HC Deb 19 March 1968 vol 761 cc273-7

I now turn to the methods by which I propose to raise the very large sum of additional taxation which is necessary. I have been exhorted from almost all sides to be bold, and from many to be imaginative as well. By imaginative I think what is primarily meant is that by thinking up new methods of taxation I should avoid the disadvantages associated with existing ones. Initially, with all the enthusiasm of a new Chancellor, I was much attracted by this approach. I looked eagerly at all the canvassed methods of new taxation. I even thought up a few additional ones of my own. But I eventually decided that in a year when I was asking for many sacrifices from many people, one of the sacrifices which I should impose upon myself was the abandonment of a widespread search for novelty. I decided this for three reasons. First, the successful introduction of a new method of taxation requires a great deal of careful preparation. [HON. MEMBERS: "Hear, hear."] The broad economic consequences should be carefully and calmly thought through. [HON. MEMBERS: "Hear, hear."] I suggest that hon. Members wait before they cheer too loudly. And the collecting Department, whether it be the Inland Revenue, Customs and Excise or another, requires a good deal of time—and a good deal of spare manpower—to work out the administrative details. A year in which the Chancellor takes office only a few months before the Budget, and in which in addition, he thinks it necessary to bring the Budget forward by a few weeks, is not therefore a good year for a major programme of tax innovation.

Second, I have been impressed by the force with which many of those engaged in industrial and commercial planning have asked for a little stability in our taxation system. They would also like stability in tax rates, of course, but that is not compatible with an effective policy of demand management, certainly not in present circumstances. In a year when rates of taxation are bound to go up, there is in my view a good deal to be said for not at the same time making major changes in the basis of taxation. There is a limit to the amount of change which the Revenue Departments, individuals, companies and their professional advisers can reasonably absorb.

Third, I believe it my duty at the present time to view with a very jaundiced eye any new tax that could not be administered without a large additional recruitment of staff. Other things being equal, a tax which is cheap to collect clearly has considerable advantages over one which is not. This is in itself a very powerful reason against any move this year towards a tax on value added. On the merits of a TVA there are arguments on both sides. It would broaden the tax base and help to align our taxation system with those of our European neighbours, although not without a price. It would, however, be an expensive tax to collect, as compared with Purchase Tax, for example, because of the great increase in the numbers of points of collection. It would also call for much more account-keeping and form-filling by industry and commerce. These considerations—apart from others—rule out any change for this year. The subject was of course examined in 1964 by a Committee under the Chairmanship of Mr. Gordon Richardson. The arguments are now being re-examined by a Committee of the National Economic Development Council, which is expected to report by the autumn.

Another change which has been canvassed involves some form of compulsory savings. This has considerable superficial attraction in a year when demand has to be cut back very severely. Many taxpayers have written to me suggesting that they would be prepared to make a temporary sacrifice of the type that would be here involved. But the objections are very powerful. Any proposal of this kind does, of course, assume a considerable increase in direct taxation, the arguments for and against which I shall discuss later. But far more formidable is the lion—in the shape of the Post-War Credit scheme—which stands in the path. This scheme was introduced 27 years ago by the last Chancellor but 12. None of my 11 intervening predecessors, seven of one party, four of another, operating in a whole range of different economic climates, has felt able to discharge at a rapid rate the liabilities incurred in those war-time years.

It would, I think, be quite wrong for me to undertake the repayment of any new liabilities which might be incurred this year and next in advance of those which have been outstanding for so long. Any form of complusory saving now introduced would therefore have to take its place in the queue for repayment behind the outstanding £230 million of principal of and interest on Post-War Credits. In these circumstances the element of compulsion would be a good deal more to the forefront than that of saving. Tempting though it is for any Chancellor, particularly one placed as I am this year, to pass on liabilities to his successors.

I concluded, regretfully but firmly, that with Post-War Credits in the way, I should not incur further commitments of this sort. If and when the time comes to relax, there will be plenty of opportunity for doing so by straightforward tax remission rather than having to discharge old debt. My job is to raise what has to be raised this year without placing a future burden on the Consolidated Fund.

How is this to be done? The old dilemma between direct and indirect taxation presents itself in a peculiarly acute form this year. Yet much of the traditional argument is now, to my mind, largely out of date. Indirect taxation, particularly if used in a selective way, is not nearly as regressive as in the old breakfast-table days. Nor is it by any means any longer the case that direct taxation is substantially paid only by the relatively well-to-do. Income tax falls significantly, and is certainly felt to bear heavily, upon those with average and even somewhat below average incomes.

Nor would I wish to ignore three other considerations. First, there is strong evidence for the belief that nearly all sections of the community would rather pay at the point of sale than through deductions from the pay-packet. I cannot ignore that view. At a time when I have to ask for sacrifices, it is right that, in a democratic society, where success depends upon the response and not merely upon the decree, that, compatibly with obtaining the necessary result, and with fairness, the views of those who have to pay should be taken fully into account. Second, indirect taxation, to some extent at any rate, offers the individual a choice. If he is horrified by the impost he can abstain from some part of his consumption and produce the same demand reduction by saving. I certainly should not object to that.

Third, there is the alleged disincentive effect of high direct taxation. There may be more allegation than reality in this. Certainly the Radcliffe Commission failed to uncover any hard evidence to support it. But the mere fact that it is so widely believed is of itself significant, and means that further substantial increases in taxation on earned incomes could well have a stultifying effect upon the development of the economy. And as my central purpose must be to make the economy work more efficiently than it has done for many years past, this consideration must weigh heavily.

Furthermore I cannot ignore the experience of our more successful competitor economies abroad. In general, the total of our public expenditure, and hence the total amount to be raised by taxation, is in no way out of line with theirs. But our direct taxation, on earned incomes is comparatively high. It may, indeed, be too high, but this is certainly not a year, as I think the House and the country will appreciate, in which I can contemplate reductions.

To be set against all this is the consideration that indirect taxation inevitably has an impact on the Retail Price Index which a direct deduction from the pay packet does not. This has to be faced. But it would be quite unreasonable for people to express their preference for indirect taxation, and then to regard its impact as a greater reason for seeking to offset its effect by income increases than if the pay packet were to be reduced at source by higher direct taxation. My main conclusion is, therefore, that I ought to look for obtaining the bulk of my additional revenue from indirect taxation, but that it should be levied in as selective and non-regressive a way as possible.

I now come to describe my proposals: first, in the field of indirect taxation.