§ Order for Second Reading read.
§ Mr. R. J. Maxwell-Hyslop (Tiverton)
On a point of order. As copies of the Bill are not available, Mr. Speaker, would you be good enough to read it to the House before we debate it?
§ Mr. Speaker
We have already dealt with that point. I should be pleased to read the Bill to the hon. Gentleman, but I do not think that the House would be very much obliged.
§ Mr. Geoffrey Hirst (Shipley)
On a point of order, Mr. Speaker. I quite appreciate that you could hardly read the whole of the Bill, but the whole basis of this debate is to take place under very unsatisfactory conditions. May we be assured at the very outset hat the Chief Secretary will make absolutely clear the precise purpose and extent of the Clauses which he is subsequently to commit to a Committee of the whole House? We must have that absolutely clear at the outset of the debate.
§ Mr. Speaker
That point will arise after we have taken the Second Reading of the Bill, because a Motion will follow the Second Reading and the right hon. Gentleman in charge will be explaining exactly what is involved. I think that the hon. Gentleman need have no worry.
§ 4.30 p.m.
§ The Chief Secretary to the Treasury (Mr. John Diamond)
I beg to move, That the Bill be now read a Second time.
I was about to say, before the last intervention, that I recognise only too well the difficulty and inconvenience in which some hon. and right hon. Gentlemen are placed and recognise that they will be paying me undue courtesy if they allow me to proceed with a Bill of which not all of them have copies. In other words, I shall try to adjust my comments in such a way as will make the absence of the Bill less inconvenient than might otherwise have been the case. [Interruption.] I think one wants to take the line that there might be hon. Members who have been inconvenienced.
I have the clearest imagination of the point of view that I should be taking and expressing were I still sitting where the hon. Gentleman is sitting. I think, there- 290 fore, that I owe it to the House to endeavour, as far as I can within the limits of time, to make clear the points to which I want to draw attention, on the assumption that the Bill is not readily available.
For those who have not had an opportunity of seeing it, it is a longish Bill of nearly 200 pages, but size and controversiality do not necessarily go together. I do not think that it will be found to be too controversial a Bill. Many parts of it will, I think, be acceptable. For example, 30 pages are in preparation for consolidation of the Finance Acts, and I think that it would be everybody's desire that they should be examined, and if appropriate approved.
The intention is to introduce later this year two consolidation Bills, an income and corporation tax Bill containing the main provisions, and a taxes management Bill containing machinery provisions. The main Bill is designed to take effect for income tax for 1970–71, and for corporation tax for accounting periods ending on or after 6th April, 1970. The management Bill will come into force on the same day. I think, therefore, we would all welcome the fact that there are all told 44 pages of consolidation and simplification.
The Bill contains about 30 pages dealing with reliefs and reductions in taxes. They, too, I think, will be welcome. There are 29 pages dealing with anti-avoidance measures, and I think that they too, will be welcome. I think that the House will want to make sure that when it passes legislation, as it has done in past years after great consideration and time spent, and has decided where the burdens of taxation should fall, the burden is falling in that way, and that the will of the House is not being flouted. I therefore think it right that if it is represented to me that tax is being avoided, and the provisions passed by the House are not being effective I should bring the matter before the House, at all events for reconsideration.
That leaves 88 pages on new provisions and variations in the taxes. Of those, a number are pressed upon us by trade associations and others who quite properly wish to have adjustments made to help them and to remove difficulties. Whether those 88 pages will be welcome is, I0 think, largely a matter of taste.
291 There is not attached to the Bill an Explanatory Memorandum. There never is in a Finance Bill, but if there were such a Memorandum it would contain a reference to the staff position. As that information is never given in a Finance Bill, I think it right for me to say that the net staff requirement in the current year, taking into account all the provisions of the Bill, will be small and can be accommodated within the terms of the Prime Minister's statement of 26th February. When one looks further ahead, the proposals tend to reduce the staff requirement below what it otherwise would have been.
I turn, now, to some of the major provisions of the Bill. As the House is aware, there is no alteration in the rates of income tax and surtax, but some very helpful reliefs given there, especially at the lower end. There are some increases in indirect taxation, but the weight of taxation all told, including direct and indirect, results in a further small move away from inequality. I am sure that the House appreciates that there is a greater buoyancy of the revenue so far as direct taxes are concerned rather than indirect, and that even if one merely wishes to maintain some balance between direct and indirect taxation it is necessary from time to time to increase indirect taxes, and indirect taxes alone.
The Bill provides for an increase in corporation tax, an increase which I gather from subsequent comments was anticipated. I think that there is every justification for seeking that contribution from the business community, and I want to explain why I say that.
It is true that during the past year more dividends have been restrained. I have paid tribute to those who have co-operated 100 per cent. in achieving that, and that is still the present position, but the restraint on dividends does not mean that profits have not risen. Indeed, they have. In 1968, they were £500 million, or about 11 per cent., above the previous year. In 1969–70, it is expected that profits will be higher still.—[Interruption.] The hon. Gentleman is talking about real terms. I shall compare like with like. Against that increase of £500 million, the increase in corporation tax amounts this year to £75 million, and in a full year to £120 million.
292 Another comparison is the total amount of ordinary dividends paid. In 1968, these amounted to £1,670 million. Corporation tax falls on profits, and it means that the additional 2½ per cent., £75 million, or in a full year £120 million, will fall on these total profits which last year were £1,670 million. I do not think it can reasonably be said that profits cannot accommodate or digest the additional burden of corporation tax.
Nor can it be said that the additional burden of corporation tax cannot he borne because of the lack of liquidity of companies. I understand that over the last two years companies have added about £850 million to their financial assets. Thus, when one compares £75 million or £120 million with that, again it is right to say that companies are still able to bear the additional corporation tax.
It will have a useful and beneficial effect on consumption. It will have a useful, though small, beneficial effect on the balance of payments. It will not, I feel sure, have an ill effect on investment, something about which one has to be very careful, because our need to plough back profits and invest more is accepted on both sides. I do not think that it will have an ill effect there. The evidence one has—the most useful piece of evidence being the investment intentions collected by the C.B.I.—is that investment is rising, and, indeed, that those intentions are the best since 1960. I therefore do not think that there is undue cause for anxiety.
Nor will the increase have a damaging effect on costs or our export capacity, because the corporation tax increase will fall on profits. It will not affect costs, nor will it damage our exports, and in any event we still have the situation of about a 7 per cent. differential advantage as a result of devaluation.
§ Mr. Hirst
This is not the moment to argue the right hon. Gentleman's erroneous economic thinking, but he must appreciate that if increased profits are made by industry they pay increased tax at the same rate of corporation tax. It does not have to be increased. It is monstrous to suggest that it should be, because all tax is a charge on costs.
§ Mr. Diamond
As the hon. Gentleman rightly says, this is not a suitable medium 293 for exchanging views. I hope that he will pay me the courtesy of listening to what I say and I shall look forward to hearing him, even though his views do not entirely coincide with mine.
I should now turn to the provision about loan interest, as this is a major departure and is related to the Chancellor's economic action. In his Budget speech, my right hon. Friend drew attention to the large expansion of credit in the domestic economy, which had resulted in 1968 from the growth in money supply and the balance of payments deficit. He said that the expansion in domestic credit had been a great deal more than we could afford, given the need to switch resources into the balance of payments, and that we could not allow credit to be supplied on anything like the same scale in the coming year.
One element in the credit extended to the domestic economy is, of course, bank credit, and the Chancellor has made this contribution to restraint here by a reversal of the central Government's borrowing requirement, so great that the public sector—not just the central Government—will be reducing rather than increasing its total outstanding debt this year. This should make it possible for the Government substantially to reduce borrowing from the banking system.
As regards bank credit to the private sector, the reduction in the advances of the London clearing banks in April showed that they had made further welcome progress towards bringing their restricted lending within the 98 per cent. ceiling. Indeed, they were left with only about £50 million to go, but getting within the ceiling does not mean that credit restraint can be relaxed. The banks will, I hope. be assisted in the hard and ungrateful task of saying "No" to their customers—no one is better able to sympathise with them in that difficult task than one who, in his professional capacity, must do it day by day—by the provisions in the Bill withdrawing tax relief on interest paid by personal borrowers.
When we are asking the banks to make strenuous efforts to cut back on inessential overdrafts for personal consumption, it is paradoxical that a considerable part of the cost of those overdrafts should be met by the Exchequer—
§ Mr. Reginald Maudling (Barnet)
The right hon. Gentleman is putting forward 294 this change of interest payments as part of the credit squeeze. May we take it that, when the credit squeeze comes to an end, it will be reversed?
§ Mr. Diamond
The right hon. Gentleman cannot take that. He can always be relied on to interrupt a speech when he has heard the first part of the argument, on the assumption that it cannot be followed through. I hope that he will be a little more patient. He does this every time, without exception.
I hope, therefore, that I may continue to explain that what the Chancellor referred to was the need to discourage private consumption by discouraging both the borrower and the lender. Also—as I shall make clear, if the right hon. Member for Barnet (Mr. Maudling) will allow me, as I explained in my Budget speech—the restoration of the old arrangements for distinguishing between what is business expenditure and what is private expenditure and applying that to bank interest is a sensible and overdue arrangement.
I do not recollect which right hon. or hon. Gentleman said it—I think that it was the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd)—but he said, interestingly enough, that this was a matter which had been reviewed every year by Chancellors when the Opposition were in power. That was surprising to me. Of course, no Minister of the present Government would have any means of knowing whether that is true, and I could only take it from what the right hon. and learned Member said. I should be surprised if it were so, but, if it were, it would merely underline my point that this is due not only on grounds of sensible, fair tax principle, but also, very timely, in relation to our present circumstances. I hope, therefore, that I have fully answered the right hon. Gentleman's intervention.
§ Mr. Maudling
Since the right hon. Gentleman has said that this was reviewed every time by previous Chancellors, may I tell him, for his own information, that that is quite untrue?
§ Mr. Diamond
I am grateful for what the right hon. Gentleman says. I will check to see who said it. My recollection—it may be wrong—is that it was 295 the right hon. and learned Member for Wirral.
The proposal about the adjustment of the tax provisions concerning the deduction of interest on private borrowing will result in a further tax yield of about £25 million in a full year. I have found that, although this proposal has created a great deal of interest as to the detail, it has won surprisingly general acceptance on the principle. In fact, many people have said to me, "We could never understand why this was not done before." That is interesting, in view of what we have just been talking about.
The objection, of course, is to a change—one is familiar with objections to any change—but before one objects to this change one should examine the present situation. If it were ideal, there is a good argument for not changing it. If—as I shall argue—it is both unfair and irrational, one cannot rely on it as a satisfactory solution of our problems.
It is irrational because not all forms of interest at present attract tax relief. Annual interest does; short interest—that is, on a loan repayable in less than one year—does not. On the other hand, interest payable on an advance from a bank or from a stockbroker, for example, be it short or long, is allowable.
It is unfair because, as has been said, when a man buys on hire purchase in a way in which he cannot buy on credit because he has not the substance to be held credit-worthy, the interest involved is not allowed, and the interest, as anyone knows who has troubled to make the calculation, is very heavy. If he buys on credit, being a person of substance and credit worthy, and pays interest, the interest does attract relief.
So the situation is the familiar one that those who have means pay least because they get tax relief on their interest and those who do not have means pay most, particularly if they are buying on hire purchase. Thus, the present system has very little to recommend it and the new one will be both more logical and more just, in addition to serving our economic needs.
Four arguments were advanced against the new proposals. The first is that, as the interest receivable is taxed as part of the income of the lender, the interest 296 payable should be allowed from the taxable income of the borrower. But if one were to accept that basis, what one pays one's solicitor, for example, which is part of his taxable income, or what one pays one's accountant, which is part of his taxable income, should be deducted from one's own tax assessment. That is not so—
§ Mr. Diamond
I pay great respect to what the hon. Member says, but he is familiar with the provisions and practice of the taxing acts, and the tax code and he knows that there is a clearly drawn line between what is spending out of one's income and what is spending to earn one's income. These examples are just the ordinary ones of spending out of one's taxed income, and there are a host of others of the same category. There is no principle in the tax code that what the recipient pays tax on, the payer should get relief on.
The second argument which is put forward is that where a loan has been used to buy income-producing assets the interest on that loan should be treated as a deduction for tax purposes. Again, this would mean restoring the regressive nature of the existing relief. It would mean that anybody who had some capital and borrowed money could claim the interest for tax purposes, whereas anybody who did not have capital would not be able to claim the interest.
I am told—I think that it was the right hon. and learned Member for Wirral who said this—
§ Mr. Diamond
—that we would have enormous difficulty in drawing the line between what is a business expense and what is not, a line which must be drawn in deciding whether or not interest is allowable.
However, this is a familiar problem which exists among a host of expenses, in addition to interest matters which form a regular part of the function of the Inland Revenue. This is sorted out with the assistance of accountants and other members of the profession. There are well-established rules and cases which help to decide whether interest is wholly allowable or disallowable or 297 whether a portion of it is allowable or disallowable. I do not anticipate any undue trouble on that score. Thus, this argument does not alter the justification which I am putting forward for the new provisions.
The third argument which is put forward—I am certain that this was adduced by the right hon. and learned Member for Wirral—is that one could have saved all these problems if one had merely withdrawn the tax relief applying to surtax payers. I will deal with the practical difficulties of this, and they are many, but meantime suffice to say that the present proposal is estimated to raise £25 million in revenue, apart from its other beneficial effects. To restrict it to surtax only would mean raising additional revenue of £5 million and, therefore, the suggestion is not worth a candle. I note from the twinkle in the eye of the right hon. Member for Barnet that he immediately recognises the point of my argument, which reveals the wide spread that exists.
It will be seen that this arrangement will fit in well with the Chancellor's proposals. One exception that we are making to what I believe is a logical and just scheme is in connection with social policy. We are proposing the continuing encouragement, through tax reliefs, of savings as represented by the purchase and improvement of housing. This exception will apply to money used to buy, for example, a caravan or mobile home on which local rates are paid. Where there is a bridging loan, the interest on both that loan and the loan which replaces it will qualify for relief.
Moreover, where, in general terms, a loan is raised to pay off a qualifying loan, interest on the new loan will equally qualify. Provided that there is a reasonable connection in time and amount between incurring the debt and the relevant expenditure on the property, the appropriate relief will be allowed from the inception of the loan, even if it takes place shortly before the incurring of the expenditure.
§ Mr. Joel Barnett (Heywood and Royton)
Would my right hon. Friend tell us what he considers to be a reasonable period of time?
§ Mr. Diamond
I do not think that my hon. Friend would expect me to do that. 298 [HON. MEMBERS: "Why not?"] In practice, it is not difficult, by the ordinary process of question and answer, to find out whether a transaction was entered into "whole"—that is, whether the money was borrowed for a particular purpose or for another purpose and has been subsequently switched. That can be discovered without too much difficulty.
I am making a simple point. We do not wish to be inflexible about this and, as long as the intention is to enter into one transaction, there will be no difficulty.
§ Mr. Diamond
I will give way to the hon. Gentleman later.
I was saying that there would be no need for the two parts of the transaction to be absolutely contemporaneous. I also wish to make it clear that what matters for this purpose is not the asset on which such a loan might be secured but the purpose to which the money is devoted. For example, a loan secured on a life policy will qualify if the loan is spent on buying or improving a house. On the other hand, a loan secured on a house will not qualify if the money is used for ordinary consumer expenditure.
Perhaps I should add that the relief need not necessarily be limited to the original borrower. Where a successor in title, such as a widow, takes over both a house and the liability to pay the interest, that interest will qualify for relief. Similarly, once a borrower has parted with the property, no further relief will be allowed, although interest may have to be paid if the loan happens to continue. There will no doubt be other details concerning this matter, but we can go into them in Committee.
§ Sir G. Nabarro
Clause 19(4) contains these curious words:If interest is paid at a rate in excess of a reasonable commercial rate …In present conditions of extreme stringency of credit, through most orthodox channels interest rates are varying from between 9 per cent., being Bank Rate plus 1 per cent., for a loan from, say, a joint stock bank, to as high as 18 per cent. or even 20 per cent. for a medium-term loan for the same purposes from non-banking institutions. How are we to interpret a "commercial rate"?
§ Mr. Diamond
The hon. Gentleman is asking me to say what is reasonable. Nobody is better equipped than himself to answer that.
§ Sir Arthur Vere Harvey (Macclesfield)
The right hon. Gentleman will be aware that industry is today not necessarily going to the banks to raise money to meet the import deposit charges but is going to finance houses, where it is having to pay between 14 and 15 per cent. Would he consider that to be a commercial rate?
§ Mr. Diamond
There will be no difficulty. [HON. MEMBERS: "Answer."] We can go into the full details of this in Committee, at which stage I will answer the individual questions asked by hon. Members. It would not be helpful for me to attempt to qualify what I have said on this issue at this point.
§ Sir Charles Mott-Radclyffe (Windsor)
The right hon. Gentleman has an advantage over me in that he has a copy of the Bill and I do not. Can he justify an anomaly by which, in terms of agriculture, the purchase of a new farm or the improvement of an existing one by bank loan will qualify for tax relief whereas the maintenance of existing buildings will not? Does he think that that state of affairs will be in the best interests of the Government's agricultural policy?
§ Mr. Diamond
I am not sure that I share the hon. Gentleman's views, but I will look carefully into what he has said.
§ Sir C. Mott-Radclyffe
If the right hon. Gentleman will study the Bill he will 300 see the point I have in mind and the situation that arises.
§ Mr. Diamond
I said that I would look into the matter carefully. My first reaction is that I am not sure that I share the hon. Gentleman's views as to the present state of the law. However, I will be glad to look into the matter. The hon. Gentleman would not want a Finance Minister to give an authoritative reply "off the cuff". He would expect me to pay him the courtesy of considering very carefully what he said.
Time is short and I come to the provisions applying to close companies because, here again, I believe that what is provided in the Bill is widely welcomed, although I do not think that we have removed the misconceptions which we wish to remove.
The misconception to which I am particularly referring—I would call it a myth rather than a misconception—is the myth which persists in regard to shortfall assessments. A shortfall assessment is an assessment which arises when a business has not, in the view of the Revenue, declared a dividend which is appropriate in the circumstances of the business. The allegation is made, first, that the needs of the business are not considered when making a shortfall assessment and, secondly, that treatment varies as between one part of the country and another.
I do not think that there is any dispute between the two sides of the House about the need for shortfall assessments based on some criteria. This has always been the case and nobody would deny that it would be a major source of tax avoidance if close companies—one-man companies, family companies, call them what one likes—were allowed to carry on the activity of being money-boxes. What the law tries to do, therefore, is to envisage the situation which would have arisen had the shareholders and directors been at arm's length instead of being, as in the situation of a close company, one and the same person.
That is the test which is applied. The law makes absolutely clear that in considering whether there has been an adequate distribution the requirements of the business are to be taken into account and "requirements" means not only current requirements, but the requirement for maintenance and development of the 301 business. If, therefore, a business is able to satisfy an inspector of taxes that the whole of the profits it has made for a particular year are needed within those words, then, of course, it need not, if it does not want to do so, issue a dividend of any kind and no shortfall assessment will ensue.
If, on the other hand, it does not need a penny of the profit which it has made for business purposes, but could distribute the whole lot, 100 per cent., it does not need to declare 100 per cent. If it declares 60 per cent. that satisfies the standard laid down in the Act. The situation is that the full needs of the business, both current and development needs, are fully taken into account. The arrangements, as far as I am aware, are sensible and working well. Certainly, the arrangements are much more lenient than they were in the pre-corporation tax era.—[An HON. MEMBER: "Rubbish."] It does not help the case for an hon. Member to say, "Rubbish". I am referring to the Act which did not provide for a 60 per cent. standard. I am referring to a situation in which the Revenue had no latitude whatever.
If there was a case where 20 per cent. was paid and the Revenue was able to satisfy the appellant tribunal that 40 per cent. should have been paid, 100 per cent. was deemed to be distributed; the Revenue has no latitude whatever. It was the dividend declared or 100 per cent. That is what I mean when I say that it was less lenient under the arrangements of right hon. Gentlemen opposite. The arrangements now are more relevant to business needs and so far as I am aware they work perfectly fairly, but we have not yet been able to extinguish this myth. Unfortunately, the right hon. Member for Barnet gave it voice as recently as 21st April. He said then:We welcome the close company concessions, but we are not sure that they go far enough. They leave the patchy administration of the short-fall computations which is causing considerable difficulty to many small close companies in different parts of the country.HANSARD records that I intervened with rather more brevity than courtesy to say "Quite wrong" and the right hon. Gentleman responded:I invite the right hon. Gentleman to ask the people who know."—[OFFICIAL REPORT, 21st April, 1969; Vol. 782, c. 144.]302 That I want to record, because I have been asking about this for two years. It started by the Father of the House, late in 1967, asking a Question relating to this topic. He asked whether I would look into the matter and receive a deputation. I said that I would do so. This was followed by the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) asking, in November, 1967, whether I would be willing to consider this matter which was causing difficulty in regard to export houses at that time. I said that I would go further and would be glad to receive a deputation. These deputations have not materialised.
The hon. Member made it clear that there was a misunderstanding and this was not the point which was troubling export houses. That is the point I am trying to make. I am not running away from it; I am trying to make it. The House has heard me many times explain that there is no reason for a company to declare a dividend of any kind if it needs the whole of its profits for business purposes.
I go further. The Financial Secretary has helped me in this. He and I both have the good fortune to attend many trade association dinners and accountants' gatherings. Time and again one or other of us has been told, "These shortfall assessments are difficult and I have heard of cases where there is a problem". In each case my hon. Friend's reply and mine has been precisely the same, "If you have a case, let me have details of it and I will look into it". My hon. Friend the Financial Secretary is gracing our benches at the appropriate moment. Neither he nor I has ever received such a case.
I am referring to two years' experience. The right hon. Member for Barnet has alleged a number of cases of many small close companies in different parts of the country. If he will be good enough to give me those cases I will look into them. If he does not produce the cases—or it transpires that there has been an error, as on a previous occasion on the Opposition Front Bench—I hope that he will support me in explaining that we need small, young growing businesses to go ahead with their business needs and business development.
§ Mr. Maudling
I agree that, in general, this certainly is so. I know that many 303 companies are not forced to distribute, but I have met at chambers of commerce and in other places people who do net understand this. I met a case the other day of someone who did not make an appeal, because his accountant advised him that it was not worth while appealing to the Revenue.
§ Mr. Diamond
I hope that the House will bear with me on this. The experience of the right hon. Gentleman tallies precisely with mine. We go to chambers of commerce and other gatherings and someone starts talking about these cases. I have always followed it up by saying, "Will you please tell this accountant you know about to get in touch with me and to put a case forward?", but none has arrived. The right hon. Gentleman is saying that at first-hand he has knowledge of cases which are working well. The only complaints he has are at second-or third-hand. He does not know them at first-hand. I am not seeking an argument with him, but I am seeking his co-operation in explaining to the business community that if there is a misunderstanding we both are anxious to have it removed.
§ Mr. Barnett
Before my right hon. Friend leaves the question of close companies, may I interrupt him? As he knows, I entirely agree with all he has said and I am grateful for the relief he has given on remuneration, for which I have been pressing from the beginning. It would be useful to know whether he would be prepared to accept an Amendment, because now apparently this will be done on a time apportionment basis. There are many close companies where the directors draw a weekly or monthly salary throughout the year, then allocate a bonus. If this is allocated after 15th April, it will be assessed on a proportionate basis instead of the whole bonus being allowable as a deduction.
§ Mr. Diamond
My hon. Friend knows that I will consider carefully and sympathetically any Amendment he wishes to put forward. Sometimes, unfortunately, one has to reject such an Amendment, but 304 that is very rare. I shall be glad to consider this problem if he will drop me a note or put down an Amendment—preferably drop me a note in advance.
Finally, I turn to selective employment tax, because I find one or two lingering doubts left in one or two quarters. I would like to remove them, if I can. I shall not delay the House by repeating what I said in the Budget debate. Everybody is familiar with the main salient points. Everybody knows that the tax produces more than £600 million a year. The alternatives would be to put standard rate income tax up to 10s. in the £ or to increase purchase tax by more than 50 per cent. through all the categories. S.E.T. is cheaper to collect than other taxes. Its impact on the cost of living is less than that of other taxes, and evidence is accumulating that it encourages efficiency. The House is very familiar with all that.
I want to move to the next stage. When these matters were last discussed I was asked why it is not applied to manufacturers as well, if it is a successful tax. It was gratifying to think that some hon. Members opposite were prepared to consider that it was such a good tax. It is not a very logical argument, if one is basing one's case on the selectivity of a tax, to say, "If it is such a good selective tax, why not make it unselective?" The reason for not making it universal, as has always been said from the day the tax was introduced, when the Opposition were considering an overall employment tax or payroll tax—I do not know whether they still are—is that such a tax would immediately put up prices all round. An employment or payroll tax would have exactly the same effect as an increase in wages. If it were overall and universal, it would immediately have the effect that prices would go up proportionately.
If what is being asked is whether it would be sensible to have a selective employment tax on manufacturing industry alone, a tax that is selective in that way as opposed to services, and if we are asked why we differentiate between the two, the answer is that the two industries do not function in the same way as regards production and arriving at prices. Putting this in its simplest terms, I remind the House that a manufacturing industry fixes its prices by reference to its prime costs—labour and materials, adding a 305 percentage for overheads. [Interruption.] The manufacturer also takes account of whether he can sell his product, as the hon. Gentleman says. Everybody must have a price list. The manufacturer then considers whether it would pay him to reduce the price and sell more; whether he would recover his overheads better in that way.
The point I am making is that if there is an increase in prime costs the manufacturer immediately adjusts his selling price. If there is an increase in overheads, such as rates, which are a form of local tax as opposed to a national tax, he does not increase his price straight away. He may consider whether he would do better to reduce his price, maintain it, or increase it to cover his overheads as a whole, because the more he sells the more profit he will make, since the overheads are fixed.
That is the very simple situation with regard to arriving at the price. In a service industry such as distribution the prime cost is only the article that is bought in the first place. The whole of the labour cost of an employer in a service industry is an overhead. It is not like a manufacturing industry, where the majority of the labour is direct labour. Therefore, the price of the article is fixed by reference to the price paid plus the established mark-up, and if there is a variation in the elements which go to make up his overhead expenses he cannot adjust his mark-up automatically, nor does he try to do so. Both economic theory and accountancy experience march hand in hand here with the experience of the tax. Instead of the distributor's price being adjusted by reference to an increase in an element in his overheads, the increase is not passed on in that way.
§ Mr. A. P. Costain (Folkestone and Hythe)
Can the right hon. Gentleman explain how he relates what he has just said to the building industry? Does he recall that the then Minister of Public Building and Works said immediately after the Budget that S.E.T. would put £30 on the cost of a house? That does not coincide with what the right hon. Gentleman has just said.
§ Mr. Diamond
I was making the case in its simplest form. One must sometimes do that so that it will be readily under- 306 stood. But I am grateful to the hon. Gentleman. He has been good enough to listen to me and follow the argument, and he distinguishes, as I do, between construction and distribution.
In construction, the hon. Gentleman has direct as well as indirect labour, and, therefore, the effect of the tax on the efficiency of construction is not so marked. But he will know from his experience in the industry that the effect is marked, and that efficiency has grown much more rapidly during the period of selective employment tax than it did before. This does not prove anything conclusively, but it is a happy thought that the imposition of selective employment tax has had that beneficial effect.
The cost to the Government of collecting S.E.T. is one-third that of collecting other taxes. That is a remarkable difference, especially since at first blush one would not expect this to be the case, because it is curious to collect a tax from a large number of people from whom one does not want it and then repay it after a period. When I made that point previously I was challenged on the cost borne by the taxpayer. I thought that that was a reasonable question, and so I considered what that cost was likely to be.
One has some experience in this. For example, one thinks of the substantial cost borne by the taxpayer as a result of the pay-as-you-earn provisions. Every employer has to alter his wages records and so on especially to enable this to be done. Many hon. Members will recall the tremendous fuss and the examinations by the House and Committees of the House when pay-as-you-earn was introduced.
I also invite the House to consider the cost of purchase tax collection, where the wholesaler must keep special records purely for the purpose. I invite the House to consider the cost in regard to income tax, where agreement on the tax payable by a company or an individual of substantial income takes hours of his time and often hours of his accountant's time. [Interruption.] I agree that investment grants also involve a considerable time. I also think of the cost of estate duty and the time of solicitors, counsel and accountants involved.
When one thinks of those things one realises what a large cost falls on a 307 number of individuals when paying purchase tax, pay-as-you-earn income tax, Schedule D, estate duty and so on. One then compares that with the likely cost falling on the individual in the collection of S.E.T. All that a manufacturer has to do is to add up at the end of the quarter the amount paid, make one application, and receive it back in about 10 days. If the payer is in the tax-bearing sector, he has to do precisely nothing. There is no other tax where the cost of paying it is nil. No interest is involved as far as the tax bearing sector is concerned.
All the payer has to do is to buy a stamp, which he would in any event buy. It is differently marked and costs a different sum of money. There is no single additional administrative cost or overhead. It must, therefore, be the case, although one cannot assert it too strongly without an opportunity of examining individuals in the private sector, which is denied to me, that the cost of paying the tax is much less for the S.E.T. than for other taxes. I repeat, therefore, that the S.E.T. has these additional advantages to its benefit.
§ Mr. Norman Haseldine (Bradford, West)
Although I know that my right hon. Friend does not accept the argument, does not he concede that, if a payroll tax were inaugurated, one would still have an easy method of collection?
§ Mr. Diamond
A payroll tax would not be anything like as easy or as inexpensive to collect as an employment tax, which is a fixed sum for each employee. A payroll tax has to be calculated by reference to each employee's wages, which may vary from week to week. There are also problems of collection. It would merely result in increased costs and prices.
§ Sir G. Nabarro
Surely that alleged cheapness of the cost of collection of the S.E.T. is only because the whole of industry is giving a vast tax-free loan to the Government for many months out of every calendar year.
§ Mr. Diamond
It is giving an interest-free loan. The hon. Member has been good enough to listen to my case and it is interesting to note that he is not disputing that administrative cost is not there. He is complaining about the interest-free loan. I think that he is right. 308 I think that most people have that in mind. The essence of and reason for the complaint is the interest-free loan. Of course, it is true that there is an interest-free loan. But this is why the tax is levied at the rate it is. If the Government are in receipt of a benefit arising out of a particular tax at a certain level, then, if they did not have that benefit, the tax would be at a different level. It is as simple as that. It is taken into account in the rates.
§ Mr. Diamond
It may be a new doctrine. I am sorry that the hon. Gentleman has not given it thought. It is a simple doctrine which applies to a number of taxes and I am glad that I have been able to explain to him something new.
§ Mr. Richard Wainwright (Colne Valley)
In his Budget Statement the Chancellor announced the exemption from the S.E.T. of certain important waste processing trades, such as metal and paper. In which part of the Bill is this provided for?
§ Mr. Diamond
Offhand, I do not think that I can help the hon. Gentleman on that. I do not think that it is in the Bill at all. I think that it is done by order by my right hon. Friend the President of the Board of Trade, but I will make sure and let the hon. Gentleman know.
§ Mr. John M. Temple (City of Chester)
What progress has the right hon. Gentleman made in talks with the building societies about their support of the contractual savings scheme?
§ Mr. Diamond
I have nothing to report on that at this moment, but I take note of what the hon. Gentleman says. I recognise his interest.
I hope that I have been able to say what I have to say, in the context of what may be, in certain cases, an absent Bill, in a way which has enabled right hon. and hon. Members to understand the main issues.
§ 5.25 p.m.
§ Mr. Patrick Jenkin (Wanstead and Woodford)
While we have many complaints about the Chief Secretary to the Treasury, we must admire the dogged persistence with which he returns to the 309 defence of his beloved selective employment tax. He said that a number of people have lingering doubts about it even after the speech he made in the Budget debate. That was the understatement of the year, considering that the increase in the tax produced a catastrophic fall in the Government's majority on the relevant Budget Resolution, in the prompt sacking of the Chief Whip and in his replacement by the right hon. Member for Bermondsey (Mr. Mellish). In view of all that, all I can say to the Chief Secretary is, "Some doubt! We have heard from the hon. Member for Bradford, West (Mr. Haseldine) an indication that many hon. Members, and not only on this side of the House, remain totally unconvinced of the case for the S.E.T.
The right hon. Gentleman dealt with the increase in corporation tax equally unconvincingly. If one increases the rate of corporation tax, either the amount is going to be met out of retained profits and so reduce the amount available for ploughback, or it is going to be passed on in higher prices to the consumer. These are the two alternatives and it is the height of naivety for the right hon. Gentleman to argue that this is not going to have any effect on the propensity of industry to invest.
The survey to which the right hon. Gentleman drew attention was taken well before the Budget and in some cases before the effects of the November measures can possibly have had their result. Every single forecast of investment that the Government have made has turned out to be over-optimistic. We should be delighted if on this occasion the opposite were to happen and we really did get an upsurge of investment. But if it happens it will be the first year since the Government took office in which we shall have had an increase in the ratio of investment to gross national product. It will be welcome if it happens but I shall wait until I see it.
The Second Reading of a Finance Bill tends sometimes to be a bit of a nonevent. It comes halfway between the Budget debate and the Committee stage. It is too soon to review the Chancellor's Budget judgment, and we shall have an opportunity of doing so in the regulator debates in Committee, when we shall have had a few more economic indicators such 310 as the unemployment and trade figures. Equally, it is inappropriate that we should look too closely at the details of all the Clauses and Schedules. These are better left to the Committee stage, particularly as on this occasion many hon. Members have not got the Bill in their hands. So, instead, I want to comment on certain general aspects of the tax system and fiscal procedures which do not always get the attention they deserve, but before doing so I wish to deal with two special matters.
First, the right hon. Gentleman did not mention the astonishing statement that we had yesterday from the Secretary of State for Social Services. It was reported on the tape this morning that the Secretary of State, in dealing with the row which has blown up between himself and his supporters, has confessed to maladroit timing. Hon. Members opposite have been fiercely critical of him not because of any national interest which may be involved but because they think that his statement has damaged even further their prospects in local elections this week. That is their problem, however, and I shall not intervene in the love-hate relationship between the Secretary of State and hon. Members opposite. However, I am bound to ask one question which is of wider interest.
I hope the Minister of State will be able to answer this when he winds up the debate. Why was this statement about the health charges not included in the Chancellor's Budget Statement? It was reported credibly by the political correspondent of The Times that this decision was taken months ago. The political correspondent of The Times said this morning:I understand that the decision in principle to raise the charges was taken six months ago, and Mr. Crossman himself had not appreciated until yesterday morning that it would emerge from the administrative machine after Question time.Now, I understand, the situation has been further complicated because the right hon. Gentleman is reported as saying on "The World at One" that he had hoped that the announcement about increased charges for dentures and spectacles would be made in the Budget speech. Why on earth was it not made then? Who vetoed the statement?
Was it the Chancellor or was it the Prime Minister? Why was it that we 311 had the announcement about pensions with no figures about contributions, yet here is the Secretary of State saying that he had hoped that his health statement would have been included in the Budget Statement? Was it perhaps because only the day before the Budget the right hon. Gentleman had said in answer to his hon. Friend the Member for Sheffield, Heeley (Mr. Hooley):If my hon. Friend is asking me whether I expect further charges to be imposed on the Health Service the answer is 'No'."—[OFFICIAL REPORT, 14th April, 1969; Vol. 781, c. 771.]This episode has been represented in the Press so far as one of the right hon. Gentleman's outstanding political gaffes. If the information in The Times is correct, and the decision was taken months ago, if the report on "The World at One" is right, that the hon. Gentleman had said that he had hoped that this would be in the Budget Statement, it seems that he has a great deal more to answer for than a political gaffe. In his reply the Minister of State must come clean and tell the House the whole sordid story behind this disgraceful episode. Have Ministers merely been guilty of muddle or is their behaviour a good deal more devious than that?
§ Sir Cyril Osborne (Louth)
Why did the Prime Minister not tell that to his captive audience on Sunday?
§ Mr. Jenkin
It has been suggested that the Prime Minister did not know anything about this, and that would not surprise me.
There is one aspect of the Budget judgment, to which the Chief Secretary referred, upon which we want some further elucidation. So far this has not had the attention it deserves. I refer to the Chancellor's intention that the Government should this year become a net repayer of debt on a massive scale—I think his figure was £807 million. He has said nothing on how this will be effected. The Chief Secretary said in a throw-away phrase that this would be a repayment of debt to the banking sector. The Chancellor assumed that the repayment would inevitably be beneficial to the economy.
Surely this depends on the method. Many people have assumed that this would take the form of a purchase, or 312 redemption, of gilt-edged held by the non-banking public. I hope that the Minister of State will be able to enlarge on what the Chief Secretary has said; namely, that the Chancellor is proposing to redeem Treasury bills as they fall due and then not reissue them. If this is the case, what will be the effect on the liquidity of the banking system? Treasury bills, as I have always understood it, have been part of the liquidity ratio which the banks are required to maintain as part of their compliance with Government policy.
If there is to be a massive reduction in the amount of Treasury bills outstanding, is it not the case that that will of itself represent a further harsh twist in the credit squeeze? We are talking about very large figures; £807 million is more than twice as much as the amount by which the Chancellor is increasing taxation in a full year in this Budget. We must have some indication of what the Chancellor's intentions are over this massive repayment.
I turn now to more general matters, with a brief look first at some of our fiscal procedures. The right hon. Member for Devon, North (Mr. Thorpe) in his speech in the Budget debate called for a wide-ranging Select Committee. My right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) thought that perhaps a more narrow-ranging Select Committee would be useful. Both were looking for ways of supplementing our existing machinery for promoting tax reforms. I want to look at a slightly different aspect.
My experience has been confined to debating the Finance Bill from this side of the House, and, last year, in Committee. Even in that short time I have become convinced that the way in which we legislate our changes in our tax laws does this House and the system we operate little credit. Like many hon. Members, perhaps more than some, I have regular dealings with those in commerce and industry and in the professions who have to operate the laws which we pass. I find, almost universally, a deepening despair at the mounting complexity of our system; at the appalling complications of the mass of anti-avoidance legislation which comes on to the Statute Book every year; at the sheer unintelligibility of many of the sections 313 and schedules which we pass into law. I find a rising concern for the amount of discretionery legislation which is being passed—inspectors being given wide powers, which they may or may not use as they choose; Ministers empowered to impose taxation or to exempt from taxation, simply by departmental fiat.
I find a growing resentment at the increasing tendency of Governments to legislate retrospectively, not merely to cancel out the skilful avoidance devices of the professional tax avoiders—it has always seemed that retrospective legislation may be defensible in those circumstances—
§ Mr. Jenkin
Perhaps we will pursue this later. I know that my hon. Friend has long campaigned on this issue. When retrospective legislation is used to upset well-settled, long-sanctioned arrangements, sensibly entered into in good faith and relied upon to give effect to legitimate transactions, then it is totally unacceptable. We have had too much of it.
I find a growing anger at the sheer "hit and miss" quality of some of the Clauses which we enact, Clauses aimed at preventing unacceptable tax avoidance by the wealthy which end up penalising entirely innocent taxpayers with very modest incomes and means. Clauses aimed at taxing transactions of one sort are used to catch transactions of a wholly different sort never contemplated when the Bill was going through Parliament.
Most serious of all, I find that the high standard of tax morality which for so long has held sway in Britain is being threatened by erosion, which is the inevitable result of a system which increasingly displays the characteristics I have described. When people feel that the dice are loaded against them, the temptation to retaliate in kind is very strong.
I do not believe that I am overstating the problem when I say that if we go on as we are there is a real danger that the system will break down with catastrophic results for every citizen. The fault lies partly in the penally high rates which we persist in imposing, resulting in the fact that the rewards for successful avoidance are correspondingly high. Many people engage their energies and ingenuity, and employ top professional 314 advice, to try to steer a way through the labyrinth—a totally unproductive labour.
In part it is the fault of an over-sophisticated pursuit of absolute equity. A tax system, it cannot be said too often, can be either simple or fair; it cannot be both. We try to pursue equity to an unacceptable degree. But to a major extent the blame lies in the inappropriate procedures by which we choose to put complicated technical fiscal legislation on the Statute Book.
§ The Financial Secretary to the Treasury (Mr. Harold Lever)
§ Mr. Jenkin
I am glad to have the support of the Financial Secretary.
Many features of this have been criticised. In his forthcoming book, Sam Brittan tilts hard at what he calls the cult of excessive Budget secrecy. Selective employment tax is a classic example of that. It burst upon an unsuspecting public on Budget day, passed into law two or three months later and now, most people agree, is so riddled with anomalies and nonsenses that the only remedy is to sweep it away and start again. There is the lack of prior consultation, whether of industry or of the professions, which allows the Revenue to insert Clauses into Finance Bills which can have effects wholly different from those which they may genuinely have contemplated.
There is the limiting effect of Money Resolutions. We shall be debating some later. They cut down even the Amendments which may be tabled to relieve the taxpayer of some of the effects of a Bill so that whole issues are never debated. We have even had the operation of the guillotine on the Selective Employment Payments Bill and the Finance Bill last year.
§ Mr. J. Bruce-Gardyne (South Angus)
My hon. Friend referred to lack of prior consultation in the context of S.E.T. But would he not agree that our experience, for instance, over R.E.P., which the Government always blazoned abroad as a case in which there was prior consultation, proves the complete inadequacy of this, unless the prior consultation is a reality? They had plenty of advice and took no notice of it.
§ Mr. Jenkin
If my hon. Friend will wait, I have my own solution to some of these problems.
315 But basically there is the sheer inadequacy of the machinery of debate. Let us not delude ourselves: when we think that we are doing rather well on some complicated Finance Bill Clause, plenty of people outside are completely convinced that we have missed many of the main points—and they are probably right. In this context, it can be seen that proposals to take the Bill upstairs, downstairs or in my lady's chamber are a futile and irrelevant tinkering with the system. We must have less secrecy and more consultation; but above all we must have an opportunity for hon. Members to hear at first hand evidence from the real protagonists in much of this legislation—the Revenue on the one side and the professions on the other—as to the issues and the merits of the legislation which we are considering.
Of course, I would exclude budgetary matters from this. The economic management of the country, the rates of taxation, the scope of indirect taxes are clearly matters which must be left to the Chancellor on Budget day. But the management of the tax system, the introduction of new taxes, the changes in the structure of our tax system, complicated anti-avoidance legislation and detailed method of computation—there is no reason why those should not be discussed openly and publicly before they reach the House.
Speaking entirely for myself, I should like a wholly different procedure. I should like these matters to be referred perhaps to a small Select Committee, which would have draft legislation presented to it. It would hear evidence from the Revenue and from representatives of taxpayers, from the professions, from industry and so on, and it would present a Report to the House which would then be available as a Preamble to the Bill. I stress that this must involve draft legislation, because it is only when legislation is in draft that one can appreciate the real complications, anomalies and problems which are likely to arise.
I cannot believe, for instance, that if this procedure had been followed capital gains tax would have reached the Statute Book in its present hideously complicated form. If a Select Committee had been able to comment on that before the 316 Government were politically committed to the details, we might have had a much simpler tax.
I have dwelt on this procedural aspect at some length because, while I am not so presumptuous as to believe that it is very original or is a cure-all for our fiscal ills, it is one avenue worthy of exploration through which we might escape from a situation which seems increasingly to embroil us.
This Bill, with its 200 pages, 53 Clauses and 21 Schedules, contains many of the evils of which I have complained. There is the fearful complexity of a whole battery of new anti-avoidance Clauses, about artificial transactions in land, disallowance of trading losses and so on. There is the wiping out of well-settled, long-sanctioned reliefs, so as to defeat existing arrangements. The disallowance of interest on loans falls into this category—loans which have been incurred long before Budget day—and this means that people now face serious problems with their personal affairs.
I should like to mention two difficulties which the Chief Secretary did not mention. Does he realise that by this disallowance of loan interest the Government are kicking away one of the remaining ladders of advancement for the young executive and technologist who is anxious to acquire a share in the enterprise for which he works? In 1967 the Government killed the stock options, and now they are killing loans to buy shares in the firm—arrangements in many cases sanctioned by the Inland Revenue. The Government seem to be driven by a sort of madness to destroy all incentive for rising young managers and technologists, who see no hope of building up savings out of their net income and suffer penal rates of direct taxation.
In the Budget debate, the Chief Secretary claimed as a merit for the Government's policy that it was shifting the burden from owners to earners. This provision and others are calculated to ensure that many earners will never be able to become owners, and that is not a society in which I want to live.
A second point is that this is wiping out a form of tax encouragement to saving through life insurance. The right hon. Gentleman made that clear. Only 317 last year we debated for hours in Committee a Clause, which the Financial Secretary introduced, regulating minutely the provisions for life insurance, including the question of tax relief on interest on loans borrowed on the strength of policies, and many thousands of people, I am told, have adjusted their affairs in the light of last year's Act. Now they find that Clause 18 has wholly nullified their arrangements. I beg Ministers to realise the sense of fury and frustration which this sort of legislation causes.
Again, there is the Clause intended to deal with the pop stars' much publicised avoidance device. It seems likely, so widely is it drawn, to hit many perfectly genuine business and professional transactions of men who seek to sell part of their business as a going concern. This has rightly been described as "shotgun legislation"—the indiscriminate peppering of a wide area in the hope of hitting the target aimed for, but without too much concern for its effects on innocent bystanders.
It is this sort of legislation which drives accountants to drink—I hope that my hon. Friend the Member for Scarborough and Whitby (Mr. Michael Shaw) will forgive me. We shall wish to probe these matters in Committee, but they seem to epitomise exactly what is wrong with the sort of fiscal legislation which we pass. It should become a major preoccupation of Treasury Ministers to simplify and render intelligible our tax system so that it can be understood so far as possible by ordinary people. But there is no doubt that the high marginal rates of direct taxation have been a major factor in this, and here the Government's record is disastrous.
Ministers are often fond of pointing out—my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) has made this point in a number of articles—that the overall weight of taxation in this country is not seriously out of line with that of our major competitors, but they readily admit that at the higher levels of income direct taxes bear a good deal more heavily on taxpayers here than those abroad. But what the Government will not recognise is the comparatively low level of income at which this discrepancy begins to appear.
318 For instance, according to a Parliamentary Answer at the end of last year, a married man with two children under 11 earning £2,500 a year—a modest professional or managerial salary—pays 8 per cent. of his income in tax in the United States, 12.6 per cent. in Germany and 22.1 per cent. in the United Kingdom. The figure which I was given for France was just over 5 per cent., which I did not believe, and I have not quoted it, although it may be true.
The Government have made the situation very much worse by a long series of anti-avoidance measures which have had the effect of putting up tax on ordinary incomes—this is something the international comparisons tend to leave out of account—the disallowance of tax relief on covenants, the imposition of fiscal penalties on stock options, the aggregation of minors' income, the 10 per cent. surcharge in surtax which took effect last year and now the disallowance of relief for loan interest. All these weight the system heavily against the United Kingdom taxpayer to an extent which the statistics do not recognise.
Although the standard rate was raised by 6d. in 1965—and that has been the only direct increase in income tax—between 1964 and 1968 the proportion of total personal incomes taken in direct taxation has risen from 10 per cent. to almost 13 per cent., a rise of nearly one-third, and the proportional increase is much higher at the higher levels. This is the effect of inflation on a tax system which is highly progressive. Inflation means that unless rates are reduced or allowances increased year by year the weight of tax presses more and more heavily even though the rates are not put up.
I can illustrate this best by looking at the total tax increases since 1964. The sum of all the increases in rates and new taxes which Labour Budgets have introduced since November, 1964, amounts to £2,620 million; that is to say, that is our estimate of the full-year yield of permanent tax changes introduced by Socialist Chancellors. If the yield of current taxation is compared with the estimated yield of what the 1964 rates would have pro-ducted if applied to the current economy, the result is an increase of more than £3,000 million, and the difference between that figure of £3,020 million and £2,620 319 million, the additional £400 million, represents the impact of inflation on a progressive system, and that is £400 million more than has been imposed in every Budget but one since 1964.
Socialist Ministers pretend that people have been brain-washed into an illusion that they are heavily taxed. There is no illusion. In 1964 the total proportion of rates, taxes and contributions represented 33.8 per cent. of the g.d.p. In 1968 that had risen to 42.3 per cent.; in 1969 it will be higher still; and we still await the announcement of what the contributions will have to be to pay for the pensions which the Chancellor invitingly dangled before the people in his Budget statement. This must be one of the most disreputable episodes in budgetary hissory. I assure the Chief Secretary, and any who may share his view, that the increase in the weight of taxation from 33.8 per cent. to 42.3 per cent. is no illusion. It represents a burden which Socialist Ministers, Socialist policies and Socialist failures have laid upon the shoulders of the British people.
The evidence now is that some Ministers are beginning to recognise that they have gone too far, and the Chancellor in his Budget Statement recognised that a reduction in direct taxation of high incomes is a high priority. We welcome this sign of enlightenment. But compare it with what the Chief Secretary has been saying. On the last day of the Budget debate he devoted a large part of his speech to justifying high and rising levels of taxation. He said it was all part of the redistributive process and went on to say that the Budget… will have the effect of reducing the inequality of incomes by a further 2½ per cent."—[OFFICIAL REPORT, 21st April, 1969; Vol. 782, c. 58.]This is yet another manifestation of the Government's schizophrenia. The Chancellor's high income earners are given a promise of reliefs to come, while the Chief Secretary struggles to retain the support of the rebellious benches behind him by boasting about how the Government have made high income earners worse off. The Government cannot have it both ways. The truth is that under Socialism virtually every taxpayer pays more tax and the prospects of relief get more and more remote.
320 Under the Tories many taxes were reduced—income tax down, purchase tax down, beer duty down. When increases were made they have been overwhelmed by vastly bigger increases made since 1964.
For instance, in 13 years the car licence went up by £2 10s.; in 4½ years it has gone up by £10. In 13 years petrol duty went up by 10½d.; in 4½ years it has gone up by double that amount, ls. 9d. The Tories got rid of bad taxes such as entertainment duty and Schedule A. The Socialists have introduced bad taxes, such as selective employment tax and betterment levy. The Tories took millions of people out of tax altogether, but even after this Bill becomes law there will be 2 million extra taxpayers over and above those who were within the net in 1964. Socialism and high taxation go together; they have become synonymous in the public mind; and the Labour Party is paying the penalty in every local election and in every by-election which it has to face. This Bill gives yet one more vicious twist to the screw, and that is why we shall divide the House against it tonight.
§ 5.55 p.m.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) at the beginning of his speech asked why the announcement of the increased health charges was not made in the Budget speech, and attributed this omission to duplicity on the part of my right hon. Friend the Chancellor of the Exchequer. I find this allegation hard to accept. It would be difficult to find a more politically damaging time than yesterday for announcing the increased charges and therefore no duplicity arises.
The hon. Gentleman has become a recent convert to procedural reform, and I welcome him into the ranks of those who are pressing for the appointment of a Select Committee to examine the aspects of taxation which are amenable to rational discussion and debate without the need for observing secrecy. Two elements in the Finance Bill which might have benefited from examination by a Select Committee are the principle of disallowing loan interest and the principle of selective employment tax, where anomalies exist and where a Select Committee might have reduced the unfairness of operation and the distortion of decision-making by those 321 affected by the tax, which is harmful to the economic interests of the country. A Select Committee might look at the minutiae and at the principles, and this might be of value in getting the financial legislation that we need.
One problem on the disallowing of loan interest is the discrepancy between capital gains tax and income tax and surtax. At present high income tax payers and surtax payers obtain interest at favourable rates, and this enables them to make capital gains which are taxed at a lower rate. I want to see the rates of capital gains tax and income tax and surtax approach each other, with income tax and surtax coming down and capital gains tax going up. This would have to be a gradual process over the years. In these early years of capital gains tax progress in this direction is likely to be slow, and needs to be, but such a movement over the years is of importance in creating the kind of legislation which is needed because of the different way in which capital gains tax and income tax are treated. It is the increase in wealth which is important, and this kind of sophistication will be required in the corning years.
§ Mr. Michael Shaw (Scarborough and Whitby)
Why does the hon. Member consider only the possibility of increasing capital gains tax? Why does he not equally consider the possibility of reducing rates of income tax and surtax?
§ Mr. Sheldon
It is a pity that the hon. Member did not hear what I said. That is precisely what I was saying, that there should be a reduction of income tax and surtax and an increase in capital gains tax so that the gap between them would narrow by the reduction of the one and the increasing of the other. I look forward to seeing such a process come about, although owing to the complexities of the issues which are involved it will need to be gradual.
The present Finance Bill comes before us in the long-term situation which has existed in this country ever since the early 1960's. My assessment of the situation is that the economic problems started in the early sixties and have formed part of a similar pattern from 1962 onwards. The situation has been affected by the loss of advantages which we once enjoyed from the empire, and the need to adjust to our changed position in a world in which we 322 no longer had these investments and markets open to us.
Perhaps the years of Commonwealth economic development were too protracted, since they permitted a distortion of the industrial economy which was once the pride of our country. Had the process lasted any longer, it may well have produced a distortion which it would have been impossible to correct. But in the last couple of years the Government have been seized of the situation and have taken a number of realistic measures, even if they were rather late in coming.
Among these realistic decisions was the decision to withdraw from our world rôle; the decision to devalue, even though it came very much too late and possibly was inadequate in extent; the decision to restructure industry, even though restructuring may not mean all that much more than that the Minister of Technology looks after the car, computer and other industries, the Industrial Expansion Act, the scheme for shipbuilding, and the setting up of the I.R.C. Though these are limited steps, they are valuable and have led us to move into an area in which we must be involved.
I maintain that we took the wrong turning on prices and incomes in that we tried to introduce certain distortions of doubtful value. I suspect that we may be taking the wrong turning on trade union reform. But at least the Government have shown themselves to be aware of some of the important changes which have been taking place. The adjustment process has gone not nearly far enough. We need to adjust very much more than we have done because much of our present thinking is still geared to the past rather than to current considerations.
Even at this late stage there is a tendency to underrate the magnitude of the problem which faces us. We need time to change our industry, time to change our methods, time genuinely to restructure industry. It may last many more years than the Government or Opposition even suspect at present. In dealing with our balance of payments problem, we need to rephase the debt to the I.M.F. on a much longer-term basis or obtain other loans than perhaps even hon. Gentlemen opposite at present suppose.
323 The only alternative to this is to live upon doles by the I.M.F., which may prevent our getting the kind of investment which is required. If we are serious about getting real investment in this country, it will produce enormous balance of payments difficulties. Therefore, we need to rephase in a massive way, and the only real way to achieve this aim is to ask for loans on a long-term basis. If loans are not available, then import quotas—not a happy prospect—are one method of reducing the high level of consumption and of producing the increase in investment which will be necessary.
We can take such a step, or we can sink into a pessimistic philosophy that there is something wrong with this country, that we have not the techniques, understanding or attributes of management or of workers, and that we are marked out as somewhat inferior to other European countries. In no circumstances am I prepared to accept that sort of attitude. What we must do is to try other alternatives, however unpleasant they may be for us.
I am worried that the people who have the responsibility to take decisions which may prove unsuccessful may find themselves forced into taking a pessimistic view about what is wrong with our country and may refuse to take the realistic alternatives before us. We need to accelerate the cutting down of our commitments to defend a vanished empire. We need to speed up cuts in Government expenditure overseas—expenditure which last year cost £462 million. How relevant is such expenditure to our present economic problems? The first priority, above all others, is the priority to invest and to expand. We must judge the Government on this basis, and almost solely on this basis.
If the methods which are followed to produce these results are unpleasant and unpalatable, we must be prepared to accept them however unacceptable they may be. We should not accept the attitude that we can go along to the I.M.F. and obtain doles to keep us going at a miserable level of economic performance which prevents a real break-through and which could have the most harmful results to our country's economy.
§ Sir C. Osborne
Is the hon. Member suggesting to his right hon. Friend that the I.M.F. would do us a great disservice if it were to refuse any more loans and make us work out our own salvation?
§ Mr. Sheldon
I am not saying that. I am saying that if the repayments of debt become impossible, we should not have just sufficient to pay back the I.M.F. and keep on with measures of austerity and a low-growth economy, but should ask the I.M.F. for something much bigger than it has accepted in the past. If that is not acceptable to the I.M.F., I have suggested other measures which might be taken.
§ Mr. Sheldon
It is a pity if the hon. Member is surprised. This is the serious situation which we face. It is not sufficient to ask for short-term loans which we know we must repay and, in order to repay them, run our economy at a lower rate than necessary. A low rate of economy means inadequate investment and expansion, and in investment lies our real salvation as a trading country in the world. That is the way we should proceed.
I understand that the Budget and the Finance Bill have been introduced to take account of possible changes which are likely to take place internationally over the next few months. It may be that some means is required to deal with the changing situation arising from the circumstances in Germany and France.
As I see it, the Budget decision is a delaying one whereby one takes a step along a tight-rope—because the balance is a very fine one—and at the same time waits for whatever may happen, whether it be a realignment of currencies or an increase in liquidity, in terms of the international monetary situation.
I have always felt that the realignment of currencies was the most important consideration in international money matters. It is far more important than increases in liquidity, which to a certain extent are not much more than a confidence trick in that one merely increases the amount of money available rather than concentrates on the differences between countries. I say "to a certain extent" because I realise that certain 325 plans allow for a considerable amount of money going to under-developed parts of the world. If this were seriously a proposition, I should be more than delighted to see it happen. It is because I think it is unlikely that I say that increases in liquidity are less important than other commentators consider them to be.
What is important is the necessary realignment of currencies. What worries me most is not the German revaluation or the French devaluation but that the revaluation of the Deutschemark will not be enough. Germany has been able to continue to increase her exports at an enormous rate. Most of the developed countries in the Western world are increasing their exports to an extent which even in what we consider to be a good year makes ours look a very sorry performance—
§ Mr. Sheldon
When we congratulate ourselves on our export performance, we must understand that ours has been one of the worst in the Western world—
§ Mr. Sheldon
This is a measure of the difficulties facing Britain today. What worries me is not the Deutschemark revaluation but that it will not be enough. I am sure that Germany could accept 10 per cent. but, bearing in mind the Customs duties which are at present organised to give her a 4 per cent. revaluation, this would be an effective revaluation of 6 per cent. That is totally inadequate. The strength of the German economic competitive machine is such that a revaluation of 20 per cent. would not be out of line. What is so dangerous is that this is quite unrealistic in the context of German thinking today. We shall not get the kind of revaluation that is necessary, and so the problem in the Western world will remain.
§ Sir C. Osborne
Instead of worrying about the Germans, surely the hon. Gentleman should be considering what is wrong in our country. Of course they are doing better. Why are they doing better? Why is their currency stronger? It is no good trying to legislate for that. The hon. Gentleman should be thinking about our problems.
§ Mr. Sheldon
The hon. Member for Louth (Sir C. Osborne) has not got the burden of my argument. The whole point is that what we do is done in the context of what is happening in the Western countries. I should have thought that, with his hon. Gentleman's knowledge of international finance, the hon. Gentleman would understand that the exchange rates which are operating are a great barrier to our exports, and the advantages that Germany has are obvious.
What we may see is a possible competitive devaluation, which I do not regard as a realistic possibility; a competitive deflation, which is much more serious and in which we are not likely to be able to ask for some sort of capital inflow; or some method like the imposition of import quotas where we can take direct action ourselves.
The first matter that we need to consider is whether we should put growth as the major unquestionable priority. Certainly I think we should. This Finance Bill makes no great contribution in that direction—[Interruption.] I hope that hon. Members opposite will put forward serious arguments as to why it does not and not make trivial points about small increases in taxation here and there.
The strategy is all important, and it is the strategy which Conservative Governments in the past have got wrong. Unfortunately, Labour Governments also have got it wrong—
§ Sir A. V. Harvey
The hon. Gentleman complains about the value of the German mark. Perhaps he will cast his mind back to 18 months ago when his Government devalued the £ and promised great things as a result. Britain was the last Power in the Western world to devalue. Would he care to give us his opinion about that?
§ Mr. Sheldon
It is apparent that the hon. Gentleman still has not got my point. I am arguing in the context of the economies of the Western world and saying that we need to study them in this connection. To make petty party points at a time when we are really concerned with economic survival is a failure to understand the real problems facing Britain today.
327 At this stage of the Finance Bill, I find it difficult to criticise in any detail the tactics of it when there is so much with which I disagree about the strategy. That it is deflationary is obvious, but it is not deflationary merely to the extent of the £243 million referred to by the Chancellor. When one considers this year's Budget and compares it with previous Budgets, it is deflationary to the extent of £500 million a year. In other words, it is deflationary to a greater extent than is currently recognised because of the November measure, which in itself introduced a further measure of deflation that has been incorporated in this Finance Bill.
As a result of the deflation, we shall see a loss of production, a loss of investment, and, most important in an industrial context, a loss of the new techniques of manufacture which we need to understand and mobilise in the interests of the country. It is a loss that we shall never restore. We all know the argument that once one loses the machinery which should have been installed one loses not only the productive potential of the machines but also the skills arising from them.
Walking on the tightrope, as the Chancellor intends over the next few months, what is the outcome if consumption runs ahead of what he has planned? We know that he has drawn a very fine line, for reasons which we must congratulate him. He does not wish to deflate more than necessary, yet he knows that there are tremendous uncertainties ahead. He has had to decide how the level of consumption is to be permitted to increase. What will he do if consumption rises more rapidly than he has expected? What remedy will he introduce? Shall we have another rotation of the purchase tax regulator wheel? Shall we have further cuts of one kind or another?
By now, all Chancellors have learned that consumption in this country cannot be cut—
§ Mr. Sheldon
I will tell the hon. Member for Louth why. There is a level of expectation in the country which compares the situation here with what is going on in other countries. While the people may not insist on the very high 328 increases being obtained elsewhere, we regard a steady if small regular increase as our right. That is what our people expect, and I fully support them. After all, it is what we encouraged them to expect, and it is perfectly reasonable. We cannot reduce consumption; so, if the Chancellor's estimates prove to be out of line, he will be faced with the dilemma of deciding what further action he should take. It is no use coming up with anything further in prices and incomes now. It is no use expecting much from industrial reform. None of these methods are going to produce results at this late stage. What may well come, if his estimates are wrong here, is a fundamental rethinking of the strategy which it is a pity was not undertaken a long time ago.
§ Mr. Speaker
Order. I remind the House that many right hon. and hon. Members wish to speak. Reasonably brief speeches will help.
§ 6.20 p.m.
§ Mr. J. Grimond (Orkney and Shetland)
It is appropriate on Second Reading of the Finance Bill to ask what the Chancellor's aim either is or should be. We have been told by the hon. Member for Ashton-under-Lyne (Mr. Sheldon) that his aim should be expansion. If that is his desire, then the Chancellor must be a disappointment to him. I doubt whether that is the Chancellor's aim. His aim in the Budget is to deal to some extent with the balance of payments.
The hon. Member for Ashton-under-Lyne also said that he would not be against further massive borrowings. What he did not seem to stress sufficiently was that we have already undertaken extremely massive borrowings. I do not know how much we owe, but it must be about £3,000 million, much of it guaranteed in gold or at least not payable in further devalued currency. That presents us with a considerable problem and the Chancellor's Budget will not make much contribution to that problem. That is not entirely the Chancellor's fault. It is extremely difficult for a Government which have lost the confidence of this country and the world, at the rate which this Government have, to deal with this problem.
329 In the last few days we have seen another example of their extraordinary mismanagement. The performance of the right hon. Member for Coventry, East (Mr. Crossman) has already been mentioned in the debate. It was a most extraordinary affair. He must have given up reading the newspapers. He told us that he was unaware that local elections were about to take place. I understand that he was once in charge of psychological warfare. Against whom he is conducting psychological warfare may be a little obscure. It is difficult to believe that he has inspired a great confidence in our general management by making a statement which he had not realised was to be made at a time—
§ Mr. Speaker
Order. With respect, we are discussing the Finance Bill, not the statement made by the right hon. Member for Coventry, East (Mr. Crossman).
§ Mr. Grimond
The Finance Bill cannot be entirely dissociated from the general management of the Government. However, I will pass to another matter.
Last year we were told that devaluation would result in being in balance in that year and having a surplus this year, and that, after two years' hard slog, all would be well. All these forecasts have proved to be wildly wrong.
As the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) has said, the effect of a confusion of taxation is profoundly depressing to all who are attempting to run British industry or export. The hon. Gentleman mentioned, quite rightly, that year by year people who are conducting their businesses to the best of their ability and are not aware that they are doing anything wrong suddenly find themselves clobbered out of the blue for no reason. The hon. Gentleman had suggested—and I agree with him, because I have suggested these things myself—that it is high time that this House reformed its own procedures and set up a Committee to investigate our financial management. This was suggested both by my right hon. Friend the Member for Devon, North (Mr. Thorpe) and by the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd). While I am in favour of Select Comittees, I believe that they should be closely geared into the process of government. We are not a research organisation. I agree with the hon. 330 Member for Wanstead and Woodford that they should be investigating either draft legislation or matters which may become the subject of draft legislation.
I do not think it is out of order to mention that the Government have produced a Green Paper on public expenditure which seems to forecast that it will be possible for the House to consider priorities in public expenditure, to examine possible alternatives and to set such alternatives against taxation and the national revenue. I think that this would be a valuable step forward and I hope that the Government will proceed with these suggestions.
This brings me to the Government's expenditure, which is at the root of our debate today. The Finance Bill is largely concerned, though not entirely, with regulating the economy and making it possible for a large amount of public expenditure to be carried on without causing acute inflation. It has to make room for large public expenditure by ensuring that the private sector does not create too much demand. Therefore, it is absolutely vital that the Government should control the public sector not only in the sense of limiting the amount of expenditure but in ensuring that they get their priorities right and get value for their money.
That is not the case now. I hope that these new procedures may improve it.
It is important to look at the Bill as mainly an exercise in attempting to keep the economy on a fairly even keel and making room for public expenditure. There are constant arguments—I have heard them ever since I have been in the House of Commons—whether Governments are right in taking £100 million, £150 million or £200 million out of the economy. I have never understood these arguments as having any great relevance, because the estimates are always out by as much as three figures. So whether they take out £50 million this way or £50 million that way seems unimportant. But there is no doubt that if the Budget goes in the wrong direction, we can expect either further inflation or unjustified deflation.
I do not entirely agree with the hon. Member for Ashton-under-Lyne that it is impossible to reduce demand and that consumption is rising. In certain sectors consumption is falling, and I am doubtful 331 whether consumption will rise in the near future. In certain trades—for example, the motor trade—home consumption is not rising at all. But I agree with the hon. Member for Ashton-under-Lyne that in the long term we are breeding an inflationary outlook. People are expecting it. This is an extremely serious situation for a debtor country largely dependent on exports.
The Chancellor must be given credit for attempting to bring in savings as a means of reducing demand. We on this bench would criticise his contractual savings scheme as being too narrow. The term "save-as-you-earn" was, I think, invented by my hon. Friend the Member for Colne Valley (Mr. Richard Wainwright). We are pleased to see that the Government are beginning to think in this direction, because savings, although not the complete answer, are certainly a help in combating this inflationary outlook.
Despite the Chancellor's greater reliance upon the monetary weapon—and I agree that it always seemed absurd to flood the economy with credit and money and try to mop it up through taxation—he has increased certain taxes. I want to deal with two of them. If I deal with them partly from the point of view of the area that I know, it is not only because I am interested in it but because it illustrates the effect of taxation on ordinary people.
We could hardly find two taxes more punishing to many of the development areas than the increase in S.E.T. and the increase in petrol tax. Possibly these increases might be justified in the South of England, but it is impossible to justify them in the North of Scotland.
The Chief Secretary gave us his well-known eulogy of the selective employment tax. It is slightly mystifying as to how he thinks the country survived before the discovery of this tax, but the right hon. Gentleman said some curious things about it. First, he totally forgot its effect on the building industry and, second, he appeared to say that it did not put up costs or prices. But if he ever went for a meal in a British Railways hotel immediately after the tax came in, he would have found that an extra 1s. was put on all meals at once. With any organisation 332 in a monoply position in the nationalised industries this tax is passed on at once.
In my constituency we suffer not from overheating and high wages but from depopulation and a relatively high rate of unemployment. The expansion of indigenous services, so far from being considered immoral, is highly desirable. This curious view of the Government that service industries are disreputable while good old manufacturing is what we ought to have is, to me, a very strange outlook. It is reckoned that the selective employment tax at the increased rate will take £220,000 a year out of the economy of Orkney alone, which will be an intolerable handicap to a small community and will gravely inhibit expansion. That is, I believe, the same sum as has been invested by the Highlands and Islands Development Board. We have 140 gentlemen in Inverness engaged in trying to put money into various parts of the Highlands, and yet the same amount is taken out of the Orkneys by this Government in one year. In Shetland a man who employed five women and six men now employs six women and three men; and this in an area where there is considerable demand for female labour but a grave need of employment for men. One shopkeeper tells me that the increase in the tax alone will mean that half of the profit on 10 per cent. of his sales will be used simply in paying the tax.
I return to the building trade. I hope that the Government will say something on this. There seems to be some doubt whether builders will be able to reclaim selective employment tax on contracts with local authorities into which they have already entered. One builder I know reckons that he will lose nearly £3,000 if this is not so, while another will lose over £1,000. It is true that the Government provide for payment of the premium to manufacturers. We welcome that, though I very much doubt whether on general economic grounds payment of this premium is justified all over the country.
But it is a complete myth to suppose that this means an instant shift of people from service to manufacturing industries, thereby benefiting the economy. It does not work like that. As far as my own constituency and many others are concerned it is the female 333 labour that is wanted and we are not getting the type of change from service to manufacturing industries that the Government claim to want. All this is happening at the same time as a very heavy squeeze which hits small businesses, small farmers and those who neither have internal resources of liquidity of their own nor are able to put up their prices and expand their business and thereby absorb the ever-increasing costs they have to bear.
A very real difficulty in many development areas is that we live in an inflationary atmosphere and that costs are continually rising. Big firms find it possible to absorb these costs, but it is not possible in areas such as those I am speaking of, and there is, therefore, an overwhelming case for some variation in taxation. We accept this in principle in different areas, and we accept variations between individuals. I do not for a moment deny that in some parts of the economy there is a great deal of liquidity. One of the Government's difficulties is that whatever taxes they put on income there are people who are enabled to carry on and keep up their consumption without suffering. That may be true in a certain degree of different types of business but there are other areas and other types of business where this is not at all so.
If it is possible to vary certain forms of grant I do not see why it is impossible to vary taxation and why we cannot have lower social insurance contributions or lower license fees or some remission of either personal or company taxation. Certainly, it is the easiest and cheapest way of relieving the development areas from the blows that are now raining on them not because they have been inflated or are over-heated or suffering from an over demand for labour but because other parts of the country are. But I can say for the Chancellor in this Bill that he is trying to move in the right direction in two respects. First, he is trying to ensure that he does not add to inflation by more Government borrowing. I hope the Minister who winds up will tell us more about the intentions of the Government in relation to repayment of their debt. Certainly, Government borrowing has been a potent force of inflation, and if we are now to seek a change, and if it is to be permanent 334 even in an election year, in the long run this may be a good thing.
Second, the Chancellor showed signs of trying to reform the system, although I and my colleagues regret that he has not gone further. Last year he appeared to be hopeful that he would make a start on the simplification of the tax system, and we were promised a report on the selective employment tax. Instead, we have had a Green Paper and we must thank the Lord, or the Chancellor, for small mercies. He is up against formidable obstacles. He inherited an especially difficult position. He is faced with various vested and bureaucratic interests and with a tremendous strain on the Inland Revenue.
I can only hope that this debate and the general tenor of speeches in Parliament, and not only from this side of the House but from behind him, will encourage the Chancellor in trying to straighten out this cat's-cradle of taxation which is in danger of strangling some of the smaller businesses which can hardly compete, and which is doing great harm to initiative within the economy. I am not one of those who think that incentives are everything but I do believe that if the Chancellor's object is to improve the balance of payments and raise exports—and it is notorious that our exports have been sluggish—he has to try to instil into this Government as a whole a sense of purpose and better management and also, in his own sphere, give people the impression that he really believes that he can get into surplus next year or if this is not possible then, that he knows what is his aim.
I hear talk of rephasing and realignment, which has a slightly sinister ring, and as undoubtedly at some point we have to get nearer to surplus than we are now—and it is not always realised that we are still running up deficits—the Chancellor has to find ways of calling out more initiative from the people. In this country there are still a vast number of people willing to give employment and generate economic activity. They are the people to be found in the private, not the public, sector of the economy.
§ 6.35 p.m.
§ Mr. Joel Barnett (Heywood and Royton)
One must have a great deal of sympathy with the right hon. Gentleman when he refers to the need for a simplified 335 tax system. I very much want to see some simplification but at the same time it would be foolish not to recognise that to get simplicity while at the same time having equality is extremely difficult. It would be simple, for example, to have one across-the-board purchase tax or sales tax without any income tax at all but it would hardly be equitable by any of our standards. On the selective employment tax the right hon. Gentleman was a little contradictory. He started by showing how it must be passed on in the field of hotels, but went on to say how small businesses in his own area have to absorb it. That proves the point my right hon. Friend was attempting to make, that S.E.T., unlike purchase tax, is not passed on to the same degree. That was all he was claiming for it in the particular context.
For me at any rate and for those on this side of the House, a Finance Bill must be examined to see how far tax changes bring nearer a more socially just and equitable society. We should be thankful that at least we have got away from any idea that a prices and incomes policy can bring us nearer to that kind of society. An hon. Friend, a junior Minister, conceded what everybody had already recognised, that no prices and incomes policy working on a basically unfair wage system could bring about a just and equitable wage structure.
What is needed is a fundamental change, and with the best will in the world the trouble with the Bill is that it does not do that; instead it attempts, in a piecemeal fashion, to deal with a number of tax avoidance measures, which are, of course, worth dealing with in themselves. By looking at two examples, which is what I propose to do, of the attempt to reform the tax system in this piecemeal way, by attempting to cut out particular abuses of patent avoidance, one sees even more clearly how much we need to make fundamental changes in the whole tax system.
I propose to consider first the question of loan interest. Anyone who knows anything about this is aware that there has been a terrible amount of abuse in the use of loan interest. There are, for instance, the "borrow-all" type policies, the borrowing of money by wealthy tax-payers to buy shares and other assets, 336 and, indeed, other methods, which will not be excluded by the Bill. I believe that it was right to try to deal with this piece of tax avoidance especially at the higher level.
My right hon. Friend the Chief Secretary said, and quite rightly, that we had an irrational system of loan interest in the way that interest was allowed and not allowed for tax purposes. I said much the same thing when we debated mortgage interest rates recently, but where I totally disagree with my right hon. Friend is when he says that under the Clause we are moving to a more rational system. My right hon. Friend said that we did not have a logical system before, but on looking at the Clause I say that we are moving from one illogical method of taxing or not taxing interest to one that can be seen to be even more illogical and irrational.
I should like to put one or two points to my hon. and learned Friend, and perhaps he will correct me if I am wrong, because I think that it is important to consider the way in which loan interest is dealt with in the Bill because it has some bearing about what has been said about the need for a Select Committee to consider various matters.
As I understand it, it will be all right to borrow to invest in land, but it will not be all right to borrow to invest in land companies. This seems to me to be the crazy way of going about things. Equally, by paying a smaller amount of money one can buy a practice or a company which has an overdraft and the interest on that will be an allowable charge, but if one does not take over the overdraft and one pays a much higher figure for the company, the interest on that will not be allowable.
What will be the position if a company buys a subsidiary company? Presumably that will be allowed. But if it is bought as an associated company, that will not be allowed. If a person expands his own business, that is allowed, but if he buys another it is not. If someone borrows from his own business by creating an overdraft and putting his capital account into debit, presumably that will be allowed.
One of the more difficult anomalies is that of a young practitioner, a solicitor, an accountant, or whoever he may be, 337 who say, last year borrowed money to buy part of a practice and is now stuck with a loan for perhaps 20 years, the interest on which is not allowable. It is not like buying shares in a company, because those shares can be sold. The young practitioner to whom I have referred cannot sell part of the practice for it is his living.
I mention those factors in brief because they are Committee points, but I suggest that before we discuss them my right hon. Friend should produce a White Paper setting out his real intentions with regard to loan interest. I am sure that my right hon. Friend should not have it in mind to deal with this matter in the way in which he seems to intend to deal with it under the Bill as it stands.
I appreciate the difficulties once we start having exemptions, particularly when they are exemptions which affect the whole of trade and the purchase of land, whether for owner-occupation or for any other reason, but if the cost of preventing abuses—which I believe could, and should have been prevented—is so heavy in terms of new complicated laws which create new anomalies, I think that it would be better not to bother at all. Incidentally, it is interesting to note that comparative smallness of the abuse at the higher end of the scale. The Chief Secretary said that only £5 million would come from surtax payers. If my right hon. Friend agrees to publish the White Paper which I have suggested, we may be able to find a way of dealing with larger abuses, if necessary leaving some of the loopholes, which will inevitably exist anyway while we have our present tax system.
I come now to the Clause which is said to deal with pop stars. The Chancellor is right in his purpose. A man who earns £10,000 a month, even if it comes down to the "trifling" sum of £15,000 a year—and generally speaking it comes to rather more than that through the judicious use of the present tax system—is in a quite different position from the many people who have net incomes of £10 or less a week. The differential between the two is far too wide. A tax system which allows him on top of that to capitalise is clearly unfair, and I want something to be done about it.
It is interesting to note that the Opposition Front Bench has not criticised the 338 Chancellor's purpose in this respect, but the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) used a phrase which I repudiate. He said that we pursue equity to an unacceptable degree. From the figures which I have quoted, I do not accept that in terms of real net incomes we are pursuing equity to an unacceptable degree. So I accept the Chancellor's purpose as set out in this Clause, but it seems to me, and apparently it does to the Sunday Times, too, that the Clause as drafted will catch, for example, the sale of good will. I had better declare an interest, because I have a reasonable sized piece of goodwill which I may want to sell some day. It may also catch the sale of a service company. It may be that we should try to tax that kind of thing. It may be that this is the sort of change that we want to make in the tax structure, but it is impossible to make that change without altering the whole national financial structure, and I assume that that is not what my right hon. Friend has in mind in this Bill. Certainly my right hon. Friend's intended purpose of preventing the capitalisation of earnings could not be regarded as an intention to change the whole financial and institutional structure of this country. That is worth considering, but it cannot be done by one Clause in a Finance Bill.
I think that my right hon. Friend is right to try to stop the abuse which perpetuates and adds to the differential in real net incomes, but if this means introducing more complicated tax laws and anomalies, it would be better not to bother unless, as with the question of loan interest, my right hon. Friend is prepared to accept Amendments which will remove the more obvious anomalies.
I have referred to only two major changes. I do not propose to refer to any more, because I believe that the two Clauses to which I have referred show how far we are from a socially just tax system. It puts in a clear perspective how tinkering with the system will not solve the problem of net differentials of income, which are still far too wide.
We on this side must reconsider our aims in taxation. In the case of capital, for example, we allow inherited wealth to a degree which creates a built-in denial of the oft repeated claim that all men are born equal. Under our tax system 339 all men are not born equal. This is surely not something which we could support, so we want a tax system geared to dealing with inherited wealth. This is much more fundamental than dealing with the relatively minor matters, important though they are, of tax avoidance.
In the case of income, we talk a good deal about freedom. What sort of freedom allows a tax system and a social structure which results in one man earning as little as £15 a week while another can earn £15,000 a year? It is accepted that we cannot do it through a prices and incomes policy, so we can only achieve an adjustment of differentials through a change in the tax structure. If playing about with small measures distracts us from our major aim, we are in danger of getting the problem out of perspective. We obviously cannot stop considering small aspects of the problem. We cannot ignore the abuses, but we should not lose sight of the fundamental changes, which is the really urgent need.
§ 6.52 p.m.
§ Mr. Nigel Birch (Flint, West)
I hope that the hon. Member for Heywood and Royton (Mr. Barnett) will forgive me if I do not follow him into what he admitted were Committee points. His Committee points showed a very sound capitalist outlook, and he thought that he would put the matter in balance by a good old anti-capitalist peroration.
Were I in possession of the Bill, I could give the number of the Clause with which I want to deal first. It is that which deals with the abolition of capital gains tax on Government and government guaranteed securities—I want to lead on from that to some consideration of Government credit in general. I have some background in this matter. When the present Home Secretary imposed capital gains tax on gilt-edged securities there was a great outcry, in which I took some part. The main argument against that action was that it was fraudulent because many gilt-edged stocks had been sold at prices at which they would not possibly have been sold unless it was confidently expected that the amount of appreciation was not to be taxed.
We have made rather a good agitation about this. I moved an Amendment in 340 1965 at that Box to exempt gilt-edged securities and local government securities from capital gains tax. Kaldor, of course, devised all these things originally and, as always, our present Home Secretary was completely under the influence of No. 2 in the Hungarian Mafia, who was sitting in that box at the time. The solution was ludicrous—that some gilt-edged securities should be wholly exempt, some should be wholly subject to capital gains tax, and some should be partially exempt and partially subject.
That did not even meet the moral case, because the nominal price at issue of a Government security has little relevance to the price at which Government securities are actually sold. Masses of stock had been sold at under issue prices and would not have been but for this expectation. The Government, having refused many times to do this, have now come around and exempted Government securities. The injustice is, to some extent, righted, but it again produces a situation, as was produced before, of sudden changes which had been unforeseen. There is a casino atmosphere in a market which should not have that atmosphere. The chaos caused by the Kaldor proposals was such that the market had to be suspended for several hours and many changes between one security and another resulted.
One must not look a gift horse in the mouth, I suppose, even if one suspects that one will find something nasty inside it. This is something which will help the market, but I do not believe that either the question of equity or that of helping the market was the Chancellor's real motive. The Chancellor likes his little deceptions. The House will remember that the first statement which he made, on the Letter of Intent, was entirely at variance with the Letter of Intent which he published the very next day. He succeeded in deceiving the House, the Press and the public for about 18 hours about his tax on blankets, sheets, knitting wool and towels, not to mention things—which are hardly mentionable because they are so horrible—like pensions and teeth and spectacles.
He did not mention his real motive. In some of these Budget documents we heard that this abolition of tax will cost £7 million. In fact, of course, it will save the Government a very large sum. 341 They will collect far more tax, because the unfortunate holders of gilt-edged securities have astronomical losses and capital gains tax is a tax on gains less losses, so it was possible for people to realise their losses and put them against their gains. Therefore, the net loss for the Government has been very large, but their motive is not to relieve anyone but to collect more tax.
I wish to turn to the effect on the municipal borrowing. This would help any local authority which can squeeze some money out of the Public Works Loan Board, and it will be of some small help there, but if they cannot do that, or can only get a relatively small proportion from the Board, it will greatly penalise such authorities, because it will make the attractions of local government securities relative to Government securities very much less and increase the difference in yield between the two.
What we have had from the Government is what the Financial Secretary said the other day, "It is all right. All they have to do is borrow abroad." Let us consider this for a moment. The only place where any weight of money can be borrowed is Germany, and we are urging the Germans to revalue their currency. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) wanted them to revalue by 20 per cent., but certainly an upward valuation against sterling, however arrived at, of 10 per cent. is not improbable and is much desired by the Government. But what happens to the unfortunate local authority which borrows for ten years and must repay at 110 per cent. and gets its interest charges "jacked up" by 10 per cent.? It seems to me to be an act of desperation.
One other thing which the Government have done which affects the gilt-edged market is the "save-as-you-earn" scheme. It will do something, but not very much, and it will only do anything if it attracts savings which otherwise would not have been made, and not in gilt-edged securities. Switching from the existing National Savings securities into the new stock would only cost the Treasury money and would make no difference to the economic position.
I do not think that workers have shown much desire to have their wages 342 attached, which is how I understand the scheme will work. It is very doubtful whether this is attractive compared with endowment assurance, and it is, of course, expensive. The Chancellor informed us that for someone paying the standard rate of income tax the grossed-up yield is equivalent of 12 per cent. What will it be for a surtax-payer paying tax at the maximum rate? Quickness of apprehension will give the answer as 86.4 per cent., which shows how utterly ludicrous are high rates of tax.
I cannot imagine why the Government do not see how damaging this is to themselves. They are bound these days to pay the rate for the job to top people in the nationalised industries. When there are enormous increases in salary—they are really only nominal because, after tax, they do not amount to much—people become annoyed. If the Government adopted a more rational tax system they would not constantly be coming up against this sort of irrational problem.
In considering the general effects of the Government's action, the first point to note is that the gilt-edged market has been slaughtered and the results of this are considerable. Hon. Gentlemen opposite must sometimes wonder why all the things that they have done have had so little effect in getting our balance of payments right. Indeed, the effect has been less than nil.
When Lord Thorneycroft was Chancellor of the Exchequer and there was a run on the £ the crisis lasted for a matter of weeks. A similar crisis occurred when my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) was Chancellor and when there was a run on the £, but that, too, lasted for only a matter of weeks. Indeed, when it was over he was able to prop up the dollar.
Our present crisis has been going on for four-and-a-half years, and it is now worse than it has even been despite devaluation. Why do we have this state of affairs? The question of money supply has a great deal to do with it. It used to be unfashionable to talk about money supply, and many of our bright financial journalists, having made a few snide remarks about Lord Thorneycroft, did not refer to the matter. But we are now turning back to it, as we are bound 343 to do because the brokers' men insist on our doing so.
The enormous increase in the quantity of money stems from three factors. The first is that in most years under Labour there have been very large uncovered deficits resulting from a large borrowing requirement. That has been reversed in this Budget, but only because of massive increases in taxation; and this in present circumstances is inflationary and ultimately self-defeating. The second reason why money supply has gone up so much is, as the Chancellor has at last admitted, because we have been running balance of payments deficits consistently. We are still doing so. The third and perhaps most important reason is that on balance the Government have for years been unable to make net sales of their securities. Indeed, they have been large net buyers, and that is still going on.
In the last quarter of last year the amount of Government securities bought by the Government amounted to £400 million, and I suspect that this year they have been buying more. There are two reasons why the market has collapsed. The first is on the supply side and the second is on the demand side. On the supply side, the amount of industry nationalised is an important factor, because if one is to finance capital expenditure by the nationalised industries without inflation one must get people to buy a sufficient quantity of Government securities to cover that capital expenditure. If that is not done the money must be raised by taxation, by borrowing abroad or by inflation. The Labour Government have done all three.
A classic example of what can happen occurred when steel was nationalised. Compensation totalled about £700 million. The Government knew that they could not sell £700 million worth of long-dated Government securities, so they issued short-term ones; three-year securities. However, they could not even sell those, and I believe that when the history books are written we shall find that about three-quarters of that sum, if not more, was sold back to the Bank of England soon after it was issued.
This means, in effect, that the Government printed money and issued £700 million of it to the holders of steel shares. That money is still knocking around the 344 economy. No wonder 1967 was a disastrous year, with an enormous balance of payments deficit and a vast increase in the supply of money. I have not yet heard a Government spokesman answer this question about the burden that nationalisation places on the country, remembering that in present circumstances we must finance all the capital expenditure of these industries out of taxation and that this in itself is inflationary.
On the demand side, the trouble is simply that people have been so badly done down. This fact is often ignored by the financial journalists. They assume that others are sillier than they are, but evidence is not convincing about that. One need only consider what has been happening in recent years. Hon. Members may recall the Radcliffe Report on monetary policy, about which I made an eloquent speech when it was debated in 1958. I described the Report as darkening counsel and said that it was muddleheaded and confused and that it has lowered our status in the eyes of the world.
However, a bland statement in that document said, in effect—the figures are long out of date—that if one got inflation at 2 per cent. per annum one wanted 5 per cent. for one's gilt-edged securities rather than 3 per cent. I pointed out that in terms of 2 per cent. compound inflation one would need, for a 25-year loan, to redeem it at a premium of 64 per cent. to get one's money back in terms of real purchasing power. Those figures are now ludicrous and it would be too terrible to calculate what one would have to have one's bonds redeemed at with inflation running at 7 per cent. Because people have taken such terrible punishment they are not buying, and it will take a lot to get them to buy.
What will happen next? I prophesied last year that there would be an increase in exports. I prophesy that there will be another increase in the coming year. I do not think that we have quite run out of the price advantage of devaluation, although the Americans will no doubt get their inflation under control and if they do, our difficulties will be much increased.
On the other side, it looks as if the prior deposit scheme has made no difference. We must thank goodness that it has not. If it had, our propensity to import would have been more horrifying 345 than it is. Oddly enough, the prior deposit scheme may produce some effect just before it is taken off with people saying, "We can afford to wait until it is removed." There might, therefore, be some good trade figures in the middle of the year, but they will not be nearly enough to cope with the enormous debt that we have.
I have no doubt that when that better trend is shown the trumpeters of the Horse Guards will be summoned to Downing Street, the door will be opened and the Prime Minister will appear wearing his Anguilla Star. He will be applauded by his colleagues who, surrounding him, will praise him as he announces the final miracle to end all miracles.
We cannot ignore the fact that the situation remains desperate. Our debts are astronomical. We have done that profoundly immoral thing of borrowing money that we know we cannot repay on the due date. It is a sign of the moral state of the country that articles often appear in the newspapers saying that this is our strength; that we have borrowed so much money that people must prop us up. Hon. Members may recall that it was Giolitti who said of the Sultan of Turkey of his day that he was armed with his debts. That was, up to a point, true. We are not trained in this country to play that sort of hand. I think the Chancellor's vices and abilities are on a far smaller scale than those of Abdul the Damned. I do not think we are going to play that hand very well. All the important things done in this Budget put up costs and prices and increased the hopeless steady continuation of inflation. It was Lenin who said:If you want to destroy a country first debauch its currency.People are reaping where they have not sown and they are not reaping where they have sown. I believe that this can be put right, but we have to have the will and the determination.
When Peter Thorneycroft was Chancellor he said that if wages raced ahead of productivity he would refuse to finance them. This basically is what they have done in Germany, and it has not resulted in unemployment but in the most rapid increase in wellbeing ever known. It is always a question of having the will.
346 My peroration is always the same; we can get rid of our troubles which are really at the margin, but hon. Members opposite, particularly this Chancellor, are not going to do it. When the Chancellor was in Bonn for the monetary conference he got very angry with the Germans and started abusing them. It is not a sensible thing to do to abuse the man who pays for your shirt and trousers. The Germans were annoyed and described him as "an incompetent miner". I am sure they did not mean offence to the great mining profession. We can at any rate say in defence of our Chancellor that he is within a tenth of a gnat's eyebrow as refined as Aubrey Jones and, even more incontrovertible, he is the best Chancellor of the Exchequer we have had since the present Home Secretary; but it is not enough.
§ 7.12 p.m.
§ Mr. Norman Haseldine (Bradford, West)
The right hon. Member for Flint, West (Mr. Birch) will not expect me to follow him.
Of the six Parts of the Finance Bill comprising 53 Clauses, I find myself in support of five Parts and 51 Clauses. I am sure that my hon. Friends on the Front Bench will not expect that I shall be able to record my support of Part V, which comprises Clauses 43 and 44.
I was able within four days of the Budget announcement to receive the reactions of people in my constituency. I my say in all honesty that I found a generally good reaction to the Budget and that many of the measures announced were acceptable. Measures to allow further increases in allowances to single persons, measures for a contractual savings scheme and measures to stop further tax avoidance, to charge interest on tax arrears—these are broadly accepted. The measure which I found most criticised was not a question of direct tax or tax on individuals, but the one to increase S.E.T. by 28 per cent.
The Chancellor is deluding himself it he believes that this tax is not the concern of the man in the street or the woman in the High Street. However much he may believe that distributors, retailers and the service trades generally get red hot about this tax, my right hon. Friend must not discount the widespread concern about this form of tax. Three times 347 now it has featured in Finance Bills. The effect on the cost of living is well understood and feared. The many simple calculations he has made that it would result in only a small percentage of rising costs have consistently shown him to be wrong. Prices have risen very much more than the calculations showed.
In his Budget Statement the Chancellor said:The second …"—the alternative to S.E.T.—would be to have gone for a further rise in 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.Does the Chancellor believe that he has not made a wide incursion into the food field? Does he realise how far he has made an incursion into the field of essential and necessary foods, hitting hardest those who can least afford it? If the Chancellor had not come for a second time on this horse following the original imposition by his predecessor, he would not have had the misfortune to have listened yet again to many of my hon. Friends and me pointing out the absolute error of his ways. He must surely realise that he has incurred widespread anger on this account.
Should my right hon. Friend be thinking at this moment that yet once again he is having to endure one of those Labour-Co-operative Members, let me tell him that this is no special pleading. Over 80 per cent. of the retail traders of the country, in the retail consortium, have expressed themselves in their recent joint statement. I shall not take the time of the House by reading it, for it is well known. In his Budget Statement my right hon. Friend also said:That 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."—[OFFICIAL REPORT, 15th April, 1969; Vol. 781, c. 1028–9.]Almost every authority in the retail distributive sector disagrees with this estimate.
The retail consortium estimated that the full effect of the Budget would be that prices charged by efficient retailers would be increased by 2½ per cent. That is five times the Chancellor's estimate.
348 [Interruption.] May I ask the hon. Member for Worcestershire, South (Sir G. Nabarro) to cease speaking so loudly, as I am quite disrupted in my endeavours to make my speech?
§ Mr. Haseldine
The National Grocers Federation made a statement recently which follows very closely that of the retail consortium, but its estimate is that prices could rise as much as 4 per cent. The grocers' estimate is that the measures will put up the grocery bill by at least 2 per cent. This is in the whole market of £3,000 million a year, which means that housewives must pay out in the coming year through S.E.T. not less than £60 million to get the same sort of goods and services as they are getting now.
It is interesting to note that the Food Manufacturers Federation has said:We have repeatedly pointed to the fact that Government actions have militated against the food industry's attempts to keep prices stable. The surprising increase in S.E.T. will inevitably be reflected in prices at the point where they matter most—in the retail outlets.A further aspect is that under Clause 44(5) persons engaged in the distribution of milk to consumers are excluded from refund of S.E.T. This is wrong. It is another example which strengthens my case that S.E.T. is a tax on essential foodstuffs. Milk seems to have been singled out for this treatment, and it is impossible to understand why.
The Co-operative movement is not alone in objecting to this. The Milk Distributive Council, which represents the whole of milk distributive trade, both large and small, has asked for the Clause to be withdrawn. This is of tremendous importance as regards the service aspect. If it is not possible to recover the extra distribution charge in milk prices, door-to-door deliveries will obviously have to be stopped. One appreciates that this can bring great hardship to old and immobile people, who rely on them. Not all households in this country are yet equipped with refrigerators. One wonders whether the distribution of milk not only to homes but to schools and hospitals is the sort of service which the Chancellor has in mind when he talks about services in his Budget. He must know that some services since 1966 have made a separate charge 349 on bills for S.E.T. This cannot be done in the case of milk. S.E.T. has been allowed in calculating the margins on milk distribution, but what now happens in the case of the additional 28 per cent. S.E.T. charge? It will inevitably increase the pressure for a rise in milk prices.
I turn to another aspect of the Chancellor's decision to increase S.E.T. In the Standing Committee on last year's Finance Bill my hon. Friend the Member for Willesden, West (Mr. Pavitt) and other hon. Members closely questioned the Chancellor on the Reddaway inquiry. He said:My reply to that is that it was not possible for me, in the circumstances with which I was confronted this year, to say that I would not deal with the problems confronting me in the way I thought they ought to be dealt with because I had to wait and hear what Mr. Reddaway had to say."—[OFFICIAL REPORT, Standing Committee A, 11th June, 1968; c. 1887.]How does that match up with his statement ten months later, in this year's Budget speech, when we appear to be no nearer receiving the Reddaway Report? He said:I must not anticipate Professor Reddaway, …"-[OFFICIAL REPORT, 15th April, 1969; Vol. 781, c. 1029.]That makes one feel that this was a red herring.
Many of my hon. Friends believe that we should have anticipated the Report from Professor Reddaway before the Budget Statement, because we hang on the words of my right hon. Friend on 19th March, 1968:… the increase I have announced will not prevent for the future any desirable re-casting of the tax in the light of Mr. Reddaway's report and any other available evidence."—[OFFICIAL REPORT, 19th March, 1968; Vol. 761, c. 286.]I wonder whether my right hon. Friend accepts the advice he received from the "Little Neddies", and the Report issued yesterday by the Economic Development Committee for the Distributive Trades. Ones must take note of the statement in Appendix 4 of the Report, which says:All legislation which is based on the principle of selectivity produces anomalies at the fringe. It does however seem that the distortions arising from the current form of S.E.T. are particularly serious.I must say without further qualifications that the expediency of raising considerable revenue on the basis that it is easy to collect is one of the most dan- 350 gerous and unjust methods that I have encountered. I remind my right hon. Friend of his Budget Statement in March, 1968, when he said of S.E.T.:It is the only means we have of taxing services"—I wish that he would not use that word when he means retail distribution, and particularly foodstuffs—Which are increasingly used in a relatively prosperous society, particularly by the better-off …".—[OFFICIAL REPORT, 19th March, 1968; Vol. 761, c. 284.]I emphasise his last words. Is he now suggesting that foodstuffs are within the category of social discrimination? Recent surveys have made it abundantly clear that despite social differences, fortunately, the pattern of our spending on essential foods varies very little. I hope that my right hon. Friend realises that he is on very dangerous ground, especially when a year later he makes such a steep increase in S.E.T., which will hit the elderly and lower-paid people most of all.
My hon. Friends and I will seek to make Amendments to the Bill to try to offset the effects of this increase on foodstuffs and milk distribution. We appreciate that the Chancellor has had a very difficult task, but we do not accept that the difficulties forced him to take such action, which increases the cost of foodstuffs to such an extent as it undoubtedy will. He should know that the Co-operative Party has undertaken a long study recently on "Taxation and the Consumer." We hope that we may be able to acquaint him more fully with the results, but in view of the length of time for which I have already spoken I propose at this juncture merely to say to the Chancellor, through my hon. Friend the Financial Secretary, that we do not want to make our complaints without suggesting some alternatives, and it will be appropriate when we present our Amendments to proceed on those lines.
§ 7.27 p.m.
§ Sir Arthur Vere Harvey (Macclesfield)
I agree with most of what the hon. Member for Bradford, West (Mr. Haseldine) said about the increased cost of living, to which I will refer later in my speech.
The Budget took a lot of people in on the day the Chancellor of the Exchequer made his Budget Statement. I can well understand why people did not notice until the following day the Schedule 351 tucked away which put a 13 per cent. tax on all textiles. The Chancellor did not refer to that in his speech, nor when he went on television that evening. It was wrong for the Chancellor, who has the privilege of broadcasting to the British public on both channels, to omit any reference to an increase in textile prices through purchase tax. Surely he must have been advised by his Department that if he did not refer to it in his long speech at the Dispatch Box he should have done so in his speech to the electorate. But there was not a word. It was deceitful and very naive of him to omit any reference to that. The Chancellor made it appear that the effect of the new proposals would be minimal on insignificant trifles of household expenditure, and that is why people were taken in. They are only now beginning to realise the full impact of the Budget.
I want now to refer to what could be termed a Committee point, because it cannot be made too often. The increased pensions for old-age pensioners were mentioned in the Budget, quite wrongly. The whole House was delighted that they are to receive an increase in the autumn but nothing was said then about how the increased pensions will be paid for, and we still have not heard. The House has a right to know, and the Chancellor should not have announced the increase like that. We know that he did it because he was currying favour with some of his Left-wing Friends and making a good impression at the time. This has a considerable bearing on the country's finances. Like every other hon. Member, I welcome the increases, but what the Government are giving the old-age pensioners with one hand they will take away with another.
Old-age pensioners cannot afford to replace linen. They stitch and darn and get given bits by relatives or friends. An old lady in my constituency said to me the other day, "Do you realise how much a reel of cotton has gone up in price?" I found that it had doubled in a short space of time. That is how old people measure their expenditure. They have to live. What about the many housewives and others who knit their own garments and buy their own skeins of wool and who must now pay 13 per cent. more? Many old-age pensioners 352 also knit. This has been a very wrong decision by the Government.
The increase in selective employment tax will bring in another £130 million, a 28 per cent. rise. As the hon. Member for Bradford, West has said, this can only increase the cost of living. The Government find it an easy way of collecting money but it is a bad tax in every form. It must have an effect on the cost or living. The cost of food will go up, thus taking a proportion of the increase which the old-age pensioners are to get. It may not be very much to begin with but every penny counts with them. I hope that we shall be told tonight how the increase in pensions is to be paid for.
When the Prime Minister made his famous broadcast at the time of devaluation he said:Farm production will be stimulated and will be able to do more to replace imported from abroad.If in the succeeding 18 months the Government had done the right things for agriculture, they could have gone a long way to solving our balance of payments but they have not done so. However, we have had repeated promises. The Minister of Agriculture's statement last autumn about the expansion of industry was encouraging, but while the annual price review could be attractive to certain sectors such as beef rearing, in the main it allows for only a little expansion.
How can the agriculture industry expand when the capital is not available? Not long ago a farmer could take out a mortgage with the Agricultural Mortgage Corporation at 6 per cent. Then it became 8¼ per cent., and now he will have to pay 10¼ per cent. That is expensive money and many farmers cannot afford to borrow at that rate. The selective employment tax also affects farmers. Admittedly, they get the money back but they have to lend it to the Government, in effect, before getting it back.
The Chief Secretary was rather boastful about the various methods in which money is collected and the amount of form filling which has to be carried out by industry. The farmers find precious little time to fill in all the forms they have to fill in in order to get back their selective employment tax, which the right hon. Gentleman says they get back 353 within a week. I do not get mine back within a week. It is more like four weeks or more. The least the Government can do is to speed up repayment of the S.E.T., at any rate for the small farmers.
Let us take the case of a farmer going in for a 150-acre farm who has to borrow half the money. It will cost an additional £400 a year in increased rates of interest. Where is the money to come from? It will cost that farmer on the basis of borrowing the money three or four times per acre what tenant farmers are paying.
If the Government went flat out to increase agricultural production we should be some way towards solving our balance of payments problem—and no better food is produced in the world than British food. We have a very efficient industry which could be of great help to the nation's economy. But what has happened? We have massive imports of dairy produce. I read the other day that yoghourt is being imported from France.
§ Sir A. V. Harvey
I appreciate that, Mr. Speaker. I am trying to convince the Government that agriculture can play a great part in solving the balance of payments problem. We have always been told, "We cannot put duties on imports from Scandinavia, for example, because we shall not be able to sell them our manufactured goods if we do." I do not accept that argument. These countries include those with which we have adverse balances of payments, and eventually the person buying a British car will buy it for quality and delivery. If the quality of our goods is right, we shall sell them.
Why do not the Government review their policy on sales to foreign powers? There were Questions in the House yesterday about the possible deal with Greece, including a nuclear reactor. Frigates could be sold to South Africa. We know that the right hon. Member for Belper (Mr. George Brown) disagreed with the Government about that. An enormous amount could be sold to help the balance of payments if the Government were sensible instead of pandering to the Left wing over these matters.
354 Since the Government took office, taxation has increased by £2,640 million, and £1,513 million of that has been imposed in the last two Budgets. These are staggering figures when we are trying to encourage people to work and do more. The Government do not seem to get anywhere at all. A year or two ago I thought that the Government were perhaps accident prone and had had a lot of bad luck, but I have concluded that they are the most incompetent lot I have seen here in the last 24 years. We saw only yesterday how incompetently they run their own affairs. I do not see how they are fit to run the nation's affairs if they cannot look after their own.
Where is the economic miracle that we were told last summer was just around the corner? The Prime Minister said at the General Election:Over the period of a Parliament I believe we can carry out our programme without any general increase in taxation.There were scores of such statements. Hon. Members opposite may wriggle about these things, but the Prime Minister said them. His Government were in power with a majority of four and he was determined to get back at any price. He was prepared to sell himself and his party at any price. Confidence has gone not only at home but overseas as well. I was in America for two days during the week before last, and if anyone talks about exporting being fun then he should do it. He should try a two-day trip with a six-hour time change. It is a killer. Our exporters are up against a tough job. There is no fun in it.
What impressed me in the United States was that, while they still like us, they have practically written us off as an important nation, and with the contraction of trade going on there I cannot see our exports increasing. What are the Government doing to help industry to sell its goods? I have tried to show how difficult it is for these men who travel round the world and have a very tough time of it. Let us consider the scales of payment made to executives in American companies, reflected in a survey carried out over a period of three years.
In marketing, finance, production, research and development, and personnel Britain is bottom of the league. These men have to be paid. They are doing it not for the Labour Party but to better 355 themselves and give their families something more than they have previously had. They are not all Old Etonians. They are doing a very difficult job and are surely entitled to some reward for their extra efforts. The executive in Italy is paid double the wage of his British counterpart. This matter must be reviewed if Britain is to get better results. The Government are killing and stifling the nation in every direction, whether it is the man selling textiles in America or the worker on the factory floor doing a few more hours to earn some overtime.
Taxes are far too high and confidence has gone not only here but, sadly abroad. When the Chancellor took over in November, 1967, he started with a lot of goodwill, in spite of the damage that had been done by the present Home Secretary. What happened? Between November and the Budget there was probably the biggest spending spree that we have had in history. Motor cars were being bought, pictures, cases of gin and wine—people were buying up anything they could get their hands on and the Chancellor neglected to deal with this problem. The Government were frightened to bring in measures to curb consumption for fear of increasing the number of unemployed.
That was the damage done, and the country has never really recovered. We have been told that we have almost run out of the benefits that might be obtained from devaluation, and I agree. There is very little mileage left in devaluation. We are now faced with the problem of having to pay considerably more for our imports.
I listened to the speech of the hon. Member for Heywood and Royton (Mr. Barnett) but he did not direct his attention to the problems facing the country. It was a question of levelling everyone down to the lowest point. Yet he is an intelligent professional man. It will not do. At the end of the day the only thing that will save the country is to export more and cut down expenditure wherever possible at home. The Government should give an example here, but I despair that they will ever do so. It is no good the party opposite blaming the Prime Minister for everything that goes wrong. They are doing it, it is being done in the Press, and it has been going on for weeks. Every Minister and every 356 member of the party opposite carries responsibility for the state of the country, and the people will remember this in the next General Election and on Thursday.
§ 7.45 p.m.
§ Mr. A. H. Macdonald (Chislehurst)
I want to refer to the speech made by the right hon. Member for Flint, West (Mr. Birch). In some ways it was so good, yet in other ways it was wanton and irresponsible. The right hon. Member knows better than most the necessity for creating real savings to finance the nationalised industries. For the sake of making a witty remark he permitted himself to refer to the "save-as-you-earn" scheme as an attachment of earnings. That was a most unfortunate reference. I saw no reason for the reference to the Mafia. It is a great pity that for the sake of a witty remark these wanton and irresponsible things were said.
The hon. Member for Macclesfield (Sir A. V. Harvey) spoke about the level of taxes. About three or four months ago the hon. Member for Lowestoft (Mr. Prior) introduced a Private Member's Bill dealing with the payment of pensions to disabled persons. There was no price tag attached to it, and I understood very well why. I was inclined to think that the principle behind the Bill was good and suggested that it should be given a Second Reading and go into Committee where a price tag could be attached. Hon. Members opposite showed great approval of these remarks. I do not delude myself. I am aware that a great part of that approval sprang from the fact that I had indicated that I would not accept the advice of my own Front Bench.
I had hoped that some of that approval was for a remark I made, saying that if we wanted to make such provisions for these people we had to face the necessity of finding the money to pay for the pensions. It will not do when hon. Members come forward with proposals of that kind yet shrink from the necessity of raising the required tax. I am proud to think that we have carried out our objectives in social security. I do not shrink at all from the fact that we have found it necessary to raise finance to pay for such things.
Every year I make the same plea in this debate. This year I am somewhat heartened to find my hon. Friend the 357 Member for Heywood and Royston (Mr. Barnett) expressing similar views. I very much regret the tinkering Amendments that come forward annually to plug loopholes or rectify anomalies—always for the most admirable reasons. However, the cumulative effect cannot but be unsettling.
How pleasant it would be if we could have a bumper Budget once every three or four years, clearing up the mass of anomalies and plugging loopholes and so on. From then on, if there were undesirable features, then we should accept them for the sake of stability. My hon. Friend was quite right when he said that instead of tackling these matters piecemeal we should have a look at the principle underlying the whole concept of taxation and have such a bumper Budget.
I warmly welcome the proposal to revise the basis of taxation on bingo. I cannot understand why a similar step is not being taken in relation to casinos. I endorse the concept of a tax on gambling—in many ways it is the perfect tax—but like other taxes it must appear to be equitable otherwise we run the particular risk of driving gambling underground. I regret that this year the Chancellor has not rectified the basis on which we tax casinos in the same way as he is rectifying the basis upon which we tax bingo.
I also warmly applauded the objective my right hon. Friend set himself when bringing forward the proposals dealing with the disallowance of tax relief upon the interest of certain loans. Upon looking at the Finance Bill, setting out the detailed implementation of these proposals, I begin to wonder whether this may not be quite as easy as was supposed. There is a danger that the proposals will not have the effect of reducing consumer expenditure, but may simply have the effect of altering the way in which we finance it.
The basic concept of these Clauses is to disallow tax relief on interest except, mainly, on the interest of loans for the purchase of property. How do we determine what is the purpose of a loan? It is obviously relatively easy to ask the borrower what the purpose of his borrowing is intended to be, but surely the reply given is an ostensible answer.
It might be a truer test to ask what would have happened had the loan not been granted. If a loan for the purchase 358 of property were not granted, and the purchase were not proceeded with, that would show that the purpose of the loan was for the purchase of property. But, the loan not having been made, if the transaction had still gone forward and had been financed in another way, perhaps by making creditors wait longer for their money, it could be argued that the purpose of the loan was not so much to finance the purchase of property as to repay the man's creditors. It is difficult to determine the exact purpose to which it is intended to put a loan.
Is the concept underlying the proposals based on the subjective test of finding out from the borrower what is the purpose of the loan, or is the test to find out exactly how the loan is secured? The subjective test is perhaps open to the objections which I have mentioned. Equally, if the test is to be the nature of the security, I foresee certain difficulties.
A young couple who raise part of the money needed to purchase a property by raising a mortgage would be entitled to tax relief on the interest. If they borrowed the balance, or part of the balance, from, for example, a grandfather, would the interest on that be allowable if the grandfather took a second mortgage on the property, or had it secured only by a bill, or not secured? This is not clear from the Finance Bill. If the test is how the loan is secured, and if it is necessary to take a second or a third mortgage so long as some value in the asset remains unpledged, the result will be that real estate will be pledged right up to the hilt, and I doubt whether this is desirable.
Stretching fancy a little far, I suppose it is conceivable that people wishing to raise money and to get the advantage of tax relief on the interest might enter into unnecessary purchases of property. If they have no mortgage on the property they currently occupy, they might deliberately move, so as to raise a mortgage on a new property on which they will get tax relief, and they might use the money from the sale of their existing property for the purchase they have in mind. If people have to borrow money on mortgage, they will borrow as much as they can. What will be the effect of this upon the resources of the building societies? In recent months there has 359 been evidence that the building societies do not have bottomless pockets.
Although I foresee difficulties both in the subjective test and in the test on how the money is secured, I hope that my right hon. Friend will come down on the side of the subjective test, and allow tax relief on the interest on loans, regardless of how they are secured, so long as the borrower is able to demonstrate that he has borrowed money for the purposes permitted in the Bill.
I entirely endorse the underlying strategy of the Bill, the concept of effecting moderation in consumer expenditure, but I wonder how far this will prove effective. For the reasons which I and other hon. Members have indicated, sophisticated borrowers will be able to get round the provisions in the Bill in such a way that they will not be hampered. I doubt whether the proposals will have any effect on unsophisticated borrowers. A substantial amount of borrowing currently goes on at exorbitant interest rates, for which no tax relief is claimed simply because people do not know that they are entitled to it. I attribute this borrowing to the phenomenon mentioned by my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), that it is difficult to restrain consumer expenditure. I agree with my right hon. Friend that this is needed, and I regret that my right hon. Friend has not seen fit to introduce measures to restrain borrowing for this purpose. There is a loophole here through which consumer expenditure will rush in ever-increasing amounts, which leads me to doubt the ultimate success of the Measures proposed.
§ 7.56 p.m.
§ Sir Gerald Nabarro (Worcestershire, South)
The Chancellor of the Exchequer came to the House on 19th March, 1968, and raised additional taxes of £923 million in the full year. He returned to the House on 22nd November, 1968, and raised further additional taxes of £250 million in the full year. He came back to the House again on 15th April, 1969, and raised further taxes of £340 million in the full year. His objectives throughout are said to have been to restrain consumption and to make progress towards increased exports, diminished imports and 360 the redress of a grievous deficiency in our balance of payments. He failed throughout last year; he will fail throughout this year, for the simple and fundamental reason that his Budget strategy is entirely wrong.
It is futile for the hon. Member for Chislehurst (Mr. Macdonald) to talk about the Government restricting borrowing and restricting consumption. People cock a snook at Her Majesty's Ministers, notably Treasury Ministers. They are the most derided and ridiculed people in our country, and rightly so. Nobody trusts them, every scheme that they have presented to the House for financial solvency during the last five years has failed, and why should repetition of the same policies in 1969 succeed when they have so miserably failed in each of the preceding four years?
The Economist got it exactly right on 12th April when it wrote this in its leading feature contribution under the heading "No, Not Again":Experience in both Britain and the United States last year suggested strongly that increases in taxes are now the rather wet noodle among weapons of economic restraint. They proved far less effective in curbing total demand than most supporters of last year's British and American budgets had hoped. This is awkward news for the British Treasury, which for the past five years has courageously believed that by flogging British taxpayers hard enough you must eventually bring the whole economy to rights, especially since such flagellation is well known to be good for the taxpayer's soul. However, the Treasury has a traditional way of handling awkward, new, empirical international, economic evidence that does not accord with its previous prejudices. It generally most resolutely ignores it. A year ago Mr. Jenkins imposed upon the British people a record increase in taxes, which signally failed in its purpose of putting the British economy back on course. Next Tuesday"—that was 15th April last—it is almost universally expected that Mr. Jenkins will announce another dollop of tax increases, which by itself is unlikely to work either.I read that passage to the House because it entirely endorses my own views. Every successive increase in taxation by Socialist Governments during the last five years has led to two things: first, continuing inflation on an increasing scale and, second, a worsening situation with our balance of payments. I have no doubt that the £340 million in the full year, which is the purpose of the Finance Bill, will have exactly the same effects.
361 I pass constructively to what in our contemporary situation and circumstances are the seven Budget requirements. I state them shortly, and I hope that the Chief Secretary will find them impeccable. I am sad to say that the Bill will give effect to none of them. The first is a strong £. I pause to observe that the £ is as weak today as it was during the month following devaluation of sterling in November, 1967. There is no sign of increasing strength in our currency.
The second requirement is, of course, a substantial surplus on our balance of payments in order to endeavour to repay our mountainous debts overseas. Last year's deficiency was of the order of £458 million on visible account. I see no evidence that we are running a surplus at present, or are likely to do so in the coming year.
The third is much greater investment in private industry. There is no evidence of an upsurge of investment in private industry for one simple reason which I give the House as a businessman. There is no confidence in the Socialist Government or in their policies.
The fourth is an acceptable prices and incomes policy. The great majority of the Labour Party which is governing the country today does not believe in the present prices and incomes policy and indeed, is largely in revolt against it. My side of the House does not believe in a statutory prices and incomes policy and certainly not as an effective instrument of budgetary policy.
The fifth is that there should be no increase in today's figure of unemployment, which is of the order of 2¼ per cent. Those who are knowledgeable in these matters say that there is an upward trend of unemployment which will manifest itself steadily throughout this year, and the anticipated level by the year's end is three quarters of a million wholly unemployed.
The sixth is a restriction of voracious public expenditure of the present time. It is all very well for Treasury Ministers to apply squeezes to private individuals, private companies and the private sector of industry and yet allow the most gross extravagance on the part of nationalised industries led by the electricity supply industry, which does little to raise its efficiency factors.
362 The seventh, and last, requirement is, of course, that the Chancellor this year should have budgeted only for a sufficient aggregation of revenue to meet his public expenditure requirements plus a modicum of cover for finance below the line, augmented by public savings. He should not have called in aid a surplus of more than £800 million which he says he will use, though I do not believe him, for the redress of public debt. On the contrary, he has much more devious purposes in mind than that He proposes to use that money as a surplus next year, a year which he anticipates will be the last in which he will present a Budget before a General Election, to reduce the taxes and try to claw back some of the millions of votes which have been lost to the Labour Party in recent years. He will, of course, fail in that last endeavour. The Labour Party has passed the point of no return.
§ Sir G. Nabarro
The hon. Gentleman with a miserable little majority of 300 will not be here in the next Parliament. He will be hoofing it round the Labour-held constituencies hoping that somebody will retire. I will not go into electoral considerations. Did I hear the right hon. Gentleman say, "Why not?".
§ Mr. Diamond
I apologise for saying anything while sitting down. I was wondering which particular Clause this had reference to or whether the hon. Gentleman had not the Bill in front of him.
§ Sir G. Nabarro
The right hon. Gentleman came in only two or three minutes ago when I had been speaking for 10 minutes or so. He missed the earlier part of my speech. He is not in touch with matters. If he listens carefully he will no doubt get switched on. I was giving the seven budgetary requirements needed in our present financial circumstances. This Budget fulfils none of them, and that is why the Chancellor's budgetary strategy will fail.
I do not propose to apply myself as did the hon. Member for Heywood and Royton (Mr. Barnett) and the hon. Member for Ashton-under-Lyne (Mr. Sheldon) to a series of Committee points and call 363 it a speech. I will deal with those matters during the four days of the Committee stage on the Floor of the House. I wish to say something generally about budgetary morals which I thoroughly dislike in the form of the behaviour of the Chancellor on Budget day. He had a lot to say about purchase tax.
§ Sir G. Nabarro
The hon. Member has just come in. He took his seat two minutes ago. If he wants me to deal with the road fund licence I will do so, but at present, in case he did not hear me, I am dealing with purchase tax.
The chancellor made a statement about purchase tax. He said that he was keeping the rates constant, that he proposed to broaden the base of purchase tax and to apply the tax to a number of items of household goods. He then proceeded to mention two or three trifling items such as paper handkerchiefs and plastic wallpaper. He was not man enough to stand up and say "I propose to broaden the base of purchase tax by applying a 13¾ per cent. rate to three major items of household expenditure all of which are essential in character. I propose to tax for the first time bed linen, blankets and towels." He left the trade to stumble across it a few days later. That is very deft, devious, bordering on dishonest behaviour.
The right hon. Member for Gloucester (Mr. Diamond) would not do a thing like that. [An HON. MEMBER: "Oh."] Of course he would not. He would have been the first to talk about towels, bed linen and blankets. He would not like to mislead anybody, nor would I. In fact, the Chancellor of the Exchequer has vastly complicated purchase tax by his proposals in the Budget. Look at the four rates that we have now: 55 per cent. or 11s. in the £; 36⅔ per cent. or 7s. 4d. in the £; 22½ per cent. or 4s. 6d. in the £; 13¾ per cent. or 2s. 9d. in the £.
The Chancellor made some footling excuse that he could not level out these rates this year. He is going back to the old complications of where the previous Labour Government left the purchase tax in 1951 with seven rates, 90 364 per cent. at the top and 5 per cent. at the bottom, which the Tories cleaned up to 25 per cent. at the top and 10 per cent. at the bottom. Those who doubt the Tories' capacity to reduce taxation should note the span: 90 per cent. at the top and 5 per cent. at the bottom was where we found the rates in 1951; where we left them in October, 1964, was 25 per cent. at the top and 10 per cent. at the bottom. Now they have gone back to 55 per cent., 36⅔ per cent., 22½ per cent. and 13¾ per cent., all designed to cause the maximum of inconvenience and extra work to wholesale and retail traders.
The imposition of the extra purchase tax, like the imposition of the selective employment tax, is all highly inflationary. I do not wish to go through every measure of increased taxation. I will deal with them all seriatim and I hope penetratingly in Committee. In a Second Reading speech, I content myself by saying—[Interruption.] It is nothing to laugh at. It is a very serious matter. I content myself by saying that £340 million of extra taxation is £340 million added to retail prices, plus the premium of the traders who levy the extra taxes, and that premium raises the addition to prices to a figure which I calculate to be in excess of £400 million.
Last year retail prices rose by 1s. 3d. in the £ and wages by a commensurate sum. During 1969, as a result of the Chancellor's nefarious fiscal habits, there will be an increase in retail prices, in my view, approaching 1s. 6d. in the £. Wages will rise by a similar amount, and we shall be gripped by the same inflationary tendencies as stigmatised all our economic efforts in 1967 and 1968, but with the inevitable result that at the end of 1969 we shall be no nearer our goal of balancing our payments overseas.
I have one last word to say, and it is about Clauses 18 and 19. I think that the hon. Member for Chislehurst had it nearest to right. What he was trying to say in a mixed up and rather verbose fashion was that these two clauses are inoperable as they stand. Even the Chief Secretary talked about the difficulties that the accountants would have. Already a dozen accountants, bank managers and businessmen have been after me to try to interpret what these Clauses mean and whether the interest on personal overdrafts in widely differing circumstances 365 will be admitted as a charge or otherwise against calculating liability to income tax and surtax for the individual.
I am not a tax consultant. I cannot even do my own tax papers, so complex are they after five years of Labour Government and the excessive Finance Acts of recent years. I would not attempt to interpret what is written in Clauses 18 and 19, but I know that these provisions are wholly bad and I shall argue against them in detail in Committee. I shall ask my party to be quite explicit in saying that immediately we resume office these provisions will be cancelled for the simple reason that if a working man—and I am the epitome of the working man—
§ Sir G. Nabarro
Alf Garnett earns a very large income and pays surtax at the top rate. The aggregation of Alf Garnett's income tax and surtax is at the rate of 18s. 3d. in the £. The hon. Member for Harrow, East (Mr. Roebuck) will never see an income of that magnitude or pay tax on that scale. He is much more likely to be paying income tax at 4s. in the £, denoting the meagre level of his own earned income. I think I am perfectly in order in responding to that irrelevant interjection.
I object to Clauses 18 and 19 for the very good reason that if a working man chooses to diminish the amount of his income by borrowing money from any source whatever, the cost of borrowing that money should, in logic, be set against his income, for the whole of his income is subject to income tax and, if it is of a higher order, to surtax. To say that he can borrow and allow the interest as a charge only for a house or for land or for house improvements is to single out one type of consumer expenditure in preference to another.
That is the sort of discrimination indulged in by a Labour Government—a government of meddlesome Matties, Nosy Parkers and busybodies, prying into the private affairs of individual citizens, which I, as a Tory and a capitalist, denounce as being none of the affairs or the functions of the Government. That is the private business of the individual citizen, and the Government should keep out of it.
I shall urge upon my party the repeal of Clauses 18 and 19, if they reach the 366 Statute Book, and certainly I shall vote happily against them as opportunity permits.
The whole Bill is bad. It is as bad as any Finance Bill since 1964 on account of its longevity, on account of its complexity, on account of its inflationary tendencies and on account of £340 million heaped on the backs of long-suffering British taxpayers after they had already shouldered manfully £250 million from 22nd November last and £923 million from 19th March, 1968. It is monstrous that the Labour Government should still remain in office after this gross contravention and travesty of every election promise that they made.
§ 8.20 p.m.
§ Mr. Ted Fletcher (Darlington)
I must resist the temptation to follow the argument of the hon. Member for Worcestershire, South (Sir G. Nabarro), if indeed one could follow his argument. I want to direct attention to what hon. Members may consider to be a trivial aspect of the Budget compared with the £340 million that the Chancellor is raising through the Finance Bill.
I agree with only one thing that the hon. Member for Worcestershire, South said; namely, that when the Chancellor made his Budget speech there was some doubt and confusion about the increases in purchase tax that arose from the ending of the exemption of those goods in Schedule 1, Group 2, of the Purchase Tax Act, 1963.
I particularly direct attention to the purchase tax, for the first time, on hand knitting wools. I do this for two reasons. First because I have a constituency interest as a large firm in Darlington provides employment for the citizens, and, secondly, on the ground of equity, because this is a tax on the leisure activities of millions of women in this country. Many of them are elderly widows and pensioners who can ill-afford the additional tax of 3d. for every two shillings they spend on an ounce of wool.
Hand knitting is possibly the oldest form of do-it-yourself activity in this country. It seems that we are penalising the most industrious section of our community by imposing a tax on hand knitting wool. It seems a most inequitable tax on an activity that is socially important in this country.
367 One of the greater novelties is that, while children's manufactured garments remain free of tax, the mother who knits clothes for her children will now, for the first time, have to pay tax on her raw materials. This is quite inequitable.
This tax will have certain effects on the retailers of wool. It will mean that shops which exclusively sell hand knitting wool will have to face the fact that the tax will mean a reduction in their turnover. This may well lead to increased prices in addition to the 3d. on two shillings per ounce of wool.
Apart from the tax on the retailers, we must also consider the tax on the woollen manufacturers. It is estimated by Patons & Baldwins, a large firm in Darlington, that a ten per cent. reduction in the sales of hand knitting wool will lead to the loss of about 300 jobs—and this in a town in a development area where unemployment is twice the national average. It will certainly have a big impact upon a town which is using all its energies to attract new industry. Therefore, from an employment point of view, it is important that the Chancellor should consider the effect of this tax not only on the people in Darlington, but in other woollen manufacturing towns.
It will also have an effect on production, because the machines used to manufacture knitting wool are special purpose machines which cannot be converted to other jobs. If these machines are idle there will be a big impact on the export trade in wool. I am informed by Patons & Baldwins that 18 per cent. of their turnover now goes for export. Its export prices are maintained to some extent because it has a good home market. If the home market is reduced, this will have an impact on import prices and this will not increase, but possibly decrease the amount of exports.
We have the anomaly of an imposition of purchase tax for the first time which discriminates against what I have described as one of the oldest forms of do-it-yourself activity. The policy of successive Governments has been to encourage leisure pursuits. This tax is penalising millions of women, many of them quite elderly, who take up knitting as a hobby, which adds to our Gross National Product. This inequitable tax will mean that many of these women will knit less.
368 We had reference this afternoon to the Health Service charges. I think they are deplorable and I hope that on another occasion I shall be able to say something about them. One thing which can be said about the Health Service charges is that those on supplementary benefits can make application for those charges to be met. But the elderly widow or the pensioner who knits is unable to get an increase in supplementary benefits to help pay for the increased cost of knitting wool. This tax will penalise widows, pensioners and others who take up this leisure time activity, and it will have a great social consequence.
I ask the Chancellor to give very careful consideration to the impact that this tax will have on the industrial activities of woollen manufacturers in my area and on the social activities of millions of women in this country. I realise that this is a Committee point and we have not yet reached the Committee stage, but I ask my right hon. Friend to look very carefully at this imposition and to ask himself whether it is possible, before we reach Committee stage, for the Government to review this imposition and to decide to reduce or abolish purchase tax on hand knitting wools.
I have been advised, in answer to a Question, that the total income from increased purchase tax, not only on hand knitting wools but on yarns and rug yarns, will be about £5 million. This is a small sum of money compared with the £340 million that is being raised through the Bill. It will certainly do a lot of harm to leisure-time activities for millions of women. It will mean that the mother wile knits for her children and who, for the first time, now has to pay purchase tax on her raw materials will possibly purchase manufactured garments. This in turn will mean that there will be an increase in the sale of manufactured garments on the home market, leaving less for exports. This is an anomaly, because the woman who knits for her children is being penalised and she may decide to purchase for her children manufactured goods which are free of tax.
With these considerations in mind, I urge my right hon. Friend to think very carefully about the impact of this tax. I hope that when we reach Committee stage he will be able to assure us that, after consideration, he has decided to 369 withdraw purchase tax on hand knitting wools.
§ 8.30 p.m.
§ Mr. John Nott (St. Ives)
I hope the hon. Member for Darlington (Mr. Ted Fletcher) will forgive me if I do not follow him on his particular subject, particularly since we shall have a full opportunity of discussing it during the Committee stage of the Bill. I refrain from following him only because several of my hon. Friends and other hon. Gentlemen may wish to speak.
Since the Second World War the British economy has been characterised by levels of employment and prosperity which were undreamed of in the 1930s; and apart from the present time when four years of incompetent economic management has pushed unemployment in this country to the highest level for decades—and my belief is that this Finance Bill will push unemployment higher still—this country's productive capacity has been more or less fully uitilised. While we have fallen drastically behind in the international race for growth and, more alarming still, in the expansion of our existing productive capacity out of which future growth in visible trade must come, this country still remains today the pleasantest, happiest and most tolerant society in the whole world in which to live. In our discussion of the Finance Bill we should remember that this, after all, is the highest economic return of all.
Yet in spite of this the British people are not satisfied, and I believe quite rightly; for it is only out of a higher growth than we have had in the last three years that better housing, health, and education, and greater leisure too, can really come. We cannot ever more maintain the stability and relative tranquillity of our society unless some dramatic economic break-through is soon obtained. The revolution of rising expectations is at work in this country, and if those expectations are to be frustrated, then eventually the uglier facets of our society will show through.
In the context of this Bill and of the Budget which preceded it I am left gasping that an able man can bring forth a measure which is so utterly lacking in direction and in vision. It seems to me that this particular Budget and this Bill have no strategy at all. At least last year there was a theme—the achieve- 370 mentof a massive surplus as a forerunner of better things to come. But in this Bill disillusionment has taken over.
In spite of the inherent danger of the position to which I have referred there are however, two grounds for optimism as we debate this Bill today. The Minister of Technology was right—and that really is an economic miracle—when he talked the other day of the huge reservoir of talent, energy and imagination which exists among the younger middle management in British industry today. This middle management is just bursting to break out if only some day some Chancellor from somewhere will come along and give it the opportunity to do so.
It is a tragic thing that practically every Chancellor of both parties in this country since the war has been completely lacking in the only commercial or industrial experience that really counts; namely, that of having had to work his way up through a competitive-minded firm. This is not the fault of Conservative and successive Labour Chancellors. It is the aftermath of the war and of our particular imperial past which preceded it. Only now is middle management emerging which was not trained and educated in, and did not have, the outlook which was necessary to run an empire and to fight a war. So now at least we have a glimmer of hope, and it needs a Chancellor to bring this talent out.
My second reason for hope is my belief that even more important than the release of talent, the task requires a fixity of purpose, a toughness, even a bloody-mindedness on the part of a Prime Minister and a Chancellor of the Exchequer of this country. I do not believe any Socialist Prime Minister, however genuine he may be, can possibly succeed mainly because it is impossible for him to implement what is necessary with the party which he has behind him. I believe that my right hon. Friends can and will.
I come now to specific comments on certain Clauses of the Bill. Naturally, I start with overdrafts. The whole purpose of the investment mechanism, as I understand it, is to put spare money to the most productive use. What better method could there be than for those seeking a fixed return to pass their savings through the banks and insurance companies to those who wish to take the 371 risks? The overdraft against securities, which is what the Chief Secretary is aiming at, the overdraft against an endowment policy of one man, is nothing but the application of the fixed-interest savings of another into the type of risk investment on which the future of this nation depends.
Moreover, the equal evil of this narrow-minded move is completely to remove the last remaining method by which the middle-income groups could at least establish a minimum degree of true financial independence. As the Chief Secretary must know, the best men enter industry to make their fortunes, and there is nothing wrong with that. The motivations of politicians and administrators are entirely different. The best men enter industry to make their fortunes, and we should encourage them to do it. If more young management in particular had the wherewithal, which it cannot have today, to cock a snook at the boss, its independence of judgment, its ability to innovate and its imagination would be much enhanced.
By removing options in the 1966 legislation whereby the capitalist was able voluntarily to share his wealth with the manager, and by removing the life policy against securities in this Bill, the Government have successfully prevented the only means by which a man of no inherited wealth but of some ability was able to achieve some financial independence of his own. It is one of the real ironies of Socialist rule that the rich should be infinitely richer here today than they were four years ago, but that the ordinary man, the young executive, or the middle-aged man working in British industry, on whom the whole future of this country depends, is in a position of not being able to save a single penny. The net result of all this is that the best young men will join the actors and the actresses: they will move abroad, and they will work for United States companies and firms. If that is the Chancellor's objective, it is very strange indeed.
The Chief Secretary has a look of incomprehension on his face. I do not expect him to understand this, but I make the statement just the same. Just as no Socialist appears to understand that it is the pacemakers of a society who make a country rich and strong, so they fail to 372 understand the rôle of profits. I do not think that our present Chancellor really understands the distinction between sales and profits, and profits and cash flow, and I am sure that Treasury officials do not understand it either. If the right hon. Gentleman is aware of it, it is difficult to understand how he can allow cash grants for new investment in plant and equipment which cost this country up to £400 million a year and then more than wipe out the whole of that amount by raising corporation tax. The net effect is to make a transfer payment whereby the profitable companies subsidise the capital investment of their unprofitable brethren. This is an achievement which not even the Secretary of State for Social Services in his maddest moments could achieve.
It is, further, clear—and here I must charge the Chief Secretary with something; he understands, but he prefers to forget—that our withholding taxes on British companies, on which the export achievements of this country depend, are now about the highest in the world. On a full distribution of corporate profits they are now at 68 per cent., and on a two-thirds' distribution of corporate profits they are 60 per cent., compared with the 1964 position of 53¾ per cent. It is an utter misconception, and quite wrong for the Chancellor and the Chief Secretary to claim that our tax rates on companies are lower than in most countries abroad. In almost every comparative case, the investor whose funds provide the capital for innovation and the expansion of capacity is worse off now than in almost any other country. I do not want to go into the question of ploughed back profits, but I hope to do so in Committee.
I come now to my major charge against this Government. It is the unique and novel means which they have adopted in the last four years of destroying the confidence of businessmen at home and of countries overseas in the achievements of this nation. They have done so by setting targets so impracticable, so euphoric and unattainable, that when they are not met the British people feel a deep sense of loss and shame.
I now quote some examples: there is their past obsession with the incomes policy, the maddest and most negative policy of all. Now there is their present 373 obsession with strikes, which represent about 4 million lost days a year against 280 million lost through sickness.
The problem in this country was never the wage element in costs, it was never strikes. The problem is the gross restrictive practices of management and men, the fact that senior management is blocking the way of younger management who want to get on, and inadequate investment in plant and machinery. Those are our problems, not strikes or the wage element in costs, about which the Government have exerted almost three years of misdirected energy.
On this Bill, the more relevant obsession is their obsession with the trade figures. It is almost unbelievable. Do the Government not know that this country has had a surplus on its current trading balance only in seven years out of the past 175 years? If it is true that a surplus on our current trading balance is that vital, this country would have been bankrupt in 1850 and the Chief Secretary knows it. During the time when this country was incontestably the most powerful nation in the world, we ran a persistent deficit on our current trading balance.
It is the invisibles which have kept this country in surplus year by year for 100 years. It is the service industries and overseas investment which have been our life blood. One has only to consider the figures to see that. Today, invisibles represent approximately 30 per cent. of total world trade. It is a field in which we, together with the United States, dominate the world and one in which growth is far faster than it is in the world trade in manufactured goods. Yet, in a field which has been crucial to this country for 100 years, the Government have put the emphasis of all their taxes. They have levied S.E.T. of £600 million, but, more than that, it is their negative attitude towards invisibles, their incapacity to see this fact, which is the most damaging of all.
Lastly, I turn to the make-up of our invisible receipts. In this connection no long-term thought has been given by the Government to the crucial heading of our investment income in future years. A glance at the capital account will show a declining deficit on capital flows, for which the Government misguidedly lavish 374 much praise upon themselves. But our continued investment overseas is the very seed corn from which our invisibles must grow in future years. If the growth in our investment receipts had not been over 200 per cent. between 1952 and 1964, where would we in this country and the Government be now?
I can list the fields for study on the capital transaction side only very briefly, concentrating on those which deserve attention and have had none at all. First is the codification of our exchange control regulations, which are a jungle. Perhaps the Chief Secretary wants his £95 million in stamp duty revenues. Let him have it if he must, but let us simplify our stamp duty laws. Then, he must look at the premium dollar. It is monstrous that British companies are being forced to pay a premium of 60 per cent. to invest overseas. Companies are often unable to set up sales subsidiaries in, say, Japan or Germany without being forced through the premium dollar market at these rates. Why do not we have an urgent review of the requirements governing the remittances of overseas profits to this country? Why are companies forced to remit their profits here when they may be needed overseas for expansion, with the companies concerned then being forced through the premium dollar market at 60 per cent. in a later effort to expand their facilities? These are the narrowest of short-range measures, damaging to this country's future.
We must look at some sort of E.C.G.D. help for investments overseas, just as the Americans provide through A.I.D. Why must we have this paranoia with manufactured goods? There should be E.C.G.D. cover for investment as well as for the movement of goods. This is done in many countries, notably in the United States, with great success. Although suggestions of this type have been made in various reports—these ideas have been well ventilated—we have heard nothing about them from the Government.
We must be an outward-looking nation if we are to survive and we must thrive on cross investments and the free flow of trade. It is not by grandiose technological communities that we will prosper. The exchange control regulations must be simplified so that companies can invest abroad.
375 Why are we not giving more help to companies which are trying to borrow in Euro-dollars to finance their expansion overseas? It is often not possible for companies to give the necessary guarantees to borrow in foreign currency. After all, I am merely asking for the same treatment as the Government are giving to local authorities and others. The British people have been deluded by the Labour Party into believing that it lies in the Government's hands to make the people rich, to make the poor happy, to restructure industry and to cause a technological breakthrough. It does not lie in the Government's hands to do those things, and the British people are beginning to realise this. Because so many Labour promises have been broken, the people are disillusioned with politics and with all politicians.
I hope that the Opposition Front Bench and the Conservative Party generally will make no promises. We should say repeatedly that the consumer can be safeguarded from monopoly, that the poor and sick can be protected from misfortune and that individuals can give of their best only in a competitive climate untrammelled by restrictions and, as far as possible, free from subsidies.
We need a society in which incentive and profit are respectable goals and in which the rewards of success are sufficiently high to compensate for the penalties of failure. This may seem a harsh doctrine, but in a world in which national Government increasingly do not have that much control over the destinies of their own countries—the Chief Secretary knows that only too well—it is the only doctrine which can preserve what I earlier described as the tolerance and happiness of our society.
§ 8.49 p.m.
§ Mr. John M. Temple (City of Chester)
I congratulate my lion. Friend the Member for St. Ives (Mr. Nott) on making an absolutely brilliant speech. It was typical of the thinking of the up and coming generation in the Tory Party.
I have had the good fortune to have had a copy of the Finance Bill for a week, unlike my right hon. Friend the Member for Flint, West (Mr. Birch), who also made a brilliant speech, which goes to show the tremendous grasp he has of 376 the financial problems which face the country.
Having had this opportunity to study the Bill, I find absolutely zero incentives in it. Having been bemused by all its complications, I was interested to hear the Leader of the House speak about the Committee stage of the Bill. He said that there would be four days on the Floor of the House and that the minutiae would then be dealt with upstairs. There will be about 150 pages of minutiae of fantastic complications dealt with in Committee upstairs.
I have been studying recently the trend of the type of man who gets the chairmanship of a big public company in this country. A generation ago chairmen of big public companies had grown up through their companies and had an intimate knowledge of the trades with which their companies were associated. Today half the chairmen of public companies are chartered accountants. That is because they have to have an intimate knowledge of the tax structure. It is a severe comment on the efforts of all political parties that they have complicated the tax structure to such an extent that today only brilliant chartered accountants can be looked on as the chief administrators of these enormous corporations. I welcome the fact that time and again my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) has said that one of the main planks in the Tory Party's programme are proposals to simplify the tax structure.
Before referring to some aspects of the Bill and two new taxes which have not been mentioned so far in this debate, I comment on selective employment tax. My hon. Friend the Member for St. Ives pointed out the tremendous contribution which invisible exports make to our balance of payments. The taxation on contributors to those invisible exports has been very serious. The impact of selective employment tax on the insurance industry and all those industries which are making such a contribution is very severe.
Another industry which has been seriously hurt is the tourist industry. I believe that it is cheaper now to have a package holiday on the Costa Brava than in Bournemouth or Blackpool. More serious, and this is what top tourists, 377 members of the jet set, find when they come into London, is the lack of personal service. When they go to London, Paris, New York, or Mexico City they require personal service. They do not want to have to get out a do-it-yourself kit to clean their shoes. This tax is severe in its effect on first class personal service for which we have been noted down the years.
I shall pick out of this rag-bag of a Bill a few general comments. My right hon. Friend the Member for Flint, West commented on one matter to which I have given some attention; exemption in future of gilt-edged securities from capital gains tax. The Chancellor has done this at a time when gilt-edged securities are virtually at the bottom. If under 40 is not the bottom for War Loan we can start tearing up all our gilt-edged securities. All those faithful people who have held gilt-edged down the years have been cheated by the fact that in future they will not be able to set off capital losses against other capital profits when they sell them.
My right hon. Friend the Member for West Flint, proposed from the Dispatch Box a few years ago that we should exempt local authority loan stocks from the provisions of capital gains tax. Today the redemption yields of local authority loan stocks with similar dates of redemption to those for gilt-edged are nearly ½per cent. worse. The public should know the great prejudice which the Government have against local authorities. This, I think, may well be because so many are controlled by Conservatives.
I do not know who dreamt up the idea of disallowance for tax purposes of interest on loans. The scheme will be riddled with anomalies. If a person buys a house today and then purchases a washing machine, a washing-up machine and a night storage heater, he cannot borrow money to finance the purchase of those items and set off the tax on that borrowed money against his income. But if, having equipped his house with those items, he sells it complete with them the buyer of the house will be able to borrow money against the total value of the house, including all those fixtures and fittings.
If a prudent farmer had to pay estate duties and also wanted to improve his 378 farm, and paid the estate duties out of his own pocket and did the improvements on borrowed money, he could set against his taxable income the interest on the money borrowed for improvements. But if he did this the other way round and financed the improvements himself and borrowed the money to pay the estate duty, he would not be able to set off the interest on the estate duty borrowing against his gross income. That is a glaring example of a different approach to exactly the same problem attracting entirely different rates of tax.
Another new tax which has not been mentioned is the proposal with regard to estate duty on discretionary trusts. I have only a modest knowledge of discretionary trusts, but I know that they are all different. They have only one common factor, which is that the income on them goes to what is called a "class" of beneficiaries, which may be very wide. Within a "class" of beneficiaries who could benefit under a discretionary trust there are probably a number of infants. They may benefit for, say, 1969 or 1970, and may not benefit again throughout the whole of their lives. Who is to keep track of them as they grow up? They may die in Timbuctoo, New York or New Zealand. Are they to send from heaven or wherever else they go a telegram to trustees they have never heard of telling them that they have passed away, and that there will be some estate duty payable by the trust, which perhaps was wound up 50 years before, which is a more than probable state of affairs?
I do not know whether in the future it will be possible to get people to serve as trustees on discretionary trusts, because the trustees will be liable for the estate duty. As I understand discretionary trusts, the trustees usually have power to dissolve the trust and distribute the assets. If so these may well be a charge for estate duties charged on a trustee who has died 50 years before and on a non-existent trust which has been distributed 40 years before that. These are not impossibilities with regard to the legislation proposed on discretionary trusts. I recommend the Chief Secretary to read the advice of the tax correspondent of the Financial Times, which is that going back a number of years should be limited to seven. That would be the realistic thing to do. It is unrealistic to think that trustees can keep 379 tabs on beneficiaries who may have benefited to a very limited extent many years before.
Another tax which has not had a mention is the new betting duty. A couple of years ago the Chancellor introduced a general betting duty, last year he doubled it, and earlier this year the Chairman of the Horserace Betting Levy Board, Lord Wigg, was responsible for the doubling of the betting levy. Now we have the Chancellor introducing a tax on bookmakers' premises, which will in effect be equal to a one per cent. tax on turnover. It is extraordinary that time after time a general betting duty or type of betting duty is increased. We have constantly advocated from this side of the House that there should be a differential between on- and off-course betting. The Chancellor claims to have brought this about by increasing the duty on off-course betting. To me, that is very much an Irishman's rise in betting duty. I seriously warn the Chief Secretary and the Government that there may well be a big revulsion by punters against these very high rates of duty, which of course will be paid by them.
We cannot go on increasing betting taxes or once again we shall face the situation where we are driving it underground. That would be exceptionally undesirable. I make the plea that this duty, which will be payable from 1st October and will amount to £7 million, should be capable of being paid by instalments.
The final insult in the Bill, which is so unconstructive, is the swipe it takes by the purchase tax imposed on potato crisps and pet foods. This may seem part of the minutiae of life, but if one fries one's own potato chips no tax is attracted, and if an old-age pensioner is well enough to go out and buy a penny worth of pet food in the local butcher's or fishmonger's no tax is attracted. But if he is infirm and has to rely on tins of pet food, a tax of 22 per cent. is attracted. I estimate that this tax on pet foods will cost an old-age pensioner keeping a cat or dog about one shilling a week extra. Just how mean can one get with pensioners who are not capable of going out and buying a pennyworth of pet food from the normal supplier and has to 380 buy food carrying a 22 per cent. purchase tax.
I am more disappointed with this Budget than ever before. It is a rag bag, and I am afraid that the Chancellor has lost his position in the leadership stakes in the Labour Party. I am not surprised. Any Chancellor who could bring in such an unimaginative Budget deserves to lose his position in the hierarchy of his party, and this has happened. But who has taken his place in the stakes? Someone, I am afraid, who failed the country and brought about devaluation. Perhaps it requires a devaluation in order to get him promoted once again to the height of being considered as an alternative leader to the Prime Minister.
I am afraid that what will happen as a result of the Budget is that prices will rise and that the in our pockets will once again be devalued. This is what is worrying our people at home and our friends overseas.
§ 9.3 p.m.
§ Mr. David Waddington (Nelson and Colne)
My hon. Friend the Member for the City of Chester (Mr. Temple) will forgive me if I do not follow in any detail the points he made but I agree with him that those of us who have been fortunate in being able to read the Bill have found it a weary document. I tried it as bedside reading and was not impressed. We are not surprised that the Government have run out of ideas, and, indeed, remembering some of the crackbrained schemes advanced by the Government in 1964 and 1965, we should be rather glad that they have.
The history of the last four years is extraordinary. Every few months the Government come to the House and say, "We are sorry but we must once again impose more and more burdens on the long-suffering British public". Every few months the burden of taxation is increased. No hope of relief is ever advanced. We know what is needed. We want to give our young energetic people, on whom our future depends, some hope for the future. We want to tell them that if they use their initiative and try to achieve something in life there will be a reward for them. What hope is ever offered by the Government? None whatever.
381 A very important detail of the Finance Bill for that part of the world from which I come is the new tax on household textiles. I should declare a negative interest here, in the sense that I spend a very small part of my time making cotton handkerchiefs. I suppose that I should be glad that a new tax has been imposed on paper handkerchiefs. The Government are under a great misapprehension if they do not realise that there is great indignation and annoyance throughout Lancashire at the imposition of this new tax. It is not for nothing, as the Government well know, that Governments over the years have always exempted these particular products from purchase tax. I appreciate the argument advanced by the Chancellor for broadening the base of indirect taxation, and I accept it. But this seems to be the oddest of times to make this change. The Government are taxing necessities. The Chancellor is quite deliberately forcing up the cost of living, particularly for those who can least afford to pay.
I refer first of all to young people setting up home for the first time, who have to spend a lot of money on things like sheets and blankets, and, second, to the older people who find at the end of their working life that they very often have to renew these household necessities. In the course of his Budget speech the Chancellor said:Household textiles and cloth were exempted from Purchase Tax in 1955 and 1958 in the interests of particular regional industries."—[OFFICIAL REPORT, 15th April, 1969; Vol. 781, c. 1023.]This is quite right, but what has happened since to suggest that those industries which needed that assistance in 1955 and 1958 do not need it today? What the textile industry lacks is confidence in the future and in this Government.
It is a great pity and a scandal that the first Governmental response to the report of the Textile Council should have been a kick in the teeth. For months at Question Time we have been fobbed off by Ministers with the reply, "Wait until you see the Textile Council Report; then we will tell you what are our plans for the textile industry". What happened? On 30th March the Textile Council produced a report calling upon the Government to give assistance to the textile industry so that it may have some 382 confidence in the future. Then the Government, instead of giving the textile industry that support, give it a kick in the teeth in the shape of this new tax.
We must not forget the dislocation of trade attendant upon the bringing of a new line of goods into the purchase tax net. Last night I was speaking to a person concerned in the manufacture of furnishing fabrics. Between now and Whitsuntide he will have sold every single thing he has in stock, and he confidently expects that he will not get another order between Whitsuntide and late autumn. He also tells me that representatives of the Customs and Excise, who had to visit him to negotiate with him about the wholesale value on which the purchase tax should be levied, told him that between now and Whitsuntide representatives of the Customs and Excise are supposed to visit no fewer than 1,000 converters and finishers in Manchester to negotiate the sum on which purchase tax is to be levied. All of this is supposed to happen before the tax comes into force in a month or so. Make no mistake about it, the administrative burden is immense.
I wish that the Chancellor in his Budget speech had pointed the way towards a comprehensive reform of indirect taxation. Instead, he has singled out for special punishment an industry which is already facing special problems.
I hope that future Chancellors of the Exchequer will be more careful than the present Chancellor of the Exchequer was in the choice of words in his Budget speech. It is monstrous that words were used in the Chancellor's speech which had the effect of casting the whole trade into a state of turmoil for the next 48 hours. No one knew what tax changes on textiles the Chancellor had in mind. I hope that in future plainer words will be spoken by the Chancellor on Budget day.
§ 9.11 p.m.
§ Sir Cyril Osborne (Louth)
I warn the Treasury that it may have great difficulty in raising the amount of tax which it anticipates will be raised under the Bill. In many industries there is evidence of a slackening of trade. Orders are more difficult to get, profit margins are being squeezed, overheads are increasing, and the balance sheets next year will not be 383 as good as in the past year. The Chancellor, and the Treasury who advise him, should bear in mind that the figures may not turn out so well as they anticipate. I am not suggesting that there will be a slump at the end of the year, but trade is difficult, and this will be reflected in the amount of money that is raised by the taxes.
The Finance Bill imposes taxation of £14,464 million, which is by far the highest burden that has ever been put on the shoulders of the British taxpayer. The last Conservative Finance Bill in 1964 imposed taxation of only £7,169 million. It is costing the taxpayer more than twice as much to live under a Labour Government as it did to live under a Tory Government.
Additional taxation on the individual in the last five years may be summarised in this way. The tax on cigarettes in October, 1964, was 3s. 8½d. a packet, today it is 4s. 9½d.; whisky 30s., today 44s.; petrol 2s. 9d., today 4s. 6d.; beer duty, 8d., today 11d.; the road fund licence has gone up from £15 to £25; the radio licence from 20s. to 25s.; the T.V. licence from £4 to £6; income tax has gone up from 7s. 9d. to 8s. 3d., and the national stamp included in the S.E.T. has gone up from 21s. 4d. to 70s. 8d.—a fantastic rise.
As a result of these impositions the Government have achieved a wonderful record. Unemployment went up from 348,000 to 558,000. If the Prime Minister had given these figures to his audience on Sunday night, they would not have cheered him so much.
This Finance Bill adds a further £340 million in extra taxes. The reasonable question to ask is, will it be enough? Last year, in 1968, the Finance Bill imposed additional taxation—the highest amount of extra taxes—of £930 million. Hon. Members opposite were stunned, shocked and disheartened by this extra burden. But it did not prove enough. In November along came the Chancellor and said, "I am sorry, I want more", and in another mini-Finance Bill he imposed an extra £250 million.
My constituents ask me, "Will this additional £340 million taxation imposed by the Chancellor be enough, or will we have to face yet another autumn 384 budget?" I should like an answer from the Treasury.
My constituents then put to me the simple question: "What on earth do the Labour Government do with all the money they take from us?" My constituents would like to know. They would more readily bear the additional taxes if they knew that they were getting good value for money. They remember that this Government have imposed an extra £7,000 million taxes upon the country. They read that the Government have borrowed £3,000 million from foreign bankers, are still in debt and want to borrow more.
Local councillors have to try to explain to my constituents that the Government's proposals for better schools, hospitals, roads, sewerage schemes, and all the things which the Labour Party promised, have all had to be cut down, and the local councillors are quite unfairly blamed for it. The central government should provide the money for the things which they have promised. We have had to cut down on the Army, the Navy and the Air Force because we have not the money to pay for them. People naturally ask "Where does all this money go? Does it go down a bottomless rat-hole?".
The Chancellor gives two excuses for his actions. Firstly, he says that the Labour Government are increasing welfare payments to the poorer section of the community. That, of course, is true. He also claims that it is part of their tactics to redistribute the internal income of the nation and to take from the rich to give to the poor. But at the Labour conference in Blackpool last year the Chancellor made this boast:Since we came to power public expenditure has risen nearly four times as fast as national income.What a stupid boast. What a foolish thing to say. It is worthy of the prodigal son, to boast that one is spending four times more rapidly than one's income is providing. Is there any cause to doubt that, internationally, we are in debt and that we have to borrow more and more, knowing full well that we will never be able to repay it. This is what hurts me in what was once a proud and independent nation.
No redistribution of internal income can affect the one problem which bedevils the whole situation, and that is 385 the balance of payments. Balance of payments on current account, excluding capital movements, during the period of office of the present Government has been as follows. In 1965 there was a deficit of £91 million. In 1966 there was a surplus of £5 million. In 1967 we went back to a deficit of £399 million. Last year—and this is the figure that matters—the deficit amounted to £419 million. The present Finance Bill does not touch that problem of foreign indebtedness of £419 million. It is to the extent of £419 million that we are, collectively and individually, living beyond our means and spending more than we are earning.
That is the trouble. Individually, we are all smoking, drinking, gambling and spending on sport and amusement more than we are earning and more than we can afford. The Chancellor is trying to build up a Welfare State which in itself is fine but which the people are not prepared to pay for. That is why we are in this horrible mess and are always running to the foreign bankers in order to borrow money.
In his Budget speech, the Chancellor took pride in saying that he promised old-age pensioners a bigger pension. That is a fine idea and we all agree with it, but from where is the money to come? Certainly it will not come from this Finance Bill. It will be necessary to provide £250 million extra. Is it intended to ask the I.M.F. to lend it to us? If it is, we should be ashamed of ourselves for rattling the begging bowl abroad to pay for welfare arrangements of which we boast.
Our task is to increase the national wealth by at least £419 million in order to get out of our current debt. On more than one occasion, the Chancellor has said that we need an extra £500 million a year to repay old debts and build up our sterling balances against a recurrence of these problems. That means that, collectively, we have somehow to produce £1,000 million extra a year without paying ourselves a farthing extra for producing it. That is the grim reality which the Chancellor has failed to put before the public. In turn, it means much harder, much longer and much more productive work from everyone, and no more wildcat strikes.
This Finance Bill will not encourage anyone to work harder or to save. Who 386 is likely to exert himself in an extraordinary way to earn more money, be he in management or on the shop floor, if too large a proportion is taken from him in taxation? It is unreasonable to expect it. The way to get men to work is to tax them less and let them keep more of what they earn.
Yesterday, we saw near-hysteria on the benches opposite over 'the proposals about spectacles and false teeth. They infuriated hon. Gentlemen opposite, as I can well understand. But the £3½ million that will be saved is mere chicken-feed when set against the problems facing us. Even to get out of debt we require to produce an extra £419 million, yet there is all this furore about £3½ million. We have to save 130 times more than the proposed saving on false teeth and spectacles. I do not know what hon. Gentlemen opposite will say when they have to face reality and we have to do this.
This Finance Bill is quite irrelevant to the problem facing us. It will not help us a bit. I hope that my respects will be passed to the Chancellor, together with the suggestion that, when he has five minutes to spare, he gives himself the pleasure of reading the fourth chapter of the book of Nehemiah. He will find there the boast of the old Jewish prophet:So built we the wall … for the people had a mind to work.That was a boast worth making. If the Chancellor could bring the English people to have a mind to work—
§ Sir C. Osborne
If the Chancellor could bring the British people to have a mind to work and could persuade them to cease living on internal or external charity, we should not need Finance Bills like this. That is why I am so disappointed with it and why it is so inadequate to meet the problems that we face.
§ 9.25 p.m.
§ Mr. Iain Macleod (Enfield, West)
My hon. Friend the Member for Louth (Sir C. Osborne) was, on the whole, gloomy in his economic analysis. Although I do not necessarily agree with him in detail, I am afraid that I, too, am gloomy about our economic position. I am sure 387 that he hopes, as I do, that we will both be proved wrong.
Second Reading of a Finance Bill is often a dull occasion sandwiched between the two major events of the Budget speech and the Budget debate and the Committee stage. Indeed, I have often thought in previous years that it is a day that we might well dispense with. But I think that today has been an excellent day, with speeches from both sides in a low key no doubt, but of real value.
I propose to be brief. This is exempt business, but we are conditioned to voting at about ten o'clock, give or take a few minutes, and I dare say that we can arrange that.
My first point refers to the Chancellor's Budget judgment. The right hon. Gentleman said that I put forward no alternative to the Budget judgment. Perhaps he will allow me to make a small amendment to that. I put forward no alternative to his Budget judgment. I used to join in the game of Budget judgments, for game it is, with the Home Secretary in previous years. But when, as last year, the Chancellor of the Exchequer takes £1,000 million out of the economy with the idea of reducing consumer expenditure and consumer expenditure rises in that same year in money terms by £1,700 million, there is, in my view, little point in arguing whether £340 million, £300 million or £200 million is the precise amount. Touches on the tiller are of little value if there is no rudder on the ship.
Rather than jump about, I should like to concentrate on one subject only, the disallowance of interest, which has played a major part in our discussions.
There is on the Order Paper, if the House is unwise enough to give a Second Reading to the Bill, a Motion in the name of the Chancellor of the Exchequer. Without referring to it, it seems a vast improvement on last year's procedure. It seems an experiment well worth trying, and I hope that the House will agree.
But everything that I have heard today confirms me in the view that the right thing to do with the Clauses about disallowance is to examine them in deep and probing detail upstairs, to find out what give, if any, there be on the part of 388 the Government, and then to bring them before the House on Report.
The Chancellor's case is largely based on people with large investment incomes running up to 18s. 3d. taxation in the pound, for whom borrowing becomes extremely cheap. We, on this side of the House, say that rather than alter an established principle of income tax law it is vastly better, if that be the right hon. Gentleman's concern, to reduce the levels of personal direct taxation. We intend to return to this in Committee. But it is a revealing figure, given by the Chief Secretary, that surtax accounts for only £5 million and income tax for £20 million of the £25 million estimated to be saved in a full year.
I invite the House to consider some of the points that we would like to hammer out in Committee, and if the Minister of State wishes to answer any of them now so much the better. First, on the question of goodwill, I will quote from a letter from a chartered accountant:In my profession, together with many others, solicitors, estate agents, etc., it is common practice when entering a partnership to pay monies for goodwill; and invariably these monies are either borrowed as a loan or from a bank, and, of course, repaid out of income earned.I believe the hon. Member for Heywood and Royton (Mr. Barnett) is quite right. The difficulties that will arise on this do merit a White Paper from the Government, as do other points I will mention. I press that particular point upon the Minister of State and the Government, because there can be no question that very many professions in this country—some of the very best people in this country—are going to be adversely affected by this particular measure.
The second point that arises—and again there is much more detail than I can cover—is agriculture, mentioned by my right hon. Friend the Member for Windsor (Sir C. Mott-Radclyffe). As I understand it, the difficulty is that an agricultural estate is not recognised as a business—although properly normally it is one—and the point one wishes to make is that tax relief should be allowed on interest on borrowings used for the running of an agricultural estate. Secondly, it is often the case, surely, that on a death money is borrowed to pay estate duty 389 when the only alternative is the fragmentation of the farm or the unit on which estate duty has become liable.
The third case I would like to mention is that of many private companies. We are apt to forget how many private corn-patties there are. There are 9,000 active public companies but 300,000 active unquoted companies; and even if I take those with a sales average exceeding £1 million per annum, there are still 37,500 prominent private companies—four times as many as the number of public companies. I invite a Treasury Minister to go to the very top in this field. Let him go to firms like Pilkington, Sainsbury and others and he will find that the method of personal borrowing they use to finance the future of their great companies is going to be very seriously and adversely affected by this particular proposal; and we will move appropriate Amendments on the Committee stage.
Then there is the question of saving. My hon. Friend the Member for St. Ives (Mr. Nott), in a really excellent speech, said this was—and it is—a blow to the young executives buying a stake in their own company; but it is more than that. There are many, many thousands of people who have borrowed money for excellent purposes through life assurances. They are, after all, borrowing their own money and they are going to be adversely affected by this. I believe this is a betrayal of everything that the Financial Secretary worked out with us on the life assurance Clauses of the Finance Bill a year ago. What the Chancellor has done with this Finance Bill is to introduce one saving scheme and kill 10,000 in the same Bill.
I wish to read extracts from a letter sent to me so that hon. Members opposite can realise that it is not the wealthy they are attacking with this Measure but precisely the kind of people whom they—and for that matter we—need if we wish to form a Government in this country.
The letter says:I am writing to ask whether you would consider trying to obtain a Clause in the Income Tax Acts to allow income tax relief for interest paid with life insurance policies where the purpose of the loan is to obtain capital for retirement.The Chancellor's proposal to disallow income tax relief in respect of loan interest paid will over the 13 years 4 months from 6th April, 1970 cost me £962 13s. 4d. … Like many 390 other lower middle class citizens I am incensed by the unfairness of this.I am not a rich man, my capital has all been obtained from savings from hard earned in come after bringing up five children. My object in joining the Insurance Scheme was to save for retirement. I shall be over 63 years of age when the loan is repaid.I have been unable to obtain a building society mortgage on my home because it is not of a high enough standard. It is a 1914 stone built cottage …If the whole of Britain worked hard, lived frugally, and saved like we do there would be no balance of payments problem."—[Interruption.]Those are the man's own words. He says that he is lower middle class—that is his phrase, not mine—that he is saving for retirement, and that his cottage is of too poor a standard to obtain a mortgage on it. It is the savings of that sort of man that we should encourage, and not oppose as this measure will do.
The Chief Secretary said today—I think he attributed it to my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd), although it was myself—that previous Chancellors had looked at this proposal, but if I might quote from the right hon. Member for Battersea, North (Mr. Jay), he said:I have been recommending every Chancellor of the Exchequer since and including Sir Stafford Cripps to get rid of it."—[OFFICIAL REPORT, 16th April, 1969; Vol. 781, c. 1199.]Thus every Socialist Chancellor at least has been recommended by the right hon. Gentleman to get rid of this, and they have all refused, until this Chancellor of the Exchequer. We are therefore asked to believe that on the question of Socialist principles, whatever they may be, the present Chancellor is a better guide than Sir Stafford Cripps. We are asked to believe that on the question of equity the present Chancellor is a better guide than Hugh Gaitskell. We are asked to believe that on the political value of those people it will hurt the Chancellor is a better guide than the Home Secretary. We believe that this is not a just but a thoroughly unjust proposal.
I believe that the true criticism of this Finance Bill is the utter lack of consistency between the Chancellor's words and his actions. As my hon. Friend the Member for St. Ives said, there is no strategy at all apparent in this Bill. The Chancellor says that he will press on with the policies of a year ago, but those policies have failed and he dare not carry 391 out the logic of his own words by taking many millions of £s out of consumer expenditure.
The Chancellor has made one change, and it is an important one. Up to a point it is the change which we have been urging on him and his predecessor for some time. We have urged that he should drop the prices and incomes legislation and concentrate on trade union reform. The Chancellor has at least accepted some of that advice, although if I read the weekend speeches rightly the Government are running away even from the meagre measure of trade union reform they have put before the House.
The Chancellor says that he intends to safeguard the balance of payments. As the hon. Member for Ashton-under-Lyne (Mr. Sheldon) said, the Finance Bill makes no great contribution in that direction, and that is a masterpiece of understatement.
There is not a Clause, there is not a Schedule, there is not a line in this Finance Bill which in any way strengthens our economy, which in any way makes us more competitive. The verdict of this side of the House, which I give without emphasis or even heat is that this Finance Bill, like the Government which spawned it, is a mess, and we are very happy to oppose it.
§ 9.40 p.m.
§ The Minister of State, Treasury (Mr. Dick Taverne)
The right hon. Member for Enfield, West (Mr. Iain Macleod) was clearly touched by some of the criticisms directed at him for not making any Budget judgment this year or last. Last year he did say that the Chancellor had done too much. Clearly, since this was not borne out by events, he regretted this, and refused to make any Budget judgments in the Budget debate this time. He explained this absence of any such judgment by saying that it was impossible to judge demands accurately or exactly.
He is perfectly right in that the indicators available are not altogether reliable or complete. To make no judgment at all on the best available information is a total abrogation of responsibility. It is a decision which no Chancellor could expect to make; it is something which no Chancellor in the past has been able to do.
392 The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) raised a general question of management demand. He asked how the Government intended to use this surplus to repay debt. I say to him, quite frankly, that I cannot give as specific an answer as he would wish. The whole of the surplus will be used to repay debt. As regards the position of the debt repayment, there will be a substantial requirement for sterling to finance the expected improvement in the balance of payments and reserves position. For the rest, the authorities remain determined to sell as much Government debt as possible, net, to the non-banking public so as to enable the maximum repayment to the banking sector.
We have to remember that the Government have to re-finance a substantial volume of maturities this year, partly in the non-banking and partly in the banking sector. It is impossible to predict how this will come out in the year as a whole. We must bear two things in mind. The first is that the large surplus, which the hon. Member correctly said is a surplus of £800 million, would put us in a very much stronger position this year than last, and the second is that many holders of maturing stock will want to replace it with other Government stock.
§ Mr. Taverne
In a most interesting speech the hon. Member devoted a great deal of time to the need for the simplification of the tax system, and for the discussion of tax changes through, perhaps, a Select Committee dealing with tax questions. He was backed in this by my hon. Friend the Member for Heywood and Royton (Mr. Barnett). I understand that the Select Committee on Procedure will be considering whether a Select Committee on Taxation is the right way to discuss this. That is obviously a suitable body to consider this question.
A word now about simplification. Successive Treasury Ministers have found that some of their high hopes for simplification have been disappointed, that the enormous burden which this carries for the Inland Revenue cannot be overestimated. In 1962 the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd), after expressing his hopes for the simplification of the system, confessed that he had on his arrival at the Treasury 393 had an "undue optimism about the simpleness of simplification". Further, as the hon. Member will realise, there is some conflict between simplication and equity.
There is another conflict too. The hon. Member said that he had come across many cases of the strongest objections to detailed avoidance provisions. He went on to say that he also found the strongest objections to the discretionary powers left to inspectors. He is riding two horses going in different directions. The one way in which we can avoid detailed anti-avoidance provisions is by having a general anti-avoidance provision, which would place far too wide and general a discretionary power in the hands of Inland Revenue inspectors. I am not, of course, saying that simplification is impossible, and I hope that the hon. Member will welcome the new approach to estate duty contained in the Bill. Here, there is a simplification of a very complex field of the kind which he has demanded. There has been very little criticism of these proposals and I assume that they command general support.
I also hope that my hon. Friend the Member for Heywood and Royton will welcome the issue of a White Paper on the lines for which he asked. I am also glad to know that the right hon. Member for Orkney and Shetland (Mr. Grimond) welcomed the Green Paper on public expenditure, which received an almost ecstatic welcome in The Times Business News. As that paper says, the present Government have done more than any previous Government in the aid of public discussion of matters of public expenditure, economic forecasting and matters in finance and taxation.
I turn to the main criticisms made of the Bill. These related to the selective employment tax and the disallowance of tax relief on personal loans. It is important that these two measures should be judged in the proper context of the Budget strategy. One starts with a judgment about the need to reduce demand and release resources for exports by a certain amount—a judgment which any Chancellor must make. This was discussed in the Budget debate, and this is not the time to judge the total. But, in approaching the way of achieving this aim, it is important for the House to remember the principles which underlie the approach.
394 These principles are mainly two—first, that the reduction of demand should be done as fairly as possible and in a way which will re-distribute rather than produce regressive measures and, second, that it should be done with as little impact as possible on the cost of living.
Clearly, in the situation which the Chancellor found, it was impossible to avoid altogether the traditional measures of indirect taxation. It has been suggested that demand cannot be reduced and that these measures are ineffective. My hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said, I believe, that it was impossible to reduce or restrain demand. The evidence is clearly against him on this. If one looks at what happened in the last financial year—
§ Mr. Sheldon
What I said was that it is impossible to reduce consumption, and what happened last year proves that.
§ Mr. Taverne
I am happy to rest on what happened last year, and that shows conclusively that the evidence is against my hon. Friend. Of course, last year the reduction in the increase in consumption or the reduction in consumption was not what had been planned. The explanation for this—this has been stated publicly—was that the increase in wages was greater than had been expected and that this offset the Budget measures to a certain extent, but to say that the Budget measures had no effect on consumption is totally misleading—
§ Mr. Taverne
If I misrepresent my hon. Friend, I withdraw that, but for anyone to suggest that the Budget measures had no effect on consumption and did not have a major effect would be totally misleading. Last year consumption rose by only 1.1 per cent. at a time when the gross domestic product increased by 4 per cent. That is clear evidence that, even if the total effect was not as great as had been anticipated, the traditional measures of indirect taxation had a considerable effect on consumer demand and consumption.
I turn to those traditional measures of indirect taxation and I want to make a short reference to the purchase tax changes. The hon. Member for Nelson and Colne (Mr. Waddington) criticised these on a number of grounds. One or 395 two of the grounds on which he and others criticised the Chancellor was the astonishing ground that the Chancellor should have explained that household textiles meant household textiles. That was made quite clear in the Budget announcement.
The hon. Member said that he is not against the idea of broadening the tax base. The Opposition keep telling us that we must broaden the tax base, but of course it cannot be broadened only by being extended to luxuries. The hon. Member must realise that it is quite impossible to broaden the tax base by confining the extension of purchase tax to luxuries. The right hon. Member for Enfield, West will realise that if one broadened the tax base a number of items would be brought in which cannot be described as luxuries. If one is broadening the indirect tax base, quite clearly the fairest way of doing so is to add items to the field covered by purchase tax, the exclusion of which was in many ways anomalous before.
Secondly, I want to say something about fuel tax. It is sometimes suggested that the motorist is in some ways a separate animal, quite unrelated to the rest of the human species, who must be freed from regulations and free from the taxes the rest of the species bear. If one looks at the question of rise of consumption it is quite clear that the fastest growing section of consumption has been in the rise in consumer expenditure on motoring. In the last decade this has increased by more than three times, and this is at constant prices and disregarding any effect of tax rates. It is therefore reasonable that some of the measures restraining consumer demand should apply in this sector. If so, much the fairest way of doing so is through the fuel tax rather than through licence duties, bearing less hardly on the weekend drivers and those with cheaper cars and more closely related to resources spent on the motorist.
However, the traditional indirect tax measures have three disadvantages. First, they tend to be regressive. Second, they tend by putting up the cost of living to increase the pressure behind wage demands. Thirdly, while it is nonsense to talk about a consumer revolution and 396 quite clear that in the course of the last year there was no substantial drop in the personal savings ratio, nevertheless there was clearly a danger that a further heavy dose of indirect taxation of the traditional kind would have a diminishing effect. In the context of the Budget strategy therefore one must look at the S.E.T. imposition and at the disallowance of tax relief on overdrafts and personal loans as measures to release resources and restrain consumer spending which do not have the same disadvantages as the traditional indirect tax measures.
The main body of the Opposition attack has, of course, fallen in the past on S.E.T. I shall add a few points to the arguments which were advanced by my right hon. Friend the Chief Secretary. There is no question that as compared with purchase tax the effect of S.E.T. on the cost of living is very much less. This is partly because of the field covered by S.E.T. and partly because some—not all, but some—of S.E.T. has to be absorbed and is not passed on in higher prices.
In addition, the selective employment tax, according to the evidence which is quite clearly available, has a considerable effect on productivity in the tax-bearing sectors. Both in distribution and in construction there has been not only an increase but an acceleration to the trend of rising productivity. There has been a clear reversal of the labour pulls and labour trends in most of the sectors affected by the tax. It is precisely for this cause, precisely because it has less impact on the cost of living because part of it in many sectors has to be absorbed, that there is a sharper outcry about increase in S.E.T. than about any corresponding increase in purchase tax.
§ Sir Harmar Nicholls (Peterborough)
Is not the hon. and learned Gentleman aware that the outcry was because the Government admitted that they had done this not out of merit or fairness but just because it was easy to collect?
§ Mr. Taverne
The hon. Gentleman is totally unaware of what has been said and what is the fact. It was explained at the start that there were three purposes to S.E.T.—first, the collection of taxes; second, the broadening of the tax 397 base and an evening of the tax distribution between manufactures and services; and, third, to produce a new pattern in the distribution of labour. It is precisely because there is a resource—releasing effect about S.E.T. that it is a particularly suitable weapon—[Interruption.]
§ Mr. Speaker
Order. The debate has been placid so far, and there is no reason why it should not continue so.
§ Mr. Michael Alison (Barkston Ash)
I am grateful to the Minister of State for giving way. He has stated the glittering qualities of the selective employment tax. Will he now tell us the doubts he has about it which led him to ask Professor Reddaway to look into it?
§ Mr. Taverne
Professor Reddaway was asked over a year ago to report on S.E.T. Since then evidence has become available which made it quite clear that of the weapons available to the Chancellor at the time when he had to take measures against consumption this was one of the most effective in the armoury of the Treasury.
The second part of the proposals which is uncomfortable to hon. Members opposite is the proposed change in relation to tax relief on borrowing. I must say to my hon. Friend the Member for Heywood and Royton that this is not a minor measure concerned with tax avoidance. It is true that when we launched the proposal we were aware of difficulties which would exist in the form in which it was implemented. We shall no doubt hear more of this in Committee, and these matters will be carefully considered. But there is no doubt that viewed in the overall Budget strategy the tax change in relation to borrowing has considerable advantages compared with other measures of restraining consumer spending.
First, it is clearly a sensible corollary to a savings scheme. If there is tax relief on saving it is logical that there should not be tax relief on borrowing for the purpose of spending.
Second, it is reasonable to expect a considerable effect from the disallowance of the tax on consumer spending. One has only to have regard to the total amount of personal loans—[Interruption.]
§ Mr. Speaker
Order. It is not fair to any speaker that a considerable portion of the House should engage in conversation.
§ Mr. Taverne
Hon. Members opposite are reluctant to hear about any suggestions which may hit certain sections of the community with which they are more closely connected, and about any tax measure which does not put the whole burden of consumer restraint on the least well-off sections of the community. The first thing hon. Members opposite must realise is the total amount of personal loans affected by the measure. This is likely to be between £700 million and £800 million. The figures of bank advances to the personal sectors, excluding loans for house purchase or professional purposes, total about £600 million. Deducting a part of this for what may be business loans, but adding the considerable figures of loans for credit sales and loans against life policies, one arrives at a total amount of loans and personal overdrafts outstanding which is in the region of £700 to £800 million.
No one expects that all these loans will be liquidated but a considerable fraction will be. In many cases, it will not pay to carry on the overdraft or continue with the personal loan. Some of the liquidation will be by selling investments, and the demand effect of this will be neutral. But it is reasonable to expect a considerable reduction in borrowing to finance consumer expenditure out of the £700 million to £800 million or so affected by the measure.
So here we have a measure which has a considerable effect on consumer demand and which is not regressive but progressive in its effect. By the two criteria by which a Finance Bill must be judged—whether the restraint on demand has a minimum impact on the cost of living, which in this case applies not at all, or whether this is a progressive or regressive way of dealing with the reduction of demand—the selective employment tax and the abolition of tax relief on overdrafts are tested and found sustainable. But it is precisely these measures, which are most eminently suitable for achieving the strategy of the Budget, with their progressive rather than 399 regressive effect, to which the Opposition object.
§ Mr. Iain Macleod
The hon. and learned Gentleman must know from his postbag, as I know from mine, that there are a host of questions on the disallowance to which people are anxious to have answers. He has been asked whether he will consider producing a White Paper. Will he deal with that now?
§ Mr. Taverne
These provisions will be considered fully in Committee. They will be debated there and possibly later on Report. All the points which hon. Members raised then will be fully gone into.
§ Question put:—
§ The House divided: Ayes 298, Noes 249.403
|Division No. 195.]||AYES||[10.2 p.m.|
|Albu, Austen||Dunwoody, Dr. John (F'th & C'b'e)||Jenkins, Rt. Hn. Roy (Stechford)|
|Allaun, Frank (Salford, E.)||Eadie, Alex||Johnson, Carol (Lewisham, S.)|
|Alldritt, Walter||Edelman, Maurice||Jones, Dan (Burnley)|
|Anderson, Donald||Edwards, Robert (Bilston)||Jones, Rt. Hn. Sir Elwyn (W. Ham, S.)|
|Archer, Peter||Edwards, William (Merioneth)||Jones, J. Idwal (Wrexham)|
|Ashley, Jack||Ellis, John||Jones, T. Alec (Rhondda, West)|
|Ashton, Joe (Bassetlaw)||English, Michael||Judd, Frank|
|Atkins, Ronald (Preston, N.)||Ennals, David||Kelley, Richard|
|Atkinson, Norman (Tottenham)||Ensor, David||Kenyon, Clifford|
|Bacon, Rt. Hn. Alice||Evans, Albert (Islington, S. W.)||Kerr, Mrs. Anne (R'ter & Chatham)|
|Bagier, Gordon A. T.||Evans, Ioan L. (Birm'h'm, Yardley)||Kerr, Dr. David (W'worth, Central)|
|Barnes, Michael||Faulds, Andrew||Kerr, Russell (Feltham)|
|Barnett, Joel||Fernyhough, E.||Lawson, George|
|Baxter, William||Finch, Harold||Leadbitter, Ted|
|Beaney, Alan||Fitch, Alan (Wigan)||Lee, Rt. Hn. Frederick (Newton)|
|Bence, Cyril||Fletcher, Rt. Hn. Sir Eric (Islington, E.)||Lee, Rt. Hn. Jennie (Cannock)|
|Benn, Rt. Hn. Anthony Wedgwood||Fletcher, Raymond (Ilkeston)||Lee, John (Reading)|
|Bidwell, Sydney||Fletcher, Ted (Darlington)||Lestor, Miss Joan|
|Binns, John||Foley, Maurice||Lever, Harold (Cheetham)|
|Bishop, E. S.||Foot, Michael (Ebbw Vale)||Lever, L. M. (Ardwick)|
|Blackburn, F.||Ford, Ben||Lewis, Arthur (W. Ham, N.)|
|Blenkinsop, Arthur||Forrester, John||Lewis, Ron (Carlisle)|
|Boardman, H. (Leigh)||Fowler, Gerry||Lipton, Marcus|
|Booth, Albert||Fraser, John (Norwood)||Lomas, Kenneth|
|Boston, Terence||Freeson, Reginald||Loughlin, Charles|
|Bottomley, Rt. Hn. Arthur||Galpern, Sir Myer||Luard, Evan|
|Boyden, James||Gardner, Tony||Lyon, Alexander W. (York)|
|Bradley, Tom||Ginsburg, David||Lyons, Edward (Bradford, E.)|
|Bray, Dr. Jeremy||Gordon Walker, Rt. Hn. P. C.||Mahon, Dr. J. Dickson|
|Brooks, Edwin||Gray, Dr. Hugh (Yarmouth)||McCann, John|
|Broughton, Dr. A. D. D.||Greenwood, Rt. Hn. Anthony||MacColl, James|
|Brown, Bob (N'c'tle-upon-Tyne, W.)||Gregory, Arnold||MacDermot, Niall|
|Brown, R. W. (Shoreditch & F'bury)||Grey, Charles (Durham)||Macdonald, A. H.|
|Buchan, Norman||Griffiths, David (Rother Valley)||McGuire, Michael|
|Butler, Herbert (Hackney, C.)||Griffiths, Eddie (Brightside)||McKay, Mrs. Margaret|
|Butler, Mrs. Joyce (Wood Green)||Griffiths, Will (Exchange)||Mackenzie, Gregor (Rutherglen)|
|Callaghan, Rt. Hn. James||Gunter, Rt. Hn. R. J.||Mackie, John|
|Carmichael, Neil||Hamilton, James (Bothwell)||Mackintosh, John P.|
|Carter-Jones, Lewis||Hamilton, William (Fife, W.)||Maclennan, Robert|
|Coe, Denis||Hamling, William||MacMillan, Malcolm (Western Isles)|
|Coleman, Donald||Harper, Joseph||MacPherson, Malcolm|
|Conlan, Bernard||Hart, Rt. Hn. Judith||Mahon, Peter (Preston, S.)|
|Corbet, Mrs. Freda||Haseldine, Norman||Mahon, Simon (Bootle)|
|Craddock, George (Bradford, S.)||Hazell, Bert||Mallalieu, E. L. (Brigg)|
|Crawshaw, Richard||Healey, Rt. Hn. Denis||Mallaliue, J. P. W. (Huddusfield, E.)|
|Crosland, Rt. Hn. Anthony||Heffer, Eric S.||Manuel, Archie|
|Crossman, Rt. Hn. Richard||Henig, Stanley||Mapp, Charles|
|Darling, Rt. Hn. George||Herbison, Rt. Hn. Margaret||Marks, Kenneth|
|Davidson, Arthur (Accrington)||Hilton, W. S.||Marquand, David|
|Davies, Ednyfed Hudson (Conway)||Hobden, Dennis||Marsh, Rt. Hn. Richard|
|Davies, G. Elfed (Rhondda, E.)||Hooley, Frank||Mason, Rt. Hn. Roy|
|Davies, Dr. Ernest (Stretford)||Horner, John||Mayhew, Christopher|
|Davies, Rt. Hn. Harold (Leek)||Houghton, Rt. Hn. Douglas||Mellish, Rt. Hn. Robert|
|Davies, Ifor (Gower)||Howell, Denis (Small Heath)||Mendelson, John|
|Davies, S. O. (Merthyr)||Howie, W.||Mikardo, Ian|
|Delargy, Hugh||Hoy, James||Millan, Bruce|
|Dell, Edmund||Huckfield, Leslie||Miller, Dr. M. S.|
|Dempsey, James||Hughes, Rt. Hn. Cledwyn (Anglesey)||Milne, Edward (Blyth)|
|Diamond, Rt. Hn. John||Hughes, Hector (Aberdeen, N.)||Mitchell, R. C. (S'th'pten, Test)|
|Dickens, James||Hughes, Roy (Newport)||Molloy, William|
|Dobson, Ray||Hunter, Adam||Morgan, Elystan (Cardiganshire)|
|Doig, Peter||Hynd, John||Morris, Alfred (Wythenshawe)|
|Driberg, Tom||Irvine, Sir Arthur (Edge Hill)||Morris, Charles R. (Openshaw)|
|Dunn, James A.||Jay, Rt. Hn. Douglas||Morris, John (Aberavon)|
|Dunnett, Jack||Jeger, George (Goole)||Moyle, Roland|
|Dunwoody, Mrs. Cwyneth (Exeter)||Jeger, Mrs. Lena (H'b'n & St. P'cras, S.)||Mulley, Rt. Hn. Frederick|
|Murray, Albert||Reynolds, Rt. Hn. G. W.||Thornton, Ernest|
|Neal, Harold||Richard, Ivor||Tinn, James|
|Newens, Stan||Roberts, Albert (Normanton)||Tomney, Frank|
|Norwood, Christopher||Roberts, Rt. Hn. Goronwy||Tuck, Raphael|
|Oakes, Gordon||Roberts, Gwilym (Bedfordshire, S.)||Urwin, T. W.|
|Ogden, Eric||Robertson, John (Paisley)||Varley, Eric G.|
|O'Malley, Brian||Robinson, Rt. Hn. Kenneth (St. P'c'as)||Wainwright, Edwin (Dearne Valley)|
|Oram, Albert E.||Rodgers, William (Stockton)||Walden, Brian (All Saints)|
|Orbach, Maurice||Roebuck, Roy||Walker, Harold (Doncaster)|
|Orme, Stanley||Rogers, George (Kensington, N.)||Wallace, George|
|Oswald, Thomas||Rose, Paul||Watkins, David (Consett)|
|Owen, Dr. David (Plymouth, S'tn)||Ross, Rt. Hn. William||Watkins, Tudor (Brecon & Radnor)|
|Owen, Will (Morpeth)||Rowlands, E,||Weitzman, David|
|Page, Derek (King's Lynn)||Ryan, John||Wellbeloved, James|
|Paget, R. T.||Shaw, Arnold (Ilford, S.)||Wells, William (Walsall, N.)|
|Palmer, Arthur||Sheldon, Robert||Whitaker, Ben|
|Pannell, Rt. Hn. Charles||Shinwell, Rt. Hn. E.||White, Mrs. Eirene|
|Park, Trevor||Shore, Rt. Hn. Peter (Stepney)||Whitlock, William|
|Parker, John (Dagenham)||Short, Rt. Hn. Edward (N'c'tle-u-Tyne)||Wilkins, W. A.|
|Parkin, Ben (Paddington, N.)||Short, Mrs. Renée (W'hampton, N. E.)||Willey, Rt, Hn. Frederick|
|Parkyn, Brian (Bedford)||Silkin, Rt. Hn. John (Deptford)||Williams, Alan (Swansea, W.)|
|Pavitt, Laurence||Silkin, Hn. S. C. (Dulwich)||Williams, Alan Leo (Hornchurch)|
|Pearson, Arthur (Pontypridd)||Silverman, Julius||Williams, Clifford (Abertillery)|
|Peart, Rt. Hn. Fred||Slater, Joseph||Williams, Mrs. Shirley (Hitchin)|
|Pentland, Norman||Small, William||Williams, W. T. (Warrington)|
|Perry, Ernest G. (Battersea, S.)||Spriggs, Leslie||Willis, Rt. Hn. George|
|Perry, George H. (Nottingham, S.)||Steele, Thomas (Dunbartonshire, W.)||Wilson, William (Coventry, S.)|
|Prentice, Rt. Hn. R. E.||Stewart, Rt. Hn. Michael||Winnick, David|
|Price, Christopher (Perry Barr)||Stonehouse, Rt. Hn. John||Woof, Robert|
|Price, Thomas (Westhoughton)||Strauss, Rt. Hn. G. R.||Wyatt, Woodrow|
|Price, William (Rugby)||Summerskill, Hn. Dr. Shirley|
|Probert, Arthur||Symonds, J. B.||TELLERS FOR THE AYES:|
|Pursey, Cmdr. Harry||Taverne, Dick||Mr. Neil McBride and|
|Rankin, John||Thomas, Rt. Hn. George||Mr. Walter Harrison.|
|Alison, Michael (Barkston Ash)||Crowder, F. P.||Harris, Frederic (Croydon, N. W.)|
|Allason, James (Hemel Hempstead)||Cunningham, Sir Knox||Harris, Reader (Heston)|
|Amery, Rt. Hn. Julian||Currie, G. B. H.||Harrison, Col. Sir Harwood (Eye)|
|Astor, John||Dalkeith, Earl of||Harvey, Sir Arthur Vere|
|Atkins, Humphrey (M't'n & M'd'n)||Dance, Jamos||Harvie Anderson, Miss|
|Awdry, Daniel||Davidson, James (Aberdeenshire, W.)||Hastings, Stephen|
|Baker, Kenneth (Acton)||d-Avigdor-Goldsmid, Sir Henry||Hawkins, Paul|
|Baker, W. H. K. (Banff)||Deedes, Rt. Hn. W. F. (Ashford)||Hay, John|
|Balniel, Lord||Digby, Simon Wingfield||Heald, Rt. Hon. Sir Lionel|
|Barber, Rt. Hn. Anthony||Dodds-Parker, Douglas||Heath, Rt. Hn. Edward|
|Batsford, Brian||Donnelly, Desmond||Heseltine, Michael|
|Beamish, Col. Sir Tufton||Doughty, Charles||Higgins, Terence L.|
|Bell, Ronald||Douglas-Home, Rt. Hn. Sir Alec||Hiley, Joseph|
|Bennett, Sir Frederic (Torquay)||Drayson, G. B.||Hill, J. E. B.|
|Bennett, Dr. Reginald (Gos. & Fhm)||du Cann, Rt. Hn. Edward||Hirst, Geoffrey|
|Berry, Hn. Anthony||Eden, Sir John||Hogg, Rt. Hn. Quintin|
|Bessell, Peter||Elliot, Capt. Walter (Carshalton)||Holland, Philip|
|Biggs-Davison, John||Emery, Peter||Hordern, Peter|
|Birch, Rt. Hn. Nigel||Errington, Sir Eric||Hornby, Richard|
|Black, Sir Cyril||Evans, Gwynfor (C'marthen)||Howell, David (Guildford)|
|Blaker, Peter||Eyre, Reginald||Hunt, John|
|Body, Richard||Farr, John||Hutchison, Michael Clark|
|Boyd-Carpenter, Rt. Hn. John||Fisher, Nigel||Iremonger, T. L.|
|Boyle, Rt. Hn. Sir Edward||Foster, Sir John||Irvine, Bryant Godman (Rye)|
|Braine, Bernard||Fraser, Rt. Hn. Hugh (St'fford & Stone)||Jenkin, Patrick (Woodford)|
|Brewis, John||Galbraith, Hn. T. G.||Jennings, J. C. (Burton)|
|Brinton, Sir Tatton||Gilmour, Ian (Norfolk, C)||Johnson Smith, G. (E. Grinstead)|
|Bromley-Davenport, Lt.-Col. Sir Walter||Gilmour, Sir John (Fife, E.)||Johnston, Russell (Inverness)|
|Brown, Sir Edward (Bath)||Glover, Sir Douglas||Jones, Arthur (Northants, S.)|
|Bruce-Gardyne, J.||Glyn, Sir Richard||Jopling, Michael|
|Buchanan-Smith, Alick (Angus, N & M)||Godber, Rt. Hn. J. B.||Joseph, Rt. Hn. Sir Keith|
|Buck, Antony (Colchester)||Goodhart, Philip||Kaberry, Sir Donald|
|Bullus, Sir Eric||Goodhew, Victor||Kerby, Capt. Henry|
|Burden, F. A.||Gower, Raymond||Kershaw, Anthony|
|Campbell, B. (Oldham, W.)||Grant, Anthony||Kimball, Marcus|
|Campbell, Gordon (Moray & Nairn)||Grant-Ferris, R.||King, Evelyn (Dorset, S.)|
|Carlisle, Mark||Gresham Cooke, R.||Kirk, Peter|
|Channon, H. P. G.||Grieve, Percy||Kitson, Timothy|
|Chichester-Clark, R.||Griffiths, Eldon (Bury St. Edmunds)||Knight, Mrs. Jill|
|Clark, Henry||Grimond, Rt. Hn, J.||Lambton, Viscount|
|Clegg, Walter||Gurden, Harold||Lancaster, Col. C. G.|
|Cooper-Key, Sir Neill||Hall, John (Wycombe)||Lane, David|
|Costain, A. P.||Hall-Davis, A. G. F.||Langford-Holt, Sir John|
|Craddock, Sir Beresford (Spelthorne)||Hamilton, Lord (Fermanagh)||Legge-Bourke, Sir Harry|
|Crouch, David||Hamilton, Michael (Salisbury)||Lewis, Kenneth (Rutland)|
|Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)||Osborn, John (Hallam)||Steel, David (Roxburgh)|
|Longden, Gilbert||Osborne, Sir Cyril (Louth)||Stodart, Anthony|
|Lubbock, Eric||Page, Graham (Crosby)||Stoddart-Scott, Col. Sir M.|
|MacArthur, Ian||Page, John (Harrow, W.)||Summers, Sir Spencer|
|Mackenzie, Alasdair (Ross & Crom'ty)||Pardoe, John||Tapsell, Peter|
|Maclean, Sir Fitzroy||Pearson, Sir Frank (Clitheroe)||Taylor, Sir Charles (Eastbourne)|
|Macleod, Rt. Hn. Iain||Peel, John||Taylor, Edward M. (G'gow, Cathcart)|
|McMaster, Stanley||Percival, Ian||Temple, John M.|
|Macmillan, Maurice (Farnham)||Peyton, John||Thatcher, Mrs. Margaret|
|McNair-Wilson, Michael||Pike, Miss Mervyn||Thorpe, Rt. Hn. Jeremy|
|Pink, R. Bonner||Tilney, John|
|McNair-Wilson, Patrick (New Forest)||Pounder, Rafton||Turton, Rt. Hn. R. H.|
|Maddan, Martin||Powell, Rt, Hn. J. Enoch||van Straubenzee, W. R.|
|Maginnis, John E.||Price, David (Eastleigh)||Vaughan-Morgan, Rt, Hn. Sir John|
|Marples, Rt. Hn. Ernest||Prior, J. M. L.||Vickers, Dame Joan|
|Marten, Neil||Pym, Francis||Waddington, David|
|Maude, Angus||Quennell, Miss J. M.||Wainwright, Richard (Colne Valley)|
|Maudling, Rt. Hn. Reginald||Ramsden, Rt. Hn. James||Walker, Peter (Worcester)|
|Mawby, Ray||Rawlinson, Rt. Hn. Sir Peter|
|Maxwell-Hyslop, R. J.||Rees-Davies, W. R.||Walker-Smith, Rt. Hn. Sir Derek|
|Maydon, Lt.-Cmdr. S. L. C.||Renton, Rt. Hn. Sir David||Wall, Patrick|
|Mills, Peter (Torrington)||Rhys Williams, Sir Brandon||Walters, Dennis|
|Mills, Stratton (Belfast, N.)||Ridley, Hn. Nicholas||Ward, Dame Irene|
|Miscampbell, Norman||Ridsdale, Julian||Weatherill, Bernard|
|Mitchell, David (Basingstoke)||Rippon, Rt. Hn. Geoffrey||Wells, John (Maidstone)|
|Monro, Hector||Robson Brown, Sir William||Wiggin, A. W.|
|Morgan, Geraint (Denbigh)||Rodgers, Sir John (Sevenoaks)||Williams, Donald (Dudley)|
|Morgan-Giles, Rear-Adm.||Rossi, Hugh (Hornsey)||Wilson, Geoffrey (Truro)|
|Morrison, Charles (Devizes)||Royle, Anthony||Winstanley, Dr. M. P.|
|Mott-Radclyffe. Sir Charles||Russell, Sir Ronald||Wolrige-Gordon, Patrick|
|Munro-Lucas-Tooth, Sir Hugh||St. John-Stevas, Norman||Wood, Rt. Hn. Richard|
|Murton, Oscar||Sandys, Rt. Hn. D.||Woodnutt, Mark|
|Nabarro, Sir Gerald||Scott, Nicholas||Worsley, Marcus|
|Neave, Airey||Scott-Hopkins, James||Wright, Esmond|
|Nicholls, Sir Harmar||Sharples, Richard||Wylie, N. R.|
|Noble, Rt. Hn. Michael||Shaw, Michael (Sc'b'gh & Whitby)||Younger, Hn. George|
|Nott, John||Silvester, Frederick|
|Onslow, Cranley||Sinclair, Sir George||TELLERS FOR THE NOES:|
|Orr, Capt. L. P. S.||Smith, John (London & W'minster)||Mr. R. W. Elliott and|
|Orr-Ewing, Sir Ian||Stainton, Keith||Mr. Jasper More.|
|Bill accordingly read a Second time.|