§ Mr. Speaker, I have now raised a substantial amount of additional revenue, but clearly not enough on the assumptions on which I think it right to work. I need more than £100 million more, and I need it in a form with a substantial demand or resource releasing effect. Broadly speaking, there are only three sources from which I would meet this need. The first would be an increase in the standard rate of Income Tax. Sixpence on the standard rate would yield £167 million in a full year. For reasons which I gave in detail last year, and which I believe to apply equally strongly now, I do not believe this would assist the effective working of the economy.
§ The second would be to have gone for a further rise in the traditional forms of indirect taxation, or for a further broadening of the Purchase Tax base, which would almost certainly have meant a wide incursion into the food field. This would have considerably increased the cost of living impact of the Budget. This I have been determined, so far as was compatible with the other objectives, to keep down. This year in particular, after the heavy price increases associated with devaluation, greater stability in the value of money is highly desirable.
§ The third possibility is some further taxation of services. They still escape very lightly compared with goods. S.E.T. at its present rate represents a services tax of the order of 5 to 6 per cent.—less than half the lowest rate of Purchase Tax, less than one-sixth of the rate on the main range of durable consumer goods. I do not suggest that we should necessarily tax services as heavily as goods. Still less do I suggest that services have not an important even an essential rôle to play in the economy. 1029 But the disparity in tax rates between the two sectors is still very great. I therefore think it right to look for some substantial further contribution from the service industries. I have explored the possibilities of some new specific tax upon defined consumer services, but the base would almost inevitably have been so narrow as to produce a disproportionate burden, and the administrative expense would certainly have been unjustifiable.
§ I therefore decided it was better to use the method we have, which is the Selective Employment Tax. I propose that the rate of S.E.T. for adult male employees should be increased from 37s. 6d. to 48s. a week as from 7th July, and the other rates in proportion. This represents an increase of 28 per cent., a good deal less than last year, but nevertheless substantial. The increase, like the existing tax, will be repaid to those employers who are entitled to refund. The additional tax will be payable in Northern Ireland, but the revenue accruing in that country will, like the existing yield from the tax in Northern Ireland, be paid to the Northern Ireland Exchequer, which is responsible for its own refunds.
§ The effect of this increase upon the retail price index will be about one-third of that of raising an equivalent amount of revenue from Purchase Tax or the other excise duties. I must not anticipate Professor Reddaway, but all the evidence available to me suggests that S.E.T. has had a smaller effect on the cost of living and a bigger effect on productivity than was expected at the time of its introduction. In retail distribution, for instance, productivity increased by 8.8 per cent. between 1966 and 1968, against a trend expectation, based on the previous five years, of only 4.2 per cent. There may have been other factors, but S.E.T. undoubtedly made a contribution, and such a resource releasing effect can be most valuable in allowing us to run the economy at a somewhat higher level of output, compatibly with our balance of payments objectives, than would otherwise be possible.
§ I also propose to make some changes in the incidence of S.E.T. There are bound to be hard cases at the borderline. Many of these have already been resolved administratively and through 1030 appeals to industrial tribunals and the courts. There are certain other steps which we can take, either in the Finance Bill, or, where appropriate, by Order. First, the latest edition of the Standard Industrial Classificaton will be adopted as the basis for the tax. One of the features of the new edition is that milk processing is classified as a manufacturing activity. Second, scrap metal and waste paper processors and industrial photoprinters will effectively be removed from the tax-bearing sector. I also propose to remove the anomaly whereby some book publishers are treated less favourably than others, as well as a similar anomaly in relation to overseas cable companies, and to extend relief from the tax to all stages of film production. These concessions in S.E.T. will reduce the revenue by about £3 million in 1969–70, and £6 million in a full year. The total effect of the S.E.T. changes will be to increase the net yield of the tax by £123 million in 1969–70, and £130 million in a full year.