customs and Excise Duties, which cost 2.1d. in the £, and Income Tax, costing 3.4d. in the £. A whole department of the Inland Revenue is employed on it. It takes up endless time and yields about 1 per cent. of the total tax and Customs and Excise revenues.

I wait with patience and anticipation for the first Conservative Chancellor of the Exchequer after the next General Election to hack through this whole fiscal jungle and abolish Stamp Duty, and forsake the interventionist tinkering with Stamp Duties and taxation which has gone on so many years, even under Conservative Administrations.

Finally, I want to comment on the handling of our monetary affairs, the means we now adopt to control the level of credit in the system. My right hon. Friend the Member for Flint, West (Mr. Birch) referred to this earlier. To a large extent our present methods of credit control derive from the Report of the Radcliffe Committee which, as I have already said, I regard as having produced a brilliant, but thoroughly unfortunate Report.

The present emphasis on fiscal as opposed to monetary controls is a heritage from successive Conservative Administrations in the late 1950s and early 1960s. I consider that during that period we forgot, as a party, our historic role of the early 1950s, of being economic liberators and doing our best to set the market free instead of imposing our prejudices, the prejudices of Government, on the people. Unfortunately the prejudices of the Socialist Government are even greater than those of the 1960–64 Conservative Administration. Therefore, selective controls with more and more fiscal imposts proliferate, and instead of emphasising the monetary aspects of credit control we are getting more and more into a position where the whole market mechanism is becoming gummed up.

Essentially, the arguments of Radcliffe in 1959, where all the troubles started, were that traditional monetary policy, operating mainly through interest rates and the supply of money, was being frustrated by other financial intermediaries such as the building societies, hire purchase companies and the pension funds, that they were frustrating Government monetary policy because they were not subject to it. For that reason the Committee suggested that there should be greater emphasis on fiscal as opposed to monetary control.

On the political side—this was heavily emphasised by the Labour Party—monetary policy was rejected not because it failed to work but because of the way in which it worked, and it was criticised because of its arbitrary effect on employment, investment and economic growth. Therefore, there grew up the theory that in order to control the economy and create more efficiency, in order to prevent the arbitrariness of monetary policy, it was necessary to intervene and control credit by means of fiscal methods. Today, credit is regulated in this country almost exclusively by fiscal means and by selective controls such as special deposits at the Bank, hire purchase restrictions and attacks on the building societies for not having the right ratios.

Now, the Bank of England is devising all sorts of methods for controlling the liquidity ratios of financial intermediaries outside the main banking system. So controls proliferate because we have gone mad about fiscal controls as opposed to traditional monetary policy, which has been down-graded. One seldom hears today a sensible discussion about the supply of money. Perhaps it goes on in the Treasury but one has the impression that it is fiscal controls which count.

This process has gone far too far and the enterprise of the financial and business community is being restricted by bureaucratic fiscal intervention and proliferating controls. The pressure to downgrade monetary policy comes not only from the Government but very largely from the Bank of England and the Treasury as well. If one is thinking of the management of the National Debt, clearly it is much more preferable for the Chief Cashier of the Bank of England and for the Treasury to finance the nationalisation of steel and all the other projects of the Government in the public sector if the emphasis is put on fiscal control rather than on monetary control.

If interest rates are going up and down, this affects the gilt-edged market and makes debt management much more difficult and complicated. So there are pressures from the Bank of England and the Treasury the whole time to use fiscal methods to control credit instead of monetary methods. By this means, prices are kept at a reasonably stable level in the gilt-edged market, which makes possible large amounts to be raised, so that the Government have their decks cleared for the nationalisation of steel and for financing the large deficit about which we heard today. I question this trend to subordinating monetary policy in order to facilitate Government financing of the public sector, because it introduces restrictive and interventionist fiscal controls which are inhibiting markets in the private sector.

We are seeing, at the moment, the exaltation of fiscal means of controlling our economy and I hope that, when the Conservatives return to power, or even before if the Government should change their mind—they are Paishites now it appears—they will abolish Stamp Duty, clear the markets and return to monetary policy, creating a situation in which individuals are free to work out their own economic destinies without the jungle of controls and Stamp Duty which now surround them.

8.23 p.m.

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

I had not intended to speak. I came into the Chamber because I am naturally interested in the subject. Having been in the House for the discussion on Finance Bill procedure last night, I expected to find the benches opposite filled with hon. Members being very vigilant in exercising the historic and constitutional right of the House in relation to Supply. Having seen the empty benches, on both sides of the House, I find that I have a constitutional duty to speak for a few moments in order that we can reach the magic hour of nine o'clock.

I want first to take up the point that is really not dealt with in the Bill but which was raised by my hon. Friend the Member for The Wrekin (Mr. Fowler). It concerns child allowances. The second point I wish to take up relates to the comment of the hon. Member for St. Ives (Mr. Nott) about local authority borrowing, which I want to discuss in the context of Consolidated Fund expenditure below the line.

In a sense, I would relate both of these to our old friends, the gnomes of Zurich, because, to some extent, this is why I must wholly approve the Budget. I think that the constraints that have been laid upon my right hon. Friend in a number of respects have their origin in the fact that, quite properly, he had to be conscious of what reactions were likely to be abroad.

It is probably true to say that the present Government's early mistakes which led to the run on sterling, apart from the failure to raise Bank Rate on 21st November, 1964, were such decisions as the abolition of prescription charges, the decision to raise retirement pensions and so on. Although these were accompanied by sophisticated Keynesian arithmetic, the gnomes of Zurich and others, whoever they may be, do not talk that sort of language or understand it and interpreted it as a Government hell-bent on welfare and one which would take a soft line with the economy.

Although the Chancellor has earned a great deal of disapproval for not including provisions for cases of real hardship with large families in the Bill, he has done the right thing. I think that he has to rebuild the economy on very firm foundations and not give people abroad the suspicion that he is going to make this sort of excursion into social welfare before our strength is built up again.

There is a real problem here and this Government or any other have a moral duty to do something about it. There is the short-term aspect, and how this is to be solved I do not know. Perhaps it can be solved in a simple way by increasing family allowances for the third, fourth and subsequent children. It worried me to read an article in The Economist this week saying that there is some sort of conflict between my right hon. Friend the Minister of Social Security and my right hon. Friend the Minister without Portfolio, who is a member of the Cabinet and is obviously prepared to take a rather harder line in this matter and who, because of his seniority, may get his way.

But perhaps by September the Chancellor will see the course of economic development more clearly and will calculate precisely what he can do in the short term and eventually we shall have a long-term review of the problem of poverty in society which will link not only the poor but many other categories who enjoy subsidies, pay taxes and so on. I am not in agreement with those who are critical that the Bill does not include the sort of provision to overcome child poverty that they wished to see.

My second point relates to the whole business of the net borrowing requirement which this sort of Budget places on the Chancellor. We have to be concerned about this, if not this year, then some year, because I am certain that it will be a long time before countries abroad, even the United States which is getting a good deal more enlightened in these matters, appreciate what our Budget surplus and our net borrowing requirement are. It is so easy if one reads a figure of £1,500 million which the Chancellor will have to borrow to indict it as a SQrt of utter prodigality, a passion for spending irresponsibly by the Government, but it is quite obvious that, just because of the formal way in which we present our Budget accounts, many people abroad are given a quite misleading conception of what the position is.

Mr. Nott

I wish that the hon. Gentleman would elaborate that point, because the Chancellor made it in his speech and I am sure that the hon. Gentleman understands what the Chancellor was getting at. Surely the gross capital formation of local authorities in housing and education and all the other items which they finance should be part of the Budget deficit, and I do not see why—and I should be interested to hear the hon. Gentleman's views—by separating them into different accounts anyone overseas should be deceived that their capital expenditure was not part of the overall public sector budget.

Mr. Cant

It is obviously part of the capital formation in the community, but the point which I want to make is simply that under this general heading we aggregate a number of items, including the amounts which we lend, through the Public Works Loan Board, to local authorities and loans to nationalised industries, just to select two. I agree with the hon. Member that if we argue, as many do, that there should be a sort of public fund for public enterprise, which is all neat and tidy, that would be one way of solving the problem. Having been associated with local government for about 15 years and having seen the sort of impact on the whole ethos of local government activity which was a consequence of the decision in 1956 to throw local authorities on to the market, I agree with the hon. Gentleman in advocating that we should not accept this simple principle of trying one way or another to get local authorities back into the Budget. This private enterprising on the part of city treasurers and town treasurers and so on to get hold of funds from anywhere in the country, or anywhere in the world, has done city, town and county treasurers more good psychologically than probably anything else. I would favour the alternative which the hon. Gentleman suggests if the Government propose changes.

In so far as we adopt this procedure, we reduce the net borrowing requirement. I would go further and say that surely the time has come when we can argue that as the nature of public expenditure is rapidly changing, the nature of the financing of public expenditure should change. The whole character of Government borrowing is very much the same as it was in the late nineteenth or early twentieth century when it was to finance war or to finance—I will not call them non-productive works—the social infrastructure which has been mentioned.

But since that period the Government in effect have gone into the equity market. They have taken over industries. Some of them do not show very substantial profits and the profits of some are negative, but if we want to reduce the burden of taxation, which I gather would be regarded as a good thing, and if we want to reduce the net borrowing requirement, which would certainly be a good thing vis-à-vis the gnomes of Zurich or anybody else abroad, it might be a good idea for the Government to try to finance the capital requirements of gas, electricity, the Post Office, or whatever it might be, by issuing some sort of quasi-equity to which people could subscribe on a non-gilt-edged terms. I should like to think that the Chancellor would consider that, if not in this, then in a later Budget.

Perhaps I can reply on some other occasion to the issue raised by the hon. Member for St. Ives and certainly if I catch Mr. Speaker's eye on Thursday in the debate on the Government's statistical services, I shall hope to deal with this fascinating point of montary versus fiscal policy and our knowledge of it.

8.35 p.m.

Mr. Michael Alison (Barkston Ash)

I am glad that the hon. Gentleman the Member for Stoke-on-Trent, Central (Mr. Cant) touched on the question of borrowing requirements, but I do not think that he fully stressed the difficulty in which the Government are likely to find themselves. Not only is the absolute amount very substantially increased, but the likelihood is that an exceptionally large proportion will have to be financed through the floating debt. It seems extremely unlikely that the Government will be able to get medium-term loans to the extent that they did last year and this year. The increase in the floating debt will multiply inflationary pressures in the economy when we do not want them.

Before dealing with one or two of the internal implications of Budget taxation measures, I should like to pursue a theme which my hon. Friend the Member for Finchley (Mrs. Thatcher) touched on at the beginning of her speech. This was the general performance of the British economy in terms of exports. This, after all, is the linchpin of our economic recovery. One thing that I have noticed in looking at the round up of our economic performance in that admirable statistical journal, Economic Trends, part of which is written by the Treasury, is the change in tone between the April and March issue.

The April issue is a far more encouraging statement. No doubt the Financial Secretary is aware of this, and he knows that it is on the whole a poor performance by the British economy in terms of exports, against a background of squeeze and freeze deliberately designed to stimulate exports.

The hard facts are that the rate of increase in the first quarter of this year, as compared with the rate of increase in 1966, is about one-half per cent. up. It has risen at the rate of 7 per cent. per year. The striking thing is that this rate of 7 per cent. increase in exports was achieved in 1965. There has been no net increase in that rate in the first quarter of this year. That is, there has been no increase over the rate attained in 1965, long before the squeeze and freeze.

This increase was a reflection of Conservative economic policies of the year before, because the exports sprang from the circumstances that we left behind. The worrying thing is that the terms of trade were less favourable in 1965, and yet we still achieved only the same rate of increase in 1966. This offers very grave reasons for doubting whether the Government's fundamental economic proposition of an export-led boom or expansion in the British economy is catching fire at all. It does not seem to be.

It seems to be hanging fire. The report in Economic Trends for April describes the difficulties that we are experiencing in the United States market and, perhaps more especially, in the E.E.C. market, which together accounted for our success in 1966. It makes one feel that matters will be far from easy in 1967, and that we have to increase the rate much faster than at present. I do not think that the Government have sufficiently taken the point that the squeeze of credit and investment upon British industry has been a disincentive to exports. Take the case of small firms, which always find that the cost of setting up in an export market is disproportionate to their other costs.

Take a small firm making office furniture. It finds that the market for its products in the United Kingdom is cut back. Here is a product which potentially could compete in overseas markets. Is it possible or feasible for this firm, in times of squeeze, to start opening up export markets? It is not. In difficult times and times of squeeze home orders are lower than in times of boom. The retailers who order their furniture normally for sale in this country cut down stocks because they know that they can order rapidly and easily in a depressed market from the manufacturers. Their scale of activity is cut. This is the wrong moment to expect them to go for export markets. This is patently true in the case of the large industrial complexes with very heavy capital overhead costs which find that home demand has slumped and unit costs have increased. Again, exporting is made more difficult.

The Government must consider this matter very carefully, particularly against the background of the effects of the Budget judgment. One thing which has struck me while pondering some of the figures given and the statements made in our debates is that the Budget judgment is probably rather more reflationary than has been assumed or judged. I select just one or two items in the growth of Government expenditure which seem to me to suggest this.

One of the most interesting sub-items, if one looks at the global totals, is the increase in current expenditure on goods and services. Under the broad heading of Government current expenditure there is a very substantial increase—as much as one-third, or £100 million—in supplementary benefits and assistance. One of the interesting things about this sort of transfer payment—this is particularly true when it reflects unemployment assistance—is that it goes from a sector of the economy in which saving is at the national average level to a sector in which saving is well below average. Part of it at least will be spent by a section of the community which was earning at one time, but which is no longer producing. Therefore, it is an inflationary trend. The same must be true of substantial increases in, for example, housing subsidy payments—about 15 per cent. this year.

These admittedly are transfer payments, but one of the worrying things, if one looks at Economic Trends for April, 1967, is the figures for personal disposable income. Here we get the other side of the coin—the effect on those from whom money has been transferred to make the transfer payment. The transfer payment goes to people who tend to save less of it and spend more of it, and those from whom the money has been transferred are dipping into their savings to maintain their standard of expenditure.

Under "personal disposable income" in Chapter IV of April's Economic Trends, in spite of a fall in personal disposable income, consumers' expenditure has increased. The explanation which is baldly given is that this is due to a drop in savings. So there is a net transfer to people who spend more because they inevitably save less and those from whom the money is taken are dipping into their savings to maintain their standard of living. All this is much more reflationary, indeed inflationary, than the Government have perceived. When one associates it with the fact that the increase in gross domestic fixed capital formation which is designed for a more purposive objective—about one-third of this in terms of £.s.d., the alleged increase in investment, which is meant to compensate for the fall in private investment—is going on social services rather than economic services, then the net effect must be to reduce the competitive power of the British economy in terms of exports, discourage investment and encourage the social infrastructure which may have long-term but not short-term benefits and at the same time help investment in the manufacturing sector.

If one adds to that an increase in the floating debt, which seems inevitable from the programme of deficit financing which the Government must face this year, there are a great many more inflationary—indeed, reflationary—subterranean veins in this Budget than has been appreciated.

All this is against the background of exports increasing, on the whole, at a sluggish rate. Taking the three recent years as the trend, they are not doing nearly as well as they should against the background of squeeze and freeze which we have seen.

I make three simple suggestions about how we might have done better in this Budget, above all, to keep down industrial costs, to which the Government have not paid nearly enough attention. A great deal has been done to increase social service expenditure. We have had mild rebates in different directions which are proving valuable to many people, but there has been little in this Budget to encourage exporters and manufacturers generally by helping them to reduce industrial costs. On the contrary, the whole gamut of extra taxation has tended to push up industrial costs.

One possible reform which might have been introduced for industry in this Budget relates to the duty on heavy fuel oil. It seems ludicrous that the Central Electricity Generating Board, whose obligation to burn fuel oil is based upon the need to safeguard the British coal industry, should have to pay something like £12 to £15 million a year to the Treasury and thus, in a sense, put it on to the consumers of electricity, at a time like this. Why could the Financial Secretary not persuade the Government to let at least some users of imported heavy fuel oil off the fuel oil duty, at any rate for the present time?

It is amusing to look back over the explanation given for the fuel oil duty in the recent White Paper on Fuel Policy. There, we have these immortal words, which show how taxation in habit forming in the Treasury: This duty was initially imposed for revenue reasons, but its protective effect on the coal industry was one of the factors taken into account in deciding to retain it. So really the reason for this fuel oil duty is to protect the coal industry.

The Government have taken two steps to protect the coal industry since the fuel oil duty was imposed. They have introduced a whole new social programme of pit closures, of capital reorganisations and other measures to help the coal industry. At the same time, they have deliberately made it impossible for the electricity authorities to build an oil-fired power station without permission.

Against that background, it seems self-evident that the way to keep industrial costs down, not only in electricity but for all consumers, is to remit for this year the fuel oil duty which has to be paid by the users of oil for industrial purposes. It could be done easily. It would cost about £12 million, and the Government have already scooped up £40 million by consolidating the regulator charge on petrol and lighter oils. That is one thing which the Government could do, not only for the electricity sector but over the whole industrial spectrum.

My second suggestion touches on the difficulties of the motor industry, which has had a poor export performance in the period of the freeze. One point which has come out recently is the difficulty imposed upon motor manufacturers by fluctuations in sales. Why could the regulator not be used to vary the rate of Purchase Tax on motor cars seasonally, either by putting them into a different bracket of charge, or deliberately introducing power to regulate and vary the rate of Purchase Tax to try to iron out the fluctuating problems of the car industry? This is something in respect of which, in the words of the hon. Member for The Wrekin (Mr. Fowler), there has been a lack of imagination. There has been a lack of sublety in the application of some of these Measures.

The way in which selective employment payments discriminate between manufacturing and distribution is nowhere felt more painfully than in the motor car industry, because an essential element in the sale of motor cars—and this is particularly true in certain areas of the country, and among certain sections of the population which have not hitherto been car owners—is the possibility of studying cars in show rooms and at various distribution points. These should be provided in new towns and in areas where towns are expanding, and yet at this crucial moment in the affairs of erstwhile leader in export performance the Government have imposed a positive disincentive to the marketing aspect of the business.

The industry has been given no incentive to provide showrooms and distribution facilities in new housing areas. Could not the premium be varied to give the distribution of motor cars a much needed boost? Motor cars are one of the few consumer durables which can be seen only in showrooms or on the streets. They are not otherwise easily visible, and in terms of retail sales there ought to be greater encouragement for the provision of showrooms and distribution centres.

Finally, we come to this ridiculous little jab at manufacturing industry in the decision to raise the Stamp Duty on loans issued by manufacturing and other companies. This is psychologically the wrong thing to do at the moment. One of the most serious effects of the Corporation Tax has been the gradual shift in the gearing of British industry in terms of its capital composition. We have hitherto been a country in which share capital, risk capital, as opposed to loan capital, has represented a high proportion of investment. One reason why we have been pioneers in many ideas is that risk capital has been available in our highly-developed capital market. This has played a large part in our fortunes, and it is now being discriminated against.

One of the problems in future will be the unwillingness of people to take risks and to launch out and innovate. This will be the result of having induced a switch towards loan stock and loan capital, and to introduce this marginal fleabite, with such important psychological effects, seems to me to be doing what the Chancellor said he was not trying to do, namely, to kill the goose which lays the golden egg.

I think that the Budget judgment is suspect. The spearhead of the operation, exports, is showing itself to be blunt and sluggish, as my hon. Friend the Member for Finchley said. The Budget has produced nothing to reduce costs for industry, and I think that the Financial Secretary can look forward to many serious Amendments and new Clauses being proposed to the Bill, which will keep us going almost as long as the Finance Bill of 1965.

8.54 p.m.

Mr. Gwilym Roberts (Bedfordshire, South)

I, too, decided to intervene in this debate, not merely to take us to the magic time of 9 o'clock, but because I felt that there were one or two things which had to be said.

I am sure that everyone in the House will agree with me when I say—and I am sure that this has been said already during the debate—that the Bill will perhaps be famous not for the things it contains but for the things that it does not. Many of us had been prepared to accept that at this juncture there may be a need for standstill conditions, but this does not debar us from saying that certain aspects of it are disappointing from a constituency point of view. There is enormous disappointment in my constituency that nothing has been done to help the motor industry. Obviously no large export industry like this can flourish without a successful home market and we had hoped that the Bill would contain some provision for reducing the hire purchase deposit on cars, which would have provided a much stronger basis for the industry.

Even if we accept that this is a standstill Finance Bill, the Treasury could consider our taxation structure. The Chancellor has established a reputation as a reformer. His Corporation Tax, whatever hon. Gentlemen opposite may say, was valuable in inducing companies to plough in rather than to distribute. Much more extensive reforms are now needed. Could the Treasury, for example, consider some form of P.A.Y.E. for companies? This may sound unrealistic, but there is no reason why firms should not have a four-weekly profit and loss account, with a tax calculation based on it.

Obviously, in many cases, tax payments could not be made by companies, particularly those involved in long-term activities, on such a short-term basis, but there is no reason why a tax calculation should not be based on such a short term. Many small companies would welcome making payments much more quickly.

There is also a great need for simplification throughout our tax structure. It is ridiculous that 61,000 civil servants are still employed on tax collection and that we will probably spend this year about £71 million. When we also consider the 100,000 tax accountants and staff employed on the other side of the fence, we realise the mass army which is tackling the taxation problem.

One obvious direction for simplification, particularly as we move towards Europe, is the replacement of much direct taxation by indirect. It has been suggested that a sales tax of about 30 per cent. on the full range of goods could replace many forms of taxation like Income Tax, S.E.T. and even the rates. Approximately the same revenue would result. Some of my hon. Friends may consider this propo- sal anti-Socialist and unhelpful to the problem of redistribution, but this is not so.

The expenditure pattern of the lowest income groups shows that they already pay about 31 or 32 per cent. in indirect taxation.

The problem of redistribution could be tackled in other ways; for example, by larger social security benefits and by the extension of those benefits to lower paid workers in general. This would, of course, have to be accompanied by higher levels of Surtax and death duties, as well as some changes in Corporation Tax. Experience has shown that taxation in general, and Income Tax in particular, is an ineffective weapon to deal with the problem of redistribution.

The advantages of this simplification would be considerable. There would immediately be a considerable saving in the amount spent on tax collection. However, the main reason why I advocate this change is the incentive that it would give to the great bulk of the industrial population. If we simplified the present over-complex taxation structure, industrial workers would be provided with an enormous incentive. And make no mistake—the economic salvation of this country depends on hard work.

9.1 p.m.

Mr. Iain Macleod (Enfield, West)

If I followed the agreeable speech of the hon. Member for Bedfordshire, South (Mr. Gwilym Roberts) correctly, he began by making a plea for the introduction of tax reserve certificates—which, I assure him, fell on ready ears; we have had them for many years—and went on to make an interesting point about the balance of direct and indirect taxation, to which I will return in the course of what I hope will be a quite short speech.

It has been said in another context that today is a historic day and an unforgettable one. Certainly that could not be said about the Budget, the Finance Bill or its Second Reading debate. It is a remarkably forgettable Budget with which we must deal. It is the first time since 1962 that the Chancellor of the Exchequer has not thought it appropriate to take part in the Second Reading debate, although I make no particular protest about that. The last time that was done was by my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) in the spring Budget that followed his July measures. It is touching to see the vitality with which the present Chancellor follows the example of my right hon. and learned Friend, even though he has been a good deal less successful in his outcome.

We are faced at the moment with the same Treasury team—or two-thirds of it—that has held the Floor, if one can use that phrase, since October 1964. With the exception of the Ministry of Agriculture, Fisheries and Food, this is the only Department that has gone on unchanged throughout two Parliaments, three Budgets and 26 deflationary statements. I do not know what the House has done to suffer this, but once more we must face exactly the same people as we have confronted in earlier years.

The long days of the Committee stage lie ahead. I made clear by my vote last night—indeed, on three occasions last night—that I personally deplore the increasing tendency of the House of Commons to try to make formal matters out of matters which, in my view, are better left imprecise. I have always had a good relationship with the present Chancellor of the Exchequer, and I have no doubt that it will survive this Bill and other Bills which we will have to debate, on whatever side of the House we may find ourselves. But I believe it to be a mistake to have formal agreements about Committee stages of Finance Bills in particular. I believe that it is a mistake to talk, as the Leader of the House did, in terms of dishonouring an agreement whereas, at best, it can be a gentleman's understanding.

There are many things, Mr. Deputy Speaker, as you will remember well from your experience of a year ago, that are unpredictable in our discussions of a Finance Bill. I would remind the Chief Secretary that once, a year ago, we were sailing along in comparatively calm waters when he suddenly discovered that the hovercraft was an ideal smugglers' vehicle. Having myself been in the Army, I made no comment—I thought it rather dotty, but I let it go—but my hon. and right hon. Friends who had been in neither the junior nor the senior Service "did their nut" about this, and we spent hours sorting out that particular observation. I very much hope that if there are to be references to hovercraft, rural buses or anything of a similar nature, the Chief Secretary will absent himself from the Committee and we will see how we can toil along without him.

All the same, there have been some remarkably good speeches, apart from those that opened the debate. We had the very elegant, witty speech of my right hon. Friend the Member for Flint, West (Mr. Birch), a typically rumbustious speech by my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro), and the splendidly Tory contribution, as usual, from the "heavenly twins" who sit opposite on the third bench below the Gangway, and who always put forward excellently Right-wing views, particularly on direct taxation. I believe that on this matter there was more agreement than one would expect, and it seems quite clear that one of the main issues—perhaps the main issue—of the Committee stage, when we come to it, will be the level of direct taxation. This is a challenge that we on this side are more than ready to take up.

Rather than meander around the Finance Bill, as one can on Second Reading, I would prefer to concentrate on the Budget judgment; why I differ, if I do, from the Chancellor of the Exchequer, and what I think he might otherwise have done. Perhaps I might remind the House that a year ago I did not challenge the Budget judgment—and much was made of this in speeches from the Treasury Bench—in its total amount. I challenged the timing. Speaking in the Budget debate a few days ago, the hon. and learned Gentleman the Financial Secretary asked with some glee whether I had foreseen the seamen's strike and the run on the reserves. The answer to the first question is that "Yes, of course I had not." I do not have that sort of crystal ball, though most of us believe that all this stuff about being blown off course by the seamen's strike was grossly exaggerated.

To the second question, the answer is, quite clearly, "Yes. I did from the beginning, and said so from the beginning, and so did many of my hon. and right hon. Friends." The clearest evidence I can give of that is to quote from the transcript of my interview on the Home Service at 10 p.m. on the day after the Budget, answering questions from Colin Jones, who was editor of the Statist. I had mentioned the Budget judgment, and particularly the point—and the Chancellor of the Exchequer knows this very well—that nothing was to happen until the autumn. Perhaps I can now quote from the transcript. This is Macleod speaking: I think he is taking a very serious risk that confidence may slide against us as we go through the second and enter the third quarter of this year, and I think this is the major criticism. It isn't one that I've seen very much comment on but I believe this is the major criticism against the Chancellor rather than the actual level that he has selected. JONES: DO you think the Budget is sufficiently deflationary? MACLEOD: I think it would be, so the answer to your question is 'yes', if it came in tomorrow. My fear is that this time-lag may induce a slide in confidence and so conceivably even difficulties in relation of our reserves. So it is abundantly clear that on this side of the House we could at least see beyond the end of our noses. We thought from the very first moment—as my hon. and right hon. Friends will recollect, from the moment the Conservative Finance Committee met a few minutes after the Chancellor sat down—that this was the first, the main and the lasting condemnation of the Budget judgment a year ago. I said, in the words I have just quoted to the House, over and over again that the most serious risk is being taken with our reserves.

A few weeks later, two or three months later, those words as we know came true. This is just one more, but it is the most serious of all the many errors of the Government, some by the Chancellor but more by the First Secretary of the day, and some by the Prime Minister. The total cost to our country of these successive errors of judgment makes the 1964 deficit, half of which in any event was adding to our investment strength, simply small change.

These are the massive miscalculations which have taken place in the last few years and the Chancellor of the Exchequer has been massively and overwhelmingly wrong. If he will allow me—I am sure he will—a small tease, he and I spoke on consecutive nights at Brierley Hill about a week ago and I read from my paper: Mr. Callaghan jeered at Mr. Macleod's prophecy of a five-figure majority. One of these days the Chancellor will perhaps listen to what is prophesied and what is said to him.

The Chancellor of the Exchequer (Mr. James Callaghan)

The right hon. Gentleman is entitled to get one right now and again after the way he got one wrong over Leicester City winning the Cup, one over the Tories winning the General Election and one over the Betting Tax being a failure owing to my gross folly. It is three to one now.

Mr. Macleod

That was not a very good reply. If the right hon. Gentleman wants to follow this particular point, he will find that I prophesied three months ago, when the odds at Ladbrokes were 500 to one against me, that the Tories were going to win not only the G.L.C. but the Inner London Education Authority election also.

This year the Budget judgment is rather different. The Chancellor has opted for what I might call a double standstill, that is to say not only a standstill in overall Budget judgment but a standstill within that standstill. It is, of course, perfectly possible to have a Budget which adds up to nought and perhaps abolishes Surtax and puts the whole of the extra cost on to beer, which would not be regarded by most hon. Members as a standstill Budget in the normal sense of the word. There is a certain discrepancy in the arithmetic about which I shall say a word in a moment, but his judgment is that there should be a £5 million reflation.

My judgment, in an article which has been frequently referred to today was that there should be something like £30 million to £35 million. Clearly those two figures in the level of figures we are discussing are so near together that we need not argue about the difference. Both show that if there should be anything it should be very small indeed. The right hon. Gentleman was prepared, or rather he found himself able, to do nothing; whereas while my overall judgment came to more or less the same answers I wanted to reduce taxation, to do something in justice for closed companies, something about the poverty of the family and something in relation to Selective Employment Tax as a prelude to its entire abolition. These things can be done only if one is prepared to give oneself sea-room. The Chancellor of the Exchequer was not. There were two ways in which I was prepared to do it. One of the methods, which is familiar to the House, is through transfer payments for prescription charges, school meals, and the like. The other is by reducing elements of capital expenditure.

I turn for a moment to a discrepancy in mathematics which I regard as interesting only from a purely intellectual point of view. It does not, in a sense, affect my budget, because it is perfectly easy for me to substitute, say, the manufacturing premiums under the Selective Employment Tax, which we have always opposed and which will give me £130 million, which is roughly in the same sort of bracket as the regulator; or I could re-emphasise the difference between the savings achieved under a Tory Chancellor and the present Chancellor.

However, I am interested, and it does not affect my budget, but the Chancellor's Budget, in the question of the treatment of the regulator. I asked the Financial Secretary if he would refer to the speech made by my right hon. and learned Friend the Member for Wirral in April, 1962. I am sure that he has done it. Talking about Exchequer prospects for that year, my right hon. and learned Friend said this: Here, the figures are complicated by the surcharge and I want to be very careful not to cause any misunderstanding. The figures which I shall give are on the assumption that taxation continues for the full year at its present rates. … This is not the statutory position because, as the Committee knows, the surcharge is due to expire at the end of August. My right hon. and learned Friend later emphasised that point. He allowed the regulator to lapse, but he simplified the Purchase Tax structure in order to raise the same amount. His conclusion was this: My proposals for changes in indirect taxation will provide revenue of £175 million … almost exactly offsetting the revenue I would have obtained if I had proposed to keep the Customs and Excise surcharge in force for the rest of this financial year."—[OFFICIAL REPORT, 9th April, 1962; Vol. 657, c. 969–93.] My right hon. and learned Friend was absolutely clear about how he was treating the regulator. He was also clear that he regarded his charges as adding to Exchequer revenue. The important point—it may be academic, but I think there is more to it than that—is that the present Chancellor treated this in an entirely different way. He treated maintaining the regulator, not as an increase in revenue at existing tax rates, but as a cost to the Exchequer if he removed it.

The consequence, in my judgment at least, is that the Chancellor's Budget is reflationary, and very substantially so, more so than people have realised, in that increased Government expenditure has not been covered by taxation. I believe that, technically at least, the Budget changes themselves were deflationary, for the reason I have given.

It is more important to challenge, which I now want to do, this statement by the Chancellor in the Budget debate a fortnight ago: It is a little absurd to pretend that in this world today one can talk about both increasing expenditure and cutting taxation, but the Conservative Party manage to have it both ways all the time."—[OFFICIAL REPORT, 17th April, 1967; Vol. 745, c. 212–13.] Why on earth not? This is what one ought to be able to do. This is what the Conservative Party did in those 13 years, because tax rates were cut between 1951 and 1964 so that £2,000 million less was being collected every year by 1964 than if 1951 rates had still been in force. But in that time central and local government expenditure at constant prices, taking inflation into account, increased by 39 per cent. That is evidence that it can be done.

There is further evidence in the examples of countries like America which has managed to run what must be the most expensive social service programme the world has ever seen and at the same time cut taxation and run or finance an extremely expensive war in Vietnam. With respect, the Chancellor is on an utterly false point here. He has had to change his mind for the simple reason that Socialism has failed.

The Chancellor's first thoughts were right. Speaking in Cardiff on 14th October, 1964, he said: The whole basis of our case is that increased social expenditure will be financed out of a growing expansion of British industry. So it ought to be. That is what ought to have happend. That is what the 1964 and 1966 elections were fought and won on. But the Chancellor now finds himself presiding—I am sure that he is as unhappy about it as I am—over a country with negligible growth, with stagnant production, with a disastrous fall in national savings, and with high and growing unemployment. It is the Socialist failure in this field that means that the Chancellor's brave words in 1964—his right words, which we repeat—are nonsense in 1967.

This helps also to explain the Chancellor's attitude towards what I describe as in many ways the most important single issue to emerge out of this debate, the attitude of the two sides of the House towards direct taxation in particular. In the same speech from which I have already quoted, the right hon. Gentleman said: What is more important is that it is not the marginal rate but the effective rate which matters."—[OFFICIAL REPORT, 17th April, 1967; Vol. 745, c. 213.] It simply is not true. If a man is Chancellor of the Exchequer and he has a large, or fairly large, income, as the right hon. Gentleman has, wholly paid for by the taxpayers of this country, and if he works as hard as the Chancellor does, it makes no particular difference to his industry whether 6d. comes on or comes off Income Tax. He will work as hard as ever. That is obvious. But it is not true for most of us. If we are not, as it were, financed in one form or another—and we are not—by the Government, then, when another project is put up to one, whether it be the idea of writing another article or the question of a board of directors taking a further risk, what matters is the marginal rate and not the effective rate of taxation. There can be little doubt about this.

The hon. Member for Heywood and Royton (Mr. Barnett) quoted some evidence, which, he said, was the latest he could find, from a Royal Commission on taxation 12 or 13 years ago. With respect, may I bring him more up to date? The Canadian Royal Commission on taxation reported a few weeks ago or, at most, a few months ago. Here is its key conclusion, which is exactly contrary to the conclusion which the hon. Gentleman put to the House. I quote from page 163 of its Report: We are persuaded that high marginal rates of taxation have an adverse effect on the decision to work rather than enjoy leisure, on the decision to save rather than consume, and on the decision to hold assets that provide monetary returns rather than assets that provide benefits in kind. We think there would be great merit in adopting a top marginal rate no greater than 50 per cent. It should be added that that illustration comes from a country where the highest marginal rate of tax is 80 per cent. and where, to reach that highest rate, a man must earn no less than 400,000 dollars a year. In this country, on the other hand, our ordinary marginal rate at the highest level is 91½ per cent. and for this year is 96¼ per cent.

I accept that there is a difference in philosophy between the two sides of the House on this. I can do no more than broadly state our position now. We shall pursue it in Committee. We believe that taxation at these levels is and must be a serious disincentive. We believe that it contributes to the brain drain. We believe that it impoverishes everybody by denying to the people of this country the advantages that would come if the dynamos of this country were given greater opportunities than they are at present.

Sir G. Nabarro

Hear, hear.

Mr. J. J. Mendelson (Penistone)

There is one of the dynamos.

Mr. Eric S. Heffer (Liverpool, Walton)

The hon. Gentleman is a dinosaur.

Mr. Macleod

This Government have no policy for dealing with these problems of personal incomes, except the idea of cutting them off. We shall never get the high-wage, low-cost economy to which we all pay at least lip service if we persevere in this particular route.

It is a pathetic delusion of some hon. Members opposite that the Government have a prices and incomes policy. That is not true. Therefore, we have the cries for price control. Price control as operated by this Government is a bluff, and they know it. They moved once on laundries, because they got 300 letters, and what have they done since then? They have reduced the price of marbles by 1d. in response to some perishing letter from a girl, probably the same one that we saw on the posters urging us to vote Labour in the G.L.C. elections. The truth is that the Government have a policy which is jolly effective for keeping wages and production down, while prices and unemployment and even salaries rise. It is time to abandon it. It has little enough support, and what there is is eroded daily.

I want to conclude by giving the reasons why as reported at col. 1216 of the OFFICIAL REPORT of 12th April, I found myself less able than the Chancellor to take a cheerful view of the position. One or two hon. Members opposite, including the hon. Member for Penistone (Mr. Mendelson) have said that I have supported the policy of severe restraint, deflation and squeeze and freeze, and have therefore found me guilty by association with the Chancellor of the Exchequer. That is only true as far as it goes. It is true that on 25th October—and this is the quotation that is mainly in the hon. Member's mind—I told the Chancellor that he should not listen to the siren voices that urged reflation.

Mr. Mendelson rose——

Mr. Macleod

I shall finish my argument and then of course I shall give way. I said at the same time that the Chancellor should look urgently at the question of giving a much-needed boost to private investment, which was already showing lower trends, and ever since then in successive debates—particularly as I have analysed the unemployment trend, which I shall do for just three minutes before I sit down—I have dissociated myself from the policy of the Chancellor. It is not a question of jumping on the bandwagon. I climbed off this hearse long ago.

Mr. Mendelson

I was particularly keen to remind the right hon. Gentleman and the House of the additional quotation which he has not mentioned, when he told my right hon. Friend the Chancellor that he must go on on the rocky road, with all the authority of Front Bench spokesman of the Opposition. That makes the right hon. Gentleman fully responsible for the policy of deflation, and he has no right to criticise the Chancellor now.

Mr. Macleod

That was the 25th October last year. Of course I said that then. It is true, because one should not start a major operation and abandon it half way through. But if the hon. Gentleman reads that speech he will see that I directed the attention of the Chancellor to private investment, and ever since then I have analysed the unemployment situation, as I shall do for a minute or two before I close.

When I spoke in the Budget debate, I said that I took a less cheerful view than the Chancellor, and in particular I made this comment about unemployment: … I believe that unemployment is a good 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 adverse."—[OFFICIAL REPORT, 12th April, 1967, Vol. 744, c. 1214.] The April figures bore this out completely. There was a reduction in the wholly unemployed of 5,669. But the month from March to April is the best seasonally of the whole year and there is normally a seasonal reduction in the figure of 34,000. Therefore, far from the "jobless total falls", as some papers headed their stories, there was a most savage worsening of the unemployment trend in that month.

I want to make one point clear, although, in a sense, I am arguing against myself in doing so. This is that, as the winter figures were much worse than the Government supporters thought they were, so it may be that the April figure is not quite as bad as it looks because if people are kept on in the winter months obviously they are not available and it is not necessary to re-engage them as the spring comes.

I recall one more prophecy that I made at Brierley Hill and which I repeat. I think that in June—it may happen in May but is more likely in June—we shall see the worse figures for June unemployment since the 1930s because the graph in a month or two will cross that of the 1962–63 period. Moreover, the trend is getting worse. It is the weather alone, the mildness of the winter, which has saved the Government this winter from having figures worse than those of 1963. Only an incredible piece of luck next winter can save them from having worse figures than at any time since the 1930s.

We will try in Committee to deal with some of these matters which I have indicated. We return tonight to the usual tradition of not voting against the Second Reading of the Finance Bill unless there are such matters, as there were last year and the year before, of deep affront to us contained within it.

A year ago, as I have shown the House, I phophesied—and unhappily was right—that there would be a dramatic result of the Chancellor's misjudgment. I make no such prophecy this year. I think that Bill is just a mess. The Bill is without ideas and without purpose. It will fall to the Opposition to try to give it more sense of direction during the Committee stage.

9.33 p.m.

The Financial Secretary to the Treasury (Mr. Niall MacDermot)

By the standards which the Government have set we certainly would not claim that this Bill is exciting. The right hon. Member for Enfield, West (Mr. Iain Macleod) has assured us that it does not provoke any deep affront to hon. and right hon. Members opposite. It has been described by the hon. Member for Worcestershire, South (Sir G. Nabarro) as a puny Bill—a curious description of a Bill which exceeds 100 pages in length.

Although we have not undertaken any major tax reforms, we have taken the opportunity to bring before the House a considerable number of minor measures which, as my right hon. Friend the Chief Secretary outlined, contain a number of useful provisions which will help to relieve the burden on the taxpayers, to reduce the administrative and paper work of a good deal of revenue collection, to simplify the administration, to clarify the law and to help industrialists, in particular exporters.

Since my right hon. Friend spoke, there has been very little reference to the Bill itself. The hon. Lady the Member for Finchley (Mrs. Thatcher) took 22 minutes before she made any reference to the contents of the Bill. Hon. Members know that in some quarters of the House there is a movement urging that the Committee stage of the Finance Bill should be sent upstairs. Perhaps we should be a little careful about how we conduct our Second Reading debates, or there may develop a movement for sending Second Readings to the Second Reading Committee.

The debate as a debate has suffered from the initial blow which was administered to the Opposition by my right hon. Friend the Chief Secretary when, in his opening speech, he blasted them out of the water before their argument had begun on what is one of their pet hobby horses. He shattered the myth, which they constantly repeat, and which they have repeated so often that they have come to convince themselves that it is true, that we are the most heavily taxed country, that we have the heaviest burden of direct taxation and that we have the heaviest burden of company taxation of comparable countries.

Hon. Members said that they wanted to study my right hon. Friend's figures, and I hope that they will. Although to some extent he knocked the stuffing out of them on this, he did not, of course, succeed in preventing them from repeating the phrase again. But they did not come forward with the same zest or enthusiasm which we are used to, and even the abdominal rumblings of the hon. Member for Worcestershire, South were, I thought, a little muted on this occasion.

Sir G. Nabarro

There were no abdominal rumbles. I devoted 15 minutes, until I saw you getting a little fidgety, Mr. Speaker, because I was taking too long, to rebutting the entirely fallacious argument of the Chief Secretary, and I shall do so many times again in Committee.

Mr. MacDermot

I was not referring to the hon. Gentleman's speech.

Mr. Speaker

Perhaps I might assure the Financial Secretary that the rumblings were not abdominal.

Mr. MacDermot

I thought that that was their source.

My hon. Friend the Member for Hey-wood and Royton (Mr. Barnett) completed the demolition work on this part of the debate when he made such a telling speech on the supposed disincentive effect of the levels of direct taxation. In his winding-up speech, the right hon. Member for Enfield, West made a brave attempt to return to the charge on this issue, and I am sure that we will all study with interest his reference to the Canadian Report on taxation. However, in this country surely we are concerned with the incentive or disincentive effect on people in this country, in our economic situation and with the attitudes and experiences of people here.

Although he himself argued for a reduction in the levels of direct taxation, the right hon. Gentleman cleared away a lot of the dross which surrounds the argument on this subject. That does not mean, of course, that my right hon. Friends are advocating or arguing for higher levels of taxation, as the right hon. Member for Flint, West (Mr. Birch), who has now left the Chamber, suggested in his witty speech. We always expect a witty speech from him. He is very ironical at everyone else's expense and suggests that everyone except Professor Paish is a false prophet. I do not know how much his own gloomy prophecies would bear examination. I can remember his prophecies of last year about the prospects of the Government obtaining what they needed by borrowing during the coming year. I do not think that his prophecies on that have proved to be very accurate. In his speech, he gave a timely reminder of the point in my right hon. Friend's Budget speech, which was the importance of looking ahead and reining in the growth of public expenditure in order to make room for increased investment in the private sector if we are to avoid increases in taxation.

The hon. Lady the Member for Finchley in her opening remarks, most of which were devoted, like the right hon. Gentleman's final speech, to the Budget statement, questioned some of the forecasts upon which the Budget judgment was based. One to which she referred in particular was the forecast on exports. She mentioned the fact that some outside commentators had questioned those figures. It is true that at present the United States and the German economies have not been expanding as fast as was hoped. There is a pretty general expectation that by the end of the year, they will be expanding again at a good deal faster rate, and we see no reason to revise the estimates upon which that forecast was made.

I was a little surprised at the hon. Lady, with her great experience in tax matters, suggesting to the House that in some way the resources of the Inland Revenue Department were being wasted on back duty cases. As I understand it, the suggestion was that if one took the staff off back duty work, and put them to work helping taxpayers to fill up their forms, this would be a better use of resources. She quoted the fact that the amount of revenue recovered in back duty was something in the order of £15 million, or three-tenths of 1 per cent. Surely she would be the first to recognise that the real effect of the very skilful back duty work is to keep tax evasion at what is, thankfully, still a very low level in this country compared with others.

This is a difficult debate to reply to, because inevitably in the circumstances it has ranged extremely widely. A number of hon. Members have made thoughtful and interesting speeches, some advocating far more radical changes in our tax system than even those which the Government have introduced. Others have made general reflections upon the economic situation, upon my right hon. Friend's Budget judgment and upon monetary policy that may be pursued in the coming year.

I hope that hon. Members will forgive me if I concentrate my remarks upon the contents of the Finance Bill, as I am supposed to be replying to the debate on the Second Reading of this Bill. A number of hon. Members mentioned the possibility of a value-added tax. Obviously that has considerable topical interest today in view of the announcement of my right hon. Friend the Prime Minister. I understand that the hon. Member for Colne Valley (Mr. Richard Wainwright)—I was sorry to be absent from the Chamber when he made his speech—raised this question of the need to study the possible harmonisation of our taxation system with the Six.

I would remind the House that Article 99 of the Treaty of Rome provides for the harmonisation of turnover tax, excise duties and other forms of indirect taxation. It does not specifically cover harmonisation of direct taxation of social security contributions and, although there was some preliminary discussion of direct taxation at the recent meeting of the Council of Ministers, the possibility of eventual harmonisation of direct taxes and of excise duties is still fairly distant.

The area in which they have made most progress is that of turnover taxation. On this, the E.E.C. Council adopted on 9th February two draft directives by the Commission to establish a harmonised value added taxation system among the member countries. The ultimate aim is harmonisation of rates of turnover tax, but this is a long term question and it is unlikely that any harmonised rates will have been decided before our application is decided. It is important to bear in mind, as I pointed out on 27th January, that the coverage of indirect taxation in the Common Market countries is generally wider than it has been here, and the har-monisation of turnover taxation could involve us in extending the net to goods which have not been taxed here. This is the point which hon. Members who have been urging a value added tax as a panacea to our tax problems need to consider very carefully. It could mean extending indirect taxation to such matters as food, fuel, travel, and rents, all of which would raise very great problems in this country.

In comparing indirect taxation here and on the Continent, we must bear in mind that at present five of the six Common Market countries have a broadly based turnover tax of the cascade type—that is, the tax is collected at each successive stage of production and distribution so that one item of goods may be taxed several times over. The immediate purpose of the Six in their present agreement to adopt a move towards the value added system is to avoid the economic distortions which this cascade method involves and also to enable precise adjustments to be made on exports and imports.

As was pointed out by my hon. Friend the Member for Heywood and Royton, our Purchase Tax system, being a single stage tax, does not involve these distortions and already allows price adjustments on exports and imports. Therefore, to this extent we are already in line with the immediate objectives of the Six. Some hon. Members have in the past advocated the adoption of a value added tax system in this country, quite apart from the object of harmonisation with the E.E.C., on the ground that it would serve as a stimulus to efficiency and exports.

The Richardson Committee examined all these arguments closely, took evidence from business men and concluded that there was not much in these arguments. The Six have not adopted this system of taxation with these objectives in mind. As is known, the Committee of the N.E.D.C. is looking at this matter again and taking the opinion of industry, and it will be interesting to see whether views have changed very much since the evidence was given to the Richardson Committee.

As I pointed out in the debate on 27th January, the coverage of indirect taxation in the Common Market countries is, generally speaking, wider than it has been here, and it is true that harmonisation would involve extending the net in the way that I have indicated. It is too early to say what the effect of this would be if we adopted it here, but if it shifted the incidence of taxation the extra growth revenue which would be derived from the extension would be available to restore the balance in other ways, whether through adjustments in other taxes or in welfare benefits.

In the remaining minutes, may I refer briefly to one or two of the provisions to which hon. Members have referred in the debate. I think that there has been a general welcome for the increase in the dependent relative allowance. Some questions have been asked, particularly outside the House, as to why this has not been extended to give a similar increase to single men or indeed to all men.

As my right hon. Friend the Chancellor pointed out in his Budget speech, he hoped that the House would accept that the fact that this was a year in which he was not able to do a great deal in the way of tax reliefs was not a reason why he should not pick out what appeared to be a particularly deserving class and one for whom a great many hon. Members have shown interest as a result of the work of the National Council for the Single Woman. The single women who are supporting relatives are, as a class, perhaps facing greater difficulties than men who are in a similar position.

May I refer briefly to Clause 17, giving relief for creative artists on the sale of copyright? It is a matter of some personal satisfaction to me that my right hon. Friend was able to find room for this. It is a matter which was raised last year by the right hon. Member for Birmingham, Handsworth (Sir E. Boyle), speaking on behalf of the Arts Council, and it received support on both sides of the House. He explained then that the proposal was aimed primarily at relieving the plight of the less affluent author who was perhaps past the peak of his earning capacity, who was approaching retirement and in need of raising a lump sum. He put forward a proposal which we felt unable to accept and adopt, but we agreed to study it and we have now brought forward the proposal which is in Clause 17.

It has been suggested in some quarters that it is a derisory concession which would not be of a great value to authors. Perhaps I may give an illustration of the way in which it could work in the case of the kind of author referred to. If one imagines a professional author who sells the copyright in a work or a number of works for the sum of £3,500, and one assumes that he is a married man with no other income, under present law he would be liable to nearly £940 tax on the proceeds. Under my right hon. Friend's proposal, on the assumption that he has no other income over the six-year period for which he spreads forward the liability, the total charge over the six years would be just over £90, and if either he or his wife were over the age of 65, the charge in similar circumstances would be nil.

There have been a number of references to the Selective Employment Tax, and no doubt we shall come back to it in Committee. The hon. Member for Finchley suggested that it was an administratively complicated machinery. I do not know whether she was suggesting that it was administratively expensive, because in fact the opposite is the case. It is probably the cheapest tax of all to collect. I think that 0.75 per cent. of the total revenue is the cost of collection. The administrative complications involved in the refund to part-timers which we are now proposing will raise the administrative costs quite substantially, as often happens when one introduces a relief to a tax.

There have been some questions directed to whether a similar relief ought not to be given to the disabled and elderly. Perhaps all that I need say at this stage, because we can go into it further in Committee, is that the evidence which has been obtained and which we have studied very carefully does not support any suggestion that the Tax is working unduly harshly upon the employment of either the disabled or the elderly. We have not seen any need to extend a relief to those categories as such, though, in particular, employers of the elderly will benefit from the relief for part-timers.

The hon. Member for St. Ives (Mr. Nott) referred in kindly terms to the new Clause, Clause 28, dealing with the question which he raised last year of foreign bearer bonds. We have been able to go rather further than the proposal which he suggested last year in that we have extended it to bearers issued in foreign currency on behalf of United Kingdom companies, as well as to bearers issued by companies abroad. I was rash enough to say last year that if we drew the line at this point it would lead to pressure for it to be extended further, and I think I added "and rightly so". Perhaps, rather belatedly, I would like to withdraw those words and make it clear that where we have now drawn the line is where we are firmly convinced is the right place at which to draw it and to hold it.

That was urged on me by the hon. Member for St. Ives himself last year, and I was sorry, therefore, to hear him today, having got his foot in the door, trying to push the door wide open by urging the total abolition of Stamp Duty for everything. This Duty brings in a revenue of about £80 million a year, and it is not one which my right hon. Friend could surrender, nor would he be able to transfer it in the way that the hon. Gentleman suggested to punters by increasing the betting tax.

My hon. Friend the Member for Chislehurst (Mr. Macdonald) raised this question, too. He thought that the rate of 2½ per cent. was derisory, and that it ought to be about 10 per cent. He will remember that during our debates last year a number of points were stressed. First, this is a tax on turnover. There is a rapid turnover in betting, and the tax on any amount invested in betting, if that is the right term, gets taxed several times over. Thus the effective rate on the net amount which is invested in betting is considerably higher than 2½ per cent. There is also the consideration that we are anxious not to drive betting underground again, and to have a rate of tax and a system of taxation which will be worked by the betting community, and I am glad to say that this is being achieved.

My hon. Friend the Member for Chislehurst also raised a question about the fixed rate of 4 per cent. laid down in Clause 38 for the interest on arrears by dilatory taxpayers. He thought that this was an abnormally low rate. I hope he appreciates that it is, in effect, a net rate, since there is naturally no deduction for tax in respect of these interest payments. This corresponds, therefore, in the case of a company—and most of this money will come from companies—to a gross rate of 6⅔ per cent., and to a gross rate of 6.8 per cent. in the case of an individual taxpayer liable at the standard rate. For the Surtax payer it represents a much higher gross rate, so we judge that this should serve as a fairly effective deterrent, and if it does not we will have power to alter the rate as necessary by order.

It might be of interest to hon. Members if I refer briefly to the provisions in Clauses 39 and 40 about the new procedure paving the way for the abolition of the Committee of Ways and Means. We have had, first, to provide a new machinery in future for setting in motion the Provisional Collection of Taxes Act before the Finance Bill becomes law. This will be done by a Resolution of the House in place of the former Resolutions in Committee.

Clause 40 provides for this to be done by a provisional Resolution to be put down by the Chancellor which can be valid for only ten days. This will enable taxes to be collected at once, and in place of the old report Resolutions there will be new confirmatory resolutions within the ten day period on which hon. Members can vote after they have had time to reflect on and consider the Budget Resolutions. Unless these confirmatory Resolutions are passed, the provisional ones will lapse.

We have taken the opportunity to make three other Amendments to the Provisional Collection of Taxes Act machinery. At present the machinery is valid only for four months from the time when the Resolutions take effect. That, of course, is the beginning of the financial year on 5th April and time runs until 5th August, but if we had an early Budget before 5th April, as sometimes happens, the last date may be dragged forward into July, with consequent pressure on the Parliamentary timetable. We therefore propose that the Resolution will in all cases last until 5th August.

Secondly, we are making clear that a Resolution can apply to the abolition of an existing tax as well as to the variation of this rate. Finally, we are extending the power to apply new Customs and Excise duties to services as well as goods, which would overcome the difficulty which happened, for example, in 1957 on the introduction of the Television Duty and in 1961 with the Television Advertising Duty.

As the fatal hour has arrived, perhaps I should conclude. I could comment on many other provisions, but perhaps we could leave them to our discussions in Committee.

Question put and agreed to.

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

Committee Tomorrow.