§ I come now to my final proposal. The new savings scheme I have just described is designed to encourage people to save rather than spend some of the money that they have earned. But it is also important, as part of the same approach, to discourage people from spending money they have not earned, or do not 1040 even possess. This, I fear, is too easy and cheap at the present time; and the main reason why it is cheap is that a large part of the expense is met by the public. Because of tax relief on loan interest, it pays anyone with a substantial taxable income to borrow as much as he can from his bank or from some other financial source.
§ We have been endeavouring, for the past year and still more stringently for the past five months, as I described earlier, to cut back on inessential overdrafts. So far, as I also described, we have met with some, but by no means complete, success. It is paradoxical, in these circumstances, that we should leave a large part of the cost of these overdrafts, and of other personal borrowing, to be met by the Exchequer. But this is indeed the case so long as the interest on personal borrowing is an allowable expense against tax.
§ Even at the present very high nominal cost of borrowing, a standard rate taxpayer who pays interest out of investment income pays an effective rate of less than 6 per cent. on his bank borrowing. For Surtax payers the effective rate is still lower. At an income of £10,000 a year it is not much over 2 per cent. At £20,000 it is less than 1 per cent. This sets market forces against the achievement of our object to a ridiculous extent. Moreover it is unfairly discriminatory and regressive in its effect. Hire purchase does not attract tax relief, but bank overdrafts and credit sales do.
§ I therefore propose that, in future, bank interest, and interest on other comparable personal borrowing, shall not be allowed as a charge against tax.
§ There will be certain exceptions to this general rule. First, interest which is a proper business expense will continue to qualify for relief; this means that bodies liable to Corporation Tax will only be affected by the new provisions in special cases. Second, we shall exempt the owner-occupier who is buying his house, though I think the exception should go somewhat wider than house purchase. Relief will therefore continue for interest on money borrowed for the purchase or improvement of any land or buildings, whether owner-occupied or let, in the United Kingdom or in the Irish Republic.1041
§ So far as existing loans are concerned, I think it reasonable to allow borrowers a short time to adjust to the new conditions. On existing loans, the interest on which is payable under deduction of In come Tax; relief will continue for the current year and will cease at 5th April 1970. Thereafter, the interest on such loans will be payable in full without deduction of tax, except where the interest is paid by a company or to a non-resident.
§ Bank overdrafts and other bank loans the interest on which is payable in full are mostly variable from day to day and within a ceiling arrangement. I propose that relief for interest here should be allowed only up to 30th June of this year.
§ In the case of new loans made after today, where under present rules the interest would be payable under deduction of tax, disallowance of relief will operate immediately and the interest, unless paid by a company or to a nonresident, will be payable in full without deduction of tax.
§ I estimate the tax yield from these proposals at £7 million in the current year and £25 million in a full year. But the benefits are not to be measured by the tax yield alone. By attacking the problem of loans for personal expenditure at both ends, discouraging borrowers as well as lenders, I expect to secure a substantial reduction in consumer demand.