SELECTIVE EMPLOYMENT TAX

HC Deb 20 May 1969 vol 784 cc256-354

Question proposed, That the Clause stand part of the Bill.

4.12 p.m.

Mr. Terence L. Higgins (Worthing)

I oppose Clause 43. Perhaps that is just as well as there was no Treasury Minister present when it became necessary for me to rise. I am glad to see that the Chancellor is now in his place.

The Clause we are to debate this afternoon seeks to increase the rate of selective employment tax yet again on top of an increase made last year to the initial rate which was imposd in 1966. Whereas the initial rate in 1966 was 25s. for a male worker whole time employed, it was raised. to 37s. 6d. last year, and now it is proposed in this Clause to raise it yet again to 48s., the whole of these increases being matched by corresponding increases at the lower rate.

It is very difficult to avoid the impression that the Government have become addicted to increases in selective employment tax and to the tax itself. That is certainly not an addiction shared by hon. Members on this side of the Committee, nor, indeed, by many hon. Members opposite, because the Government's majority on the Budget Resolution relating to this matter fell to 28. The addiction does not extend to the country as a whole. I believe that this tax is the most disliked tax which it has been the misfortune of the country to suffer since Pitt's window tax. On two occasions since the Budget the Chief Secretary to the Treasury has extolled the virtue of this tax. I will deal with the arguments he advanced.

It is worth making a preliminary point because in the debate on the Budget the Chief Secretary put forward what one might call "Diamond's approach to taxation" when he suggested that most taxes are generally introduced in and followed by a general pattern of acceptability. The first announcement is greeted with interest followed by a period of complete bewilderment and then a period of mounting opposition with a long and bitter campaign against the tax. Finally, he suggested, there is a period of grumbling acquiescence.

There is no doubt that the Minister was right in accepting that there is no question of the country yet degenerating into a period of grumbling acquiescence over selective employment tax. It is far more likely that the shape of this tax and its career will be that of the Pitt window tax and that opposition will continue to mount to it. It will continue only until such time as a Conservative Government are returned and have the opportunity of abolishing both the tax and the increases imposed on the country.

A particular point which should be made in this connection because the representations made this year have been, if anything, heavier than in any previous year since the tax was introduced, is that often in the country people are not familiar with our proceedings. They are puzzled why Amendments are not debated and why some are tabled in a rather strange form. It is right to point out that the Government have successively tended to draw the Money Resolution regarding this tax tighter and tighter. This has made it more and more difficult to put Amendments which are in order.

As will be appreciated, we are debating this part of the question of selective employment tax on the Question, That the Clause stand part of the Bill. We have a number of Amendments which have been selected to be considered when we discuss the following Clause, which is concerned with selective employment tax refunds or premiums. This is very difficult and it is worth while pointing out to the many who have made representations about the tax.

We now find ourselves in a quite extraordinary position where the Chancellor of the Exchequer has set up an investigation into the operation of the tax and has asked Professor Reddaway to carry out that investigation. Yet, without waiting for Professor Reddaway's views on this subject, the Chancellor proposes to increase the tax by this Clause. It is strange that the Chancellor does not think that he should have obtained an interim report before taking any action. In some ways it is stranger still that Professor Reddaway feels that he can continue, although his views will not be taken into account about this considerable increase. There seems some case for having the Department of Economic Affairs on one side of the river exchanging ideas with King's College, Cambridge, and Dr. Kaldor, on the other, but to bring in this increase without consulting Professor Reddaway is quite extraordinary.

I want to deal with the arguments put forward by the Chief Secretary in favour of this tax, although the Chancellor is himself to reply to this debate. The Chief Secretary has distinguished five arguments in favour of the tax, three of which he put forward in his speech on the Budget and two in his speech on Second Reading of this Bill. I shall discuss them and rank them in what I might describe as order of invalidity.

The Chief Secretary's first argument was that it was necessary to broaden the tax base by including services. It certainly does broaden the tax base, but our contention is that it does so in an absurdly discriminatory way, partly because of the initial false basis of Professor Kaldor's conception, and, secondly, because when first introduced it was introduced as an administrative convenience using the Ministry of Labour to collect because the tax imposed by the Chancellor's predecessor could not be dealt with adequately by the Inland Revenue.

Despite the contentions at that time that the tax would be refined, and so on, it is an absurdly discriminatory tax, born out of expediency, and has been encouraged and increased as a result of the second reason which the Chief Secretary put forward, which is that it raises revenue. Perhaps one of the few things one can say with certainty about the tax is that it does, in fact, raise revenue, but it is not merely a question of raising revenue that the Chancellor should be concerned about. His prime objective, he has told us again and again, is to get the balance of payments right. Yet this tax, whether by raising industrial costs to manufacturers or falling heavily on invisible exports, goes quite contrary to the overall objective which the Chancellor himself declared is the prime objective of Government policy.

The third reason which the Chief Secretary advances is that this tax is cheap to collect—one-third the cost of collecting other taxes, he tells us. As appeared clearly from the debate on Second Reading, this is done through the mechanism of collecting a large amount of money and then dispersing much of it back to those who originally paid it. Thus, there is an interest-free loan imposed on those who originally pay the tax and who eventually receive the refund.

Interest-free loans have become very fashionable with this Government, not only on the selective employment tax, but also on the import deposit scheme. It is not surprising that a Government whose credit has been reduced to the level to which this Government's credit has been reduced should find the idea of an interest-free loan attractive. None the less, this is a point which should be borne in mind when considering the cost of collection. On Second Reading, the Chief Secretary put forward the extraordinary view that this interest-free loan had been taken into account and that, if the Government had not taken it into account, the tax would have been imposed at an even higher rate. That is a very strange doctrine, because we are not clear why all taxes are not collected on this basis if the Chief Secretary believes that to be a valid argument.

I come to the Chief Secretary's two remaining points, it is on these that I shall concentrate this afternoon. The first is that the S.E.T. does not increase the cost of living as much as other taxes. The second contention is that it encourages economies in the use of labour and makes more available for manufacturing. I want to deal very carefully with the cost of living question, because it is one which the Chancellor and the Chief Secretary have emphasised to a very considerable extent.

The Chief Secretary says that it would put up the cost of living by only one-third as much as would a corresponding yield in the case of purchase tax. This is a very strange argument indeed. It is worth going into it in some detail, because in his speech on Second Reading the Chief Secretary appears to have been thinking up new arguments to justify the tax. In columns 304–5 of the OFFICIAL REPORT of 6th May the Chief Secretary became involved in a most convoluted argument seeking to suggest that the economic analysis of a tax on services was somehow totally different from the economic analysis of a tax on manufacturing industry. He ended with this rather splendid peroration to this part of his speech: Both economic theory and accountancy experience march hand in hand here with the experience of the tax. I would like the Chancellor to tell me just one thing when he replies. The Chief Secretary appeals to "economic theory". Can the Chancellor tell me what economic theory makes the distinction which the Chief Secretary makes? Could he tell me whether it is in Samuelson's economics, for example, in Stonier and Hague's textbook on economics, perhaps in Professor Cairncross's textbook on economics—he was the former Treasury Economic Adviser—perhaps in Benham, which is rather more in the time span of the Chief Secretary? What textbook is it in? If it is not in these, in what special studies by M.I.T., or the Cowles Foundation, or the Rand Foundation, or Brookings Institution, can he find this extraordinary argument, which ran as follows?

I quote again from the Chief Secretary's speech: … I remind the House that a manufacturing industry fixes its prices by reference to its prime costs—labour and materials, adding a percentage for overheads … … 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 straightaway … 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."—[OFFICIAL REPORT, 6th May, 1969; Vol. 783, c. 304–51.] This is absolute nonsense. In fact, the whole of the labour cost in a service industry is a prime cost, because it is directly related to the amount of work which is actually undertaken. It is not an overhead in this sense. It is completely nonsensical for the Chief Secretary to draw spurious distinctions of this kind, which, I suggest to him, are certainly not to be found in economic theory and which, indeed, are quite contrary to accounting experience, unless he wants his clients to go bankrupt.

There may be an alternative view. That is concerned with the point which the Chancellor at Question Time today finally introduced—the concept of an estimate of the elasticity of demand. I was glad to hear the Chancellor say that this afternoon. The fact of the matter is that, if anything, the elasticity of demand for services is probably greater than that for manufacturing industry, rather than the other way about as the Chancellor suggested this afternoon. If it is really the case that S.E.T. increases prices by only one-third as compared with purchase tax, where do the other two-thirds come from?

The Committee may well ponder this question, because the Economist got involved in the same problem. It may merely come out of productivity. Is this really the case? Does the Chancellor think that it will come out of productivity? The fact is that it cannot come out that much. The crucial question is, not how much does the Chancellor think that prices will rise, but how much will the tax be passed on?

What the Chancellor has done is to engage in a very clever sleight of hand. To bring this point out, I want to quote a passage from his television broadcast after his Budget: This left me with the need for rather over a £100 million more to raise. I decided to get it where it would be cheapest on the cost of living. That meant the selective employment tax. To have got it from other indirect taxes would have raised the retail price index by nearly three times as much. The fact is that, although it is true that the impact of the S.E.T. on the retail price index is only about one-third, it is not at all true that only one-third is passed on, because the tax is in fact levied on a very large number of parts of the economy which do not enter into the retail price index. Therefore, the Chancellor is engaging in a very rapid sleight of hand.

I ask him to state clearly this afternoon, first, not merely what would be the effect on the retail price index, but what he believes the effect is on prices as a whole, and, secondly, what percentage of the tax he believes is passed on on the basis of the estimates which he has made about the elasticity of demand, because I believe that the argument about the selective employment tax not being inflationary is in fact a wholly false one.

I want, finally, on the question of the arguments advanced by the Chief Secretary, to turn to the question of economy in the use of labour. It was the original contention that the amount of labour which would be available for manufacturing industry and for increasing exports would be increased by the operation of the selective employment tax. It has not worked out this way, because in practice what has happened is that unemployment has risen very fast and, although some labour may have been shaken out of service industries, a great deal of it has not been shaken into manufacturing, partly because of the rise in unemployment and partly because many of the industries and the people worse hit by S.E.T. have been part-time workers or elderly workers who have not been able to find occupations to which they could move. Whereas previously they had reasonable jobs, perhaps in their old age or retirement they have left the labour force altogether.

The second point is that the S.E.T. is a very regressive tax indeed. Therefore, we have found that it has hit worst at the lowest-paid workers who, hon. Gentlemen opposite are constantly telling us, should be given a great deal of consideration. What has happened is that the lowest paid, least skilled workers have been driven out of occupation by the S.E.T. and their opportunities have been diminished. There has not been a corresponding retraining to enable them to go into more skilled jobs.

The whole basis of Professor Kaldor's argument is wrong, because he argued originally that there would be a movement into industries where productivity was rising and where economies of scale were greater. Yet if we look at the Chief Secretary's own point of view, as expressed in his Second Reading speech we see that he points out that it is in the service industries very often, and not where Professor Kaldor expected them, that productivity has been going up.

I should now like to point out the very strong arguments against this tax which we on this side of the Committee have continually put forward. I think they were summarised very well indeed in an article in the Economist of 19th April, 1969. First of all, it points out that this tax is uniquely unfortunate in that it inhibits exports and, unlike a value-added tax or purchase tax which is not charged on exports, it cannot be rebated so far as this country's exports are concerned. So this tax is directly opposed to the object of increasing exports because, unlike a value-added tax and purchase tax, it has an adverse effect on the prices of exports.

4.30 p.m.

Mr. F. A. Burden (Gillingham)

As an illustration of his remark, does my hon. Friend agree that foreign countries' buying houses situated in this country purely to buy goods for export are subjected to this tax and that they resent it tremendously?

Mr. Higgins

Yes, I am aware of that. I hope we shall return to the point in greater detail in later debates when, no doubt, my hon. Friend will wish to speak.

It certainly is the case that exports are adversely affected in the way in which I was stating. Secondly, the whole incidence and timing of this tax is uncertain compared with other taxes. Thirdly, this tax, unlike most taxes which increase in yield as the gross national product goes up in money terms, or decrease in yield if the gross national product were to fall, does not move in this way. Therefore, instead of putting a built-in stabiliser into the economy, evening out fluctuations, this tax has no such stabilising effect and is far less favourable than many of the others which could have been imposed in its place.

Above all, this tax is arbitrary. It is arbitrary in its incidence. It divides one part of the country from another; it divides one part of a development area from another; it divides construction from manufacturing; it divides almost any particular aspect of our economic life in a purely arbitrary way, dependent on the construction of the actual index which is used to classify the various industries. Therefore, I hope that the Committee will vote against this Clause which seeks to increase this tax.

I do not think that it is necessary to go into the question of the revenue which it raises because we have no idea at all what is the Chancellor's Budget judgment. Following the fiasco on the whole question of the pensions increase and the way in which it has been financed, we have an enormous range within which the Chancellor's Budget judgment—if it ever existed—now exists. We are, therefore, right to attack a tax which, if anything, will have an adverse effect on the balance of payments.

One thing is absolutely clear. It is not that devaluation has failed so much as that it was half strangled at birth by the Government's actions and has been consistently kicked to death by their actions ever since. The danger now is that the Government pile deflation after deflation upon a devaluation which has failed. The Government themselves failed to make it work not only because they had procrastinated at the time of devaluation, but also because nearly everything they have done since has tended to operate against the effective way in which exports might have been stimulated by that devaluation.

The fact is that we are suffering from consistency and inconsistency amongst Ministers. The Chief Secretary is consistently in favour of this tax, and the Secretary of State for Social Services is inconsistent about almost everything. Indeed, some of his statements lately remind one of Mark Twain's description of the weather in Connecticut, namely, "If you do not like it, wait a minute." The statements of the Secretary of State vary almost from moment to moment. But about one thing he was right last Thursday. He said, with regard to the imposition of the pensions increase: To put it crudely, if we put the increase on the employer we put it on the cost of goods, and it would not help us now to overload him."—[OFFICIAL REPORT, 15th May, 1969; Vol. 783, c. 1742.] Yet this is a further imposition upon industry. It is particularly adverse on our exports and it is certainly adverse on our invisibles. It is discriminatory and it ought to be abolished at the earliest possible moment. An increase in this tax is quite absurd, and I hope that the Committee will unite to defeat the Clause.

Sir Dingle Foot (Ipswich)

I rarely trouble the Committee on a Finance Bill and I do not propose to do so on this occasion for more than a few minutes. I am, however, one of a considerable body of hon. Members on this side who have great misgivings about this tax. We think that it was ill-considered at the outset and that it has proved extremely unjust in its operation.

I appreciate that this tax is regarded with great favour by the Treasury, though that is not necessarily a reason why it should commend itself to the Committee. I have thought for many years, both in and out of office, that one of the main defects in our present system of government is excessive Treasury control. I am not making any personal attack on my right hon. Friend the present Chancellor, or on any of the Finance Ministers, for whom I have the highest regard. I am mentioning them simply as figures.

Under our system, the Chancellor is really all-powerful. When he has to introduce his Budget he goes to the Cabinet and tells his colleagues the details of the Budget a day or perhaps two days before. There is consultation in form, but, in effect, it is really a Treasury diktat. The Cabinet has to take it as it stands. We had an example of Treasury control last week, when we had the debate on betterment levy. In the debate there were demands from both sides of the House for retrospection in favour of the citizen. The arguments in that debate were overwhelmingly one way, but the Treasury point of view had to be defended by the Minister for Planning and Land. My heart bled for him as I listened to the debate. He was left with no really plausible argument whatever, but only with a Treasury brief, and not a very convincing one at that.

I want to deal with this tax which, no doubt, commends itself to the Treasury. All taxation is inevitably unpopular, but hon. Members on both sides of the Committee will agree from their experience in their own constituencies that we have never known a tax which has been quite so generally unpopular and so capricious in its operation. It has certain virtues from the Treasury point of view. It is difficult to evade, and it is easy and cheap to collect. That would apply to a good many other taxes recorded in history.

I take, for example, the most famous taxation measure of all, the one which is recorded in the first three verses of Chapter Two of the Gospel according to St. Luke: And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed. And this taxing was first made when Cyrenius was governor of Syria. I suppose Cyrenius was the Jim Callaghan of his day.

It continues: And all went to be taxed, every one into his own city. I have always thought that that must have involved an extraordinary degree of expense and inconvenience for all the taxpayers concerned. As we know, at the end of the journey some of them could not even find adequate accommodation. But it was a perfect tax from the point of view of the Roman Treasury. It was easy and cheap to collect and difficult to evade.

There have been many other examples. Another tax which had the same virtues from the Treasury point of view was the poll tax in 1380, which led to the Peasants' Revolt, one of the great popular uprisings in our history. It had the most unfortunate and unpleasant consequences, but it was a perfectly good tax from the Treasury point of view.

The window tax was imposed for a very long time. It was cheap and easy to collect, but nobody would propose introducing it again.

An Hon. Member

There is plenty of time.

Sir Dingle Foot

A more recent example which I particularly recall, and in which I confess an interest because for a time I was professionally engaged as an adviser to those who were agitating against the tax, was the entertainment tax on the living theatre. It was introduced as a wartime measure in, I think, 1917. It continued as a permanent feature of our taxation system until the middle 1950s, and it had considerable consequences.

I deeply regret the decline of the living theatre up and down the country, and I have no doubt that one of the reasons for that decline was the entertainment tax on the living theatre. But it was a convenient tax; it was easy to collect, and so it continued in operation for nearly 40 years, quite regardless of the social consequences.

I have studied with care the defence which my right hon. Friend the Chief Secretary put forward the other day, when he said in effect, comparing the selective employment tax with purchase tax, that it could not always be passed on. As we know, some people can pass it on, but his point was that others could not. He said: Purchase tax, by comparison, is passed on in full to the consumer and, indeed, the consumer accepts that it should be passed on in full. Increases in purchase tax, therefore, do not represent anything like the same problem to the distributor as S.E.T. which, by virtue of its selectivity in the field in which it operates, often cannot be wholly passed on. Competition does not permit it, nor does public acceptance. The shopkeeper finds himself in the painful position of having a portion of the burden remaining on his own shoulders and, being in pain, he cries out. He finds himself compelled to take steps to absorb part of the tax in additional efficiency and, to do him justice, he has succeeded in doing so."—[OFFICIAL REPORT, 21st April, 1969; Vol. 782, c. 48–49.] That is just playing with words.

Let us consider the position of the shopkeeper, particularly the small shopkeeper. It may be that he has one or two assistants, and he is dependent on the volume of trade in his area. What can he do to make any marked difference to his efficiency? What can he do to raise productivity? It may very well be that he has already reached the maximum of efficiency. But he has to pay the tax and he cannot pass it on to the consumer, because he has to compete with the multiple store, the co-operative store, and so on. So far from what my right hon. Friend said being a recommendation of the tax, it is a condemnation of it, because this means that some people can pass the tax on to the consumer whereas others cannot, and in that lies the essential injustice of this form of taxation.

I was one of those who abstained when the matter came up on the Budget Resolutions. I always regret having to differ from the Government, particularly on a Finance Bill. But I think that I speak for some of my hon. Friends as well as myself when I ask for a further assurance on the matter from my right hon. Friend the Chancellor with reference to the Reddaway Committee.

I remind him that on Second Reading of the Finance Bill last year said: That does not mean that I regard the tax as it stands as perfect or immutable. As I told a group of my hon. Friends representing the Co-operative movement who came to see me the other day and argued a case with great force, I shall approach Mr. Reddaway's Report, which I hope to receive during next year,"— he did not say whether that was 12 months from 24th April last year or the whole of 1969— with an open mind and great readiness to listen to any constructive criticisms and suggestions which may come from his inquiry."—[OFFICIAL REPORT, 24th April, 1968; Vol. 763, c. 254.] I ask my right hon. Friend for a further assurance today. Has he still an open mind to consider the recommendations of the Reddaway Committee when they are made? Will he then consider the whole incidence of the tax and abolish it or at any rate reform it in the next Finance Bill?

4.45 p.m.

Sir Gerald Nabarro (Worcestershire, South)

I am pleased to follow the right hon. and learned Member for Ipswich (Sir Dingle Foot). His speech was very acceptable to me, though I shall proceed on rather different lines. I shall not quarrel with him in trying to assess the inflationary effect or otherwise of the selective employment tax in terms of retail prices. I aver that the whole of the selective employment tax goes on to retail prices, plus a premium per centum added at the various stages of distribution.

In opening the debate my hon. Friend the Member for Worthing (Mr. Higgins) might have quoted the extraordinary increase in the yield of the tax, because that is the measure of the inflation of retail prices which has occurred, notably since devaluation of sterling. I hope that my hon. Friend will forgive me if I give those figures to the Committee, as published by the Conservative Central Office. They are, therefore, absolutely correct. They are not exaggerated—the Chancellor's favourite word—in any way.

For the financial year 1966–67, when the tax was introduced, the yield was £258 million; in 1968–69 it was £438 million; in 1969, £606 million; and in the full year measured from 7th July, 1969, £613 million. That suggests to me that there is an increase of £355 million in the revenue yield of the tax in a brief period of three years.

My case is that the whole of the £613 million goes on to retail prices. I believe that to be incontrovertible. There is also an additional premium inevitably added at each stage of distribution at which the selective employment tax is levied. There is no better example of what happens with increases in indirect taxation than the behaviour of the Kitchen Committee in the House of Commons over the 1s. 1d. a bottle increase on wines. It was not 1s. 1d. a bottle on the tariff that was brought to me.

This is an analogy with the situation I am describing; it is exactly what happens. The tendency is that the shopkeeper, faced with the payment of this heavy additional impost, adds not only the aggregation of his selective employment tax measured over a year to his turnover and divides it up in the retail prices of his goods, but adds a per centum as well—not in every case, but in the majority of cases.

I want to take issue with the Chancellor at once, not on what he said last year or the year before but on what he said in his Budget Statement this year. My hon. Friend and the right hon. and learned Gentleman have alluded to the unfortunate comparison made by the Chancellor between the effect of S.E.T. and the effect of purchase tax. I challenge the Chancellor to publish in appropriate form, and put in the Library of the House and in the OFFICIAL REPORT, the statistical justification for these words, which he used on 15th April: 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. 1029.] I tell the right hon. Gentleman plainly and simply that I do not believe it. I do not believe his advisers. I do not believe that there is any statistical justification for that statement. I think that that is a complete red herring. I believe—my fiscal philosophy dictates, if the right hon. Gentleman prefers it that way—that the whole of purchase tax and the whole of S.E.T. are added immediately to the prices of goods in the shops.

Did the right hon. Gentleman really believe that, when he put 13¾ per cent. purchase tax on bed linen, blankets and towels, which have never been purchase taxed before, shopkeepers would absorb it? On the contrary, it is reported in the national Press today that there is a rush to buy pre-Budget goods in these categories before the goods carrying this purchase tax are offered over the counters. The fact is that every shopkeeper will add the net amount of purchase tax plus, no doubt, a per centum for himself, to the former retail prices of the goods. I aver that precisely the same principle occurs with S.E.T. and that it is highly inflationary. As in the case of my speech on Second Reading and on earlier Amendments, I am delighted to have my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) seated at my elbow.

Mr. Eric S. Heffer (Liverpool, Walton)

I am not sure that he is.

Sir G. Nabarro

My right hon. Friend is listening intently, as always. There is nothing evasive about what I am saying. It is unequivocal and forthright, as always. I am sorry that the Chancellor snorts. These are not qualities that he is associated with.

What I want done by my party is the total abolition of all purchase tax and of S.E.T. and the substitution of a value added tax in place of these two forms of taxation. Value-added tax is far less inflationary and far less inequitable and unfair than purchase tax and S.E.T. in their present forms.

I want to pass for a moment to the universal abhorrence of this form of taxation among the general public and notably among the retail and distributive trades. At the onset of this Parliament, 24 candidates offered themselves for election as Labour and Co-operative Members and 18 were elected. I believe that one or two have dropped by the wayside since, but I have not been able to establish that from the record. But there were 18 successful Co-operative candidates on 31st March, 1966.

The whole Co-operative movement is pledged to the abolition of this form of taxation. Every Co-operative Member opposite has instructions from the Cooperative movement to oppose the increase in S.E.T. The hon. and learned Member for Warrington (Mr. W. T. Williams) is listening intently to me and will, of course, go into the Lobby against the tax and in support of the Conservative Party this afternoon.

I am sorry that the right hon. Gentleman the Member for Devon, North (Mr. Thorpe) is not here. He invited the co-operatives to join the Liberal Party. There is, of course, not a single Liberal Member here. The Liberal Party outside this House is all blather and the right hon. Member for Devon, North is the blatherskite himself. He calls on the co-operatives to join the Liberal Party to vote against S.E.T., but there is not a single Liberal Member in his place to listen to my words this afternoon. Of course, the co-operatives have rejected the Liberal call but the co-operatives this afternoon, notably the hon. and learned Member for Warrington, who is a man of integrity, honesty and political perspicacity, should be trotting through the Lobby with me.

Mr. Tony Gardner (Rushcliffe)

Will the hon. Gentleman, to be fair, also recall that the Co-operative movement is equally opposed to the Official Opposition alternative of a tax on value added?

Sir G. Nabarro

Of course, the co-operatives believe in no taxation at all, but they would indeed prefer a value added tax to the inequitable effects of S.E.T.

I want to apply myself to two aspects of this increased taxation in Clause 43. The first is the objections put to the Treasury by the laundry and cleaning industry which opposed particularly the savage increase in S.E.T. which the Chancellor is proposing. It wrote to me on 13th May: Laundry and dry cleaning are industrial processes and much more allied in their methods and requirements to manufacturing industry than to commerce. Laundry and dry cleaning are just one example. Building houses and civil engineering construction are perhaps another. Private fee-paying schools and educational establishments outside the State system are perhaps another.

All of them are my method of underlining what the right hon. and learned Member for Ipswich rightly referred to—the injustice of this taxation in its present form. The reply to the launderers and dry cleaners, sent in the Chancellor's name on 29th April, was by a Treasury official signing himself, "C. D. Butler, Private Secretary". He said: No Government likes to increase taxation.

Lieut.-Colonel Sir Walter Bromley-Davenport (Knutsford)

Ha, ha!

Sir G. Nabarro

I am glad to note the mirth of my hon. and gallant Friend the Member for Knutsford (Sir W. Bromley-Davenport).

The Chancellor takes a savage and almost masochistic pleasure in increasing taxation because he believes, wholly wrongly, that, by doing so, he helps the balance of payments. I wonder if anyone else in this Committee supports the view that, by putting S.E.T. on launderers and cleaners, he helps our balance of payments. It is drivelling rot and is seen to be drivelling rot by the entire nation. Yet this kind of assertion is trotted out by the Treasury officials in the Chancellor's name. Here it is: No Government likes to increase taxation. But it is necessary to raise a substantial amount of additional revenue this year in order to achieve our balance of payments objectives. 5.0 p.m.

I do not believe the Chancellor. All that he has done by increasing purchase tax and S.E.T. is to hasten the inflation, manifest by an increase of approximately 7 per cent. in the retail price index during 1968, immediately following devaluation—and the rate of inflation which will be quickened this year. Most largely it will be caused by the deliberate increase in the cost of living promoted by the Chancellor's Budget. The spate of wage claims today, the rush of strikes, unofficial and official in all parts of the country, the mammoth number of days lost last year in industry, should all be laid at the door of the guilty person—the Chancellor, who believes that he gets more exports by increasing the cost of living here.

I believe exactly the opposite, that if he increases the cost of living here he causes more and more wage demands. Is there any greater manifestation of this that this morning's news? The most utterly respectable body of men and women in the country, the professional civil servants, is clamouring—I said "utterly respectable" and the Chancellor grins. Does he not accept my assessment of them? He was not grinning at me? [HON. MEMBERS: "He was."] I do not think that he was, but whether or not he was he should treat the civil servants' claim with the seriousness it deserves.

The Chancellor of the Exchequer (Mr. Roy Jenkins)

indicated assent.

Sir G. Nabarro

I am glad to see the right hon. Gentleman nodding assent.

The civil servants would not be blowing off in public like this about inflation and the need for substantial increases in their pay unless we had this underlying inflation caused by the Chancellor, the principal promotion of which is S.E.T. and purchase tax.

I now say a word on behalf of a section of education, which pays S.E.T. very heavily. There are rising 500,000 pupils in private fee-paying schools in Britain. I leave out direct aid grammar schools. These fee-paying schools raise from public schools to preparatory school to Froebels and nursery schools. There are thousands of fee-paying schools, all with teaching staffs, all with administrative staffs, all with domestic staffs and all subject to S.E.T. None of the staffs of State education establishments is subject to S.E.T.

Mr. Heffer

Hear, hear.

Sir G. Nabarro

Immediately the Labour Party bursts into a cacophony, because it does not like private fee-paying education. But I do.

Mr. Heffer

Well, look at you.

Sir G. Nabarro

It is all very well for the hon. Member for Liverpool, Walton (Mr. Heffer) to point the finger of scorn at me. I will give him the quotation and he can go away and look it up. The Workers' Educational Association, a body that he strongly supports—

Mr. Cyril Bence (Dunbartonshire, East)

Hear, hear.

Sir G. Nabarro

I am glad to hear that the hon. Member for Dunbartonshire, East (Mr. Bence) supports it, too.

The Workers' Educational Association submitted its evidence to the Newsom Committee on the same day as I was privileged to submit evidence, as Chairman, on behalf of the National Consultative Committee for Independent Education on behalf of the fee-paying schools. The Workers' Educational Association said, "We may as well put up with fee-paying education. It would be impossible to abolish it. There would be no room in the State schools to take in another half-a-million pupils, if we tried to abolish fee paying tomorrow."

If S.E.T. is not applicable to a State educational establishment I say to the Chancellor why should it be applicable to a private fee-paying establishment, be it Winchester, Eton, or Harrow—[Interruption.] I said "Eton" in case the hon. and learned Member for Northampton (Mr. Paget) did not hear me.

Mr. Reginald Paget (Northampton)

Or Borstal?

Sir G. Nabarro

That is where the hon. and learned Gentleman displays his ignorance of these matters. S.E.T. is not applicable to borstal establishments, but it is applicable to Eton.

What the hon. and learned Gentleman prefers is for his old school, Eton—he is hardly the epitome of the Labour Party as one of the old Etonians opposite—to pay S.E.T. He likes his old school to pay it but considers that borstal should not, and it does not.

I say that no school staffs in the country should pay S.E.T., be they in private or be they State schools. They will particularly suffer as the result of the increase, in Clause 43, of S.E.T. I hope, therefore, that the Chancellor will give consideration between now and Report to bringing in an Amendment to exclude the staffs of private fee-paying schools—

The Chairman

Order. The hon. Gentleman is now impinging upon Clause 44, which is out of order.

Sir G. Nabarro

I will immediately return to my main theme. I trust that my hon. and right hon. Friends will join this evening, with the Liberal Party—I am now glad to see a single representative of their party here—I hope that the whole of the Tory Party sustained by the Liberal Party and by the Co-operative Members, all 18 of them, will vote against the Government this evening and that the right hon. and learned Member for Ipswich, who has displayed great courage and fortitude in these S.E.T. matters, will not this evening only go to the halfway house of abstaining.

On the contrary, his abhorrence of this form of taxation is as great as my own and he should have the courage, with the other legal luminaries seated opposite—the hon. and learned Member for Warrington and the hon. and learned Member for Northampton, to vote against Clause 43 because of the dreadfully inflationary effects of S.E.T. in our economy and the evil influence it has on all our determined and patriotic efforts to increase the nation's export performance.

Mr. Laurence Pavitt (Willesden, West)

One of the difficulties about the performance of the hon. Member for Worcestershire, South (Sir G. Nabarro) for me at least, was that he seemed as much interested in performing to his hon. and right hon. Friends behind him as he did to the Committee, with the result that I got the impression from time to time that he was talking out of the back of his neck. There were parts of his speech, when, in his usual fruity manner, he was able to attract my attention. As I am one of those whom he was tempting, with those dulcet tones of his, to follow him into the Opposition Lobby this evening, I listened with great care to what he said.

I should like to assure him that there would need to be a much greater temptation to sway me from the paths of righteousness than that which he has put before me. I speak as a Co-operative Member. I understand that when one declares an interest there should be a pecuniary interest involved. I am not quite certain about "pecuniary". I have spoken in the debates on this tax and I speak again tonight from the point of view of the consumers, and those trying to give a service in distribution. This tax, and this Clause, are particularly concerned to impose further penalties upon those sectors of the community.

The hon. Member for Worcestershire, South referred to a yield of £613 million. I could not agree that all this has been added to retail prices. In 1966 and 1967 it was possible to absorb a certain amount of the tax, but the limit was reached long ago. One cannot continue to absorb increases. My great regret is that the main criterion of efficiency which has been adopted is the very short-term criterion of profitability. If that were the only criterion, it would be possible to speak in favour of selective employment tax. But it is not possible to have profitability in areas in which one seeks to give a service. This is very much a metropolitan tax. We look at it through London eyes. We tend to forget the rural areas where it is not possible to continue to absorb the tax by self-service methods which exist in large departmental or self-service stores or supermarkets in the centre of urban areas. Service must be given to the whole community and not merely to those who live in towns.

The hon. Member for Worthing (Mr. Higgins) referred to selective employment tax as the most disliked tax. Other hon. Members have spoken of their abhorence of it. I dislike it. But I do not think that it is as disliked as all that; I wish it were. One of the changes which I have seen during my brief time as a Member is in the attitude towards taxation: that the tax which we see we dislike and the tax which we do not see is acceptable. I reject that philosophy entirely. If a person is taxed according to his means, it is possible to be equitable. But the unfairness of selective employment tax is that it spreads right across the board. This is one of the reasons why I have hoped, and will continue to hope, that some other form of taxation would be found which was more equitably distributed and fairer, especially for the consumer.

This is a housewives' tax. In the last analysis, the housewife pays. It seems that we are always prepared to let the housewife absorb greater burdens because she cannot exert the pressure and influence which perhaps other sectors of the community can bring to bear.

The Chancellor of the Exchequer, in his Budget speech, said that, having considered all the possibilities, he preferred to increase selective employment tax rather than purchase tax. Much as I dislike any tax on essential goods and services, at least purchase tax has the merit of being discriminatory. The differential rates of purchase tax make it possible to make a social judgment that perhaps a mink coat is more worthy of being taxed than bread, butter, milk and sugar. However, selective employment tax makes no such discrimination. This is the first time in history that an indirect tax directly affects food prices. The fact that the selective employment tax has been increased this year only aggravates the disappointment of many of my colleagues and myself.

My argument against the tax concerns its failure to be selective. My right hon. and learned Friend the Member for Ipswich (Sir Dingle Foot) quoted from the Chancellor's Budget Statement last year in which he talked about his open mind and the fact that the Reddaway inquiry would be reporting. It would appear, however, that between then and now his mind closed. I have had the privilege of looking at a questionnaire prepared by Professor Reddaway in which retail distributors were asked to give statistics which would enable him to come to a decision. The terms of reference of the Reddaway inquiry were so narrow that it is entirely irrelevant to the wide philosophical basis on which the tax is drawn. Because my right hon. Friend the Chancellor knows that it is irrelevant, he has not waited for the report before increasing the tax.

To me it is nonsense that at a time when we are desperately trying to hold down prices Government action should cause them to rise. This is politically inept because whenever prices are increased people can say, "It is the Government again—and it is your Government who have done it".

Sir G. Nabarro

Hear, hear.

5.15 p.m.

Mr. Pavitt

But, as the hon. Member for Worcestershire, South knows, that is not so. I have always contended that if we are to hold wages, salaries and incomes we must start with prices. If we cannot hold prices, whatever our intentions, we shall never be able to hold wages and salaries. On that score, the tax is wrong.

I have seen no figures to justify the second contention of the hon. Member for Worthing about the possible transference of labour. For years retailing has relied upon part-time female labour. If one cannot get such labour, one closes unprofitable units and fails to give a service. That labour is not transferred to production. One of the biggest fallacies has been that the tax would bring about an increase in exports in some mysterious and undefined way. I remember the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) giving all kinds of incentives in 1961 to increase exports. Each year the Chancellor gives some new incentive, and we still hope and pray without getting the necessary results, in spite of the excellent efforts made.

Anyone who knows anything about employment in retail distribution knows that youngsters leaving school at 15 or 16 years of age in areas where there is any kind of industrial employment can get 20, 30, 40 or 50 per cent. more if they do a mundane part-time job on a production belt in a factory than if they go into a shop to work or become salesmen of goods or give services. Since 1945 there has been no superfluity of labour on which one could draw for other purposes.

I am interested in health matters. An inevitable consequence is that I am considering all the time the problems of the disabled. The techniques which have made it possible to train blind people to be telephonists and to handle switchboards so that they may feel that they are, not living on charity, but doing a useful job have brought joy to many of us. The productivity and value of disabled people in the service industries is taxed to the extent of £2 8s. a person and this must be absorbed and reckoned in any costings of the labour of people who are not disabled. An employer who wishes to help disabled and blind people may be unable to do so because of the economic burden he has to bear as a result of this increased tax.

A case has been made about laundries. Since I have been a Member, when any sector of the economy has been in danger of being eliminated, Governments of both parties have sought to render assistance. I became a Member 10 years ago when the Conservative Government passed a Bill to ensure that shipbuilding was not economically priced out of the market. Laundries face this problem today. They provide an essential service if people, and especially married women, are to go out to work. Because of the changing pattern of laundries and the impact of coin-operated establishments, laundries, which are still needed to give an essential service, will go out of business. There should be a much closer analysis, when the charge is as much as £2 8s. per person, of how the impact falls on specific areas of the economy which might be driven out of business.

My particular interest is in co-operative societies. In rural areas people rely entirely upon service since there are no large supermarkets. The basis of co-operative societies is that they are non-profit making and belong to the members, and any surplus which is made is returned to those members. If there is no surplus, members are lost and, once members are lost, the shops must close down. These small co-operative societies cannot be compared with joint stock companies and private companies in which people invest and may lose money. Every investment involves a certain amount of risk. There are 13½ million ordinary people who invest in co-operative societies, not capitalist investors, but people who put their savings into one of the finest small savings concerns that there is. I am not talking about London, Birmingham and Manchester but about the small societies in Yorkshire, Lancashire and elsewhere which have existed for 80 or 90 years, some of which are finding that they have to close their doors. When this happens it is not investors who lose their capital but ordinary housewives and mill workers who have accumulated a little money over the years in the dividends received according to the amount of their purchases.

My right hon. Friend said last year that he had an open mind, and I hope that he will consider ways of abating this tax. Unfortunately, neither in Clause 43 nor in Clause 44 do any ameliorations emerge.

This is a blunt instrument, and the decision about who pays and who does not rests on the Standard Industrial Classification. This was realised to be a blunt instrument and was revised and published in the 1968 edition, but the Chancellor did not take the opportunity of ironing out the anomalies, apart from slaughter houses and another exception which we shall be discussing on Clause 44. The hoped-for results have not been achieved, and the S.I.C. is much the same as it was when it was first put forward long ago by the Minister of Public Building and Works. The anomalies are still there, and serve to irritate still further those people who find the incidence of this tax extremely onerous.

The skills of people working in retail distribution have been down-graded. These are among the lowest wage earners, and the service which they give is incomparable. The tendency is to say that they are second-class workers in comparison with those who produce. Since when has "service" been a dirty word?

I was hoping that this year my right hon. Friend would be able to give some concessions. I did not expect him to alter substantially his tax base, since he must raise a certain amount of money. It is more difficult for a Chancellor of the Exchequer to reduce his base of tax than it is to put a man on the moon, and it is unlikely that any Chancellor will ever reduce his base. If ever we should have the misfortune to be governed by a Tory Government, right hon. and hon. Gentleman opposite will know that £613 million will have to be raised by the Chancellor of the Exchequer in some way which will not be pleasing to us. Whether this is done by a value-added tax or anything else, the taxpayer will still have to pay, and it is unlikely that my hon. Friends and I in the Co-operative movement will welcome the tax in whatever way it is imposed.

The whole Clause is unacceptable. It has been thought fit to raise the rate right across the board, with no discrimination in the four categories, and this is an innovation. There was last year a differential between full-time and part-time workers, and there was no increase in some sectors, but this year, no. I understand that we are now committed. I am not so politically naïve as to think that when hon. Gentlemen opposite make jibes across the Chamber they will expect us on this side to link arms with them and join them in the Lobby.

If not this year, then during the following year there will be an opportunity for the tax to be applied with more social justice and with more selectivity, to use a rapier rather than a bludgeon. I appeal to my right hon. Friend to remove the anomalies; for example, the anomaly that nationalised industries are able to sell cookers and other appliances free of tax in unfair competition with others. There are many such anomalies, of which he is well aware, and which I hope he will take account before next year so that we do not then face an impost which is unacceptable, bad in its incidence, unfortunate in its presentation and which is the last thing I want to vote for.

Sir Arthur Vere Harvey (Macclesfield)

We have had two powerful speeches from the Government benches. The right hon. and learned Member for Ipswich (Sir Dingle Foot), who speaks as a lawyer and is held in considerable esteem by the Committee, said that he had misgivings about the tax, which I can well understand. The hon. Member for Willesden, West (Mr. Pavitt), who is a Co-operative Member, made a very strong speech against the tax but, towards the end, I thought that he was trying to work his passage back into the favour of the new Chief Whip. When we vote tonight, I doubt whether one right hon. or hon. Gentleman opposite will be in the Lobby with us. That has been the trouble over the years. It is all puff and wind. If only they would occasionally vote against their Government it might put some sense into the Government on issues which affect every constituency in the country.

The right hon. and learned Gentleman referred to the window tax. He did not think that any Government would bring in such a tax. I would not put it beyond this Government to consider bringing in a window tax; they are quite capable of doing so.

A few weeks ago the Government announced an increase of 10s. per week to old-age pensioners in the autumn. I wonder in this year alone how much of that 10s. will be left when inflation has had a go at it. They are the people who will have to foot the bill.

I am constantly receiving complaints from my constituents, as no doubt are other hon. Members, about the increased cost of living all the way round. I get them even in my own home—a penny on this, 2d. on that. I was recently asked if I had some drugs to treat a person in my home who was suffering from a cold. I said that I had and was asked when they were bought. I said that they were bought about a year ago. Whereupon I was told that at that time they cost 2s. 1d. but now cost 2s. 9d. That is an illustration of the ratio of the increases, and it is nation-wide. The cost of living is rising very rapidly. The Government are now past the point of return, whatever they do for the electorate. The electorate have "had" the Labour Government.

The selective employment tax has a considerable effect of prices. I agree with the hon. Member for Willesden, West that people who work in the services are looked down upon as second-raters. Where would families be every morning without the man who delivers the milk, the man who delivers the bread? These services are essential to every citizen.

The tax has, of course, failed to persuade people to transfer into the manufacturing industries. Every service has a bearing on the manufacturer. Laundries have been refered to, and a high proportion of the business of laundries is for industry in the washing of towels and roller towels, and the cleaning of clothes, overalls and so on. The laundry bill is a large item in many industries, particularly in dirty industries such as chemicals and engineering. Increases in the price of laundry will have an all-round effect.

5.30 p.m.

Among the first establishments to put on a surcharge when S.E.T. was first introduced were the British Railways hotels. They lost no time in putting on a surcharge. I had detected over the months that the Government were beginning to doubt the wisdom of the tax. It is an easy method of raising money, but when Questions were put to various Ministers they said that they were watching the matter carefully. I therefore thought that there would be some alleviation in the tax. But we are now told that there is to be a 28 per cent. increase.

Where do the Government feel they are going in the taxation of our people? All exports will be affected involving all the items which are put on to lorries for the docks at London, Manchester, Liverpool or Southampton. The increase must put up the costs.

The poor British motorist is clobbered every time. Costs will go up for the hotels, which bring in a great amount of money in foreign currency from tourists. Up will go the costs to hoteliers, to shops, and to laundries.

I should like now to deal with the effects on the agricultural industry. When the tax was first introduced it was not intended that the farmers would get a refund. The House had long debates about the matter, and eventually the Government thought better of it and gave way. I remember asking what was the difference between a farmer who produced milk and had to pay the tax and Cadbury's who turned the milk into chocolate and got back their premium. The Government eventually gave way on the matter.

The Prime Minister told everybody in his now famous devaluation speech what he intended to do for agriculture. One of the quickest methods to assist the balance of payments is to improve agricultural output, and it can be done. But the agricultural industry has not been given the means to do it.

Could the Minister say what in the forthcoming year will be the average sum of money tied up by the farmers, and what the free loan to the Government will amount to in the form of S.E.T.? The Minister said the other day that most people get their refunds within a week. I have checked up and I find that in agriculture it is nearer five or six weeks. The situation ought to be looked into. If farmers could be freed from this premium and it could be ploughed back into agriculture, then the many millions of pounds a year which would be saved on importing food would directly help the balance of payments. But the Government rarely do what is obvious.

The tax is bound to increase unemployment, which is the last thing we want to do. We want to encourage everybody to work. The unemployment figures must rise. One or two shops I visit have been told by their head offices to cut down on staff. The Government believe that such people will go into the manufacturing industries, but a great many of manufacturing concerns are not doing too well, including the motor car industry and many others. I could give direct examples, but I will not particularise since it would not help the industry to do so. But the barometer is beginning to fall in regard to both employment and profitability. The S.E.T. is the most unhelpful tax of all.

The tax is always passed on to the consumer. It is the poor old consumer who pays. The people it really hurts are the low-paid workers, the pensioners and those living on small fixed incomes. Many people, in spite of taxation, can earn a bit extra, and it is the lowest-paid people who foot the bill. In successive Labour Governments they are the people who pay for Socialism.

The Government will not return. They have had it and they must realise this in their constituencies. I was amazed that the hon. Member for Dunbartonshire, East (Mr. Bence) said yesterday that we ought to have a longer recess so that he could get among his constituents. I wonder how much he wants to get among them. From what I hear about Members they have a rough time on Fridays and Saturdays in their constituencies. I ask the Chief Secretary, in the interests of the whole nation and of industry, when people are working hard, to look again at this tax and if necessary to bring in another form of tax if the money has to be made available. This tax is iniquitous and wrong.

[Mr. E. L. MALLALIEU in the Chair]

Mr. Richard Wainwright (Colne Valley)

As the four Amendments which are in the names of Liberal Members testify, we oppose this Clause as strenuously as anybody in the Committee, not excluding the Co-operative Party Members. From the first, since selective employment tax was introduced, we have been anxious in opposing it not to dismiss it out of hand as though the Exchequer could do without this growing amount of revenue or to suggest that the Government can live on air or live by simply jacking up existing ineffective taxes to yield revenue on a scale which they were never intended to provide.

This dismissal was the impression left upon me by the otherwise admirable speech of the hon. Member for Worthing (Mr. Higgins) who said nothing to indicate that the whole country is interested in the huge prospective yield of S.E.T. and how it would be raised under a Conservative administration.

In discussing S.E.T., those of us on this bench believe that the Committee should recognise that there is a case to be made for a new tax which will not fall upon the profits and results of successful enterprise. We also believe that a case is to be made for a tax which is more related than any existing tax to the use made by employers of Government expenditure in looking after the education and technical training and the health and welfare of the working population.

There is also a case for a tax which is genuinely straightforward and cheap to administer, cheap not only to the Government service but also to the taxpayer himself. We are distressed that this opportunity to introduce a tax of this character has been missed. Instead, we have wasted three years with a tax which does not produce these admirable results.

We believe that a strong case can be made for an overall payroll tax on a percentage system, without any of the alleged selective element of the selective employment tax. The selective element is the most unfortunate aspect of the whole of S.E.T. Over the last three years it has led to anomaly after anomaly and a great sense of unfairness in many industries and services in the country.

The alleged distinction between services and manufacturing is not only unfair and unfortunate but also quite bogus and impossible to sustain in argument. One striking sector in which the fallacy of this alleged distinction is illustrated is that of the reclamation industries which save this country material which otherwise would need to be imported since we do not produce many of the raw materials ourselves. Many millions of £s are saved which contribute directly on a substantial scale to our exports. These industries take waste products and render them available as substitutes for raw materials which are often of good quality and of great use to manufacturing industries.

The chaos and unfairness in this important sector of industry is rampant and growing. Some reclamation industries are treated as being due for a rebate of S.E.T. but others must bear the tax. None of the industries concerned can make any sense of the rules. The procedure involved is also unfortunate from the point of view of democracy. I understand that Orders are to be laid before the House to exempt the scrap metal and waste paper industries from S.E.T. quite apart from the enforced temporary loan which every undertaking must suffer.

We are told that, if the House agrees, waste paper is shortly to be exempted by Order in Council. Good luck to the waste paper industry. In our view, it should never have had to suffer the tax. But the textile reclamation industries, which contribute some £4 million a year to our export totals and provide the home textile industry with a great deal of economical raw materials are, we understand, definitely not to be exempted. No one in those industries or amongst those who advise them can understand the alleged reasoning behind the decisions. These are not incidental anomalies. They spring from the wholly bogus attempt to distinguish between so-called service and so-called manufacturing industries.

The second reason which in our view makes it imperative that this Clause should be voted down is that it perpetuates a poll tax. As a result, if it encourages any employer to do without labour, it encourages the employers of those who are causing least waste in the economy. There is no great improvement to be sought in our affairs by pushing out of employment low-paid and unskilled workers, or people coming towards the end of their working lives. Yet it is on those sorts of people that the incidence of S.E.T. is highest from an employer's point of view.

What is needed is a payroll tax which, operating as a percentage of remuneration, would make an employer think more carefully about the deployment of higher-paid skilled workers who are often not used to the best advantage, particularly in manufacturing industries which at the moment are exempt from the tax. In the late 1960s, there is no justification for a heavy poll tax to be increased year by year in this country, which has shown that in other respects it can put up with an extremely sophisticated tax system.

Thirdly, as has been proved as a result of three years' experience of the tax, there is the overwhelming disadvantage of the rule about establishments and the rule whereby the liability to S.E.T. depends upon the status of the majority of workers in a concern. This has been shown again and again to produce crashing anomalies.

I do not wish to detain the Committee with anything like all the correspondence that I for one have received. Other hon. Members will have received as many letters, if not more. I give only one example of the absurd result of the establishments rule whereby incidence of the tax depends simply upon the number of roofs under which employees of a common employer happen, by accident and history, to be working. The example which I quote is that of a very efficient firm of worsted spinners and weavers whose manufacturing establishment is situated near Keighley. Being highly export conscious, like most members of that textile trade years ago the firm opened a physically separate export office in Bradford. Recently, the managing director of the firm wrote, saying: In order to export more efficiently, my Company established an Export House in Bradford over 40 years ago. This Company is an integral part of our organisation, yet because we established it in Bradford, which made the communications so much better, we are now penalised to the extent that we have to pay the S.E.T. on every member of that firm. At the same time, other concerns in the same trade, which again purely by accident have their export unit under the same roof as the spinning and weaving operatives, suffer no S.E.T. burden at the end of the day. This sort of unfairness goes down very badly with taxpayers large and small.

5.45 p.m.

I hasten on to the fourth serious disadvantage of the tax, which will be aggravated by the proposed increase. This is that it is not subject to and does not lend itself to any kind of export rebate.

I happen to be one of those who regard the cancellation of the whole export rebate scheme for indirect taxes, at the time of devaluation, as a disaster—

Sir G. Nabarro

So do I.

Mr. Wainwright

But this Clause could never have been incorporated in an export rebate system. If it were a payroll tax right across the board, it would be possible and practicable for exporting firms to calculate how much payroll tax they had suffered in respect of goods exported. But, with a selective tax which is only paid by some of the contributing processes to their exports, it is impossible to make any rebate calculation which could be checked or which would be satisfactory to any revenue department. It is well known that, as a result, many export trades are suffering and having to put up their prices or lower their margins because of the incidence of S.E.T. on the various professional and service trades which enter into their export costs. I am thinking of such matters as insurance, accountancy and shipping services.

All these are disadvantages which, in total, add up to a denial of any virtue in the tax. The tragedy is that, with a difference of emphasis, with a concentration upon the whole payroll with the idea that employment and the cost of providing an educated and healthy labour force is a matter which merits a return to the State from the employer, instead of S.E.T. we would have had a healthy and acceptable tax which would have got into its stride and could be bringing in something approaching the prospective S.E.T. yield of £600 million and, at the same time, would have promoted a new economy of labour in manufacturing as well as in other sectors of the economy. Because that has not happened, my hon. Friends and I intend to vote against the Clause.

Mr. Paget

I have always been a supporter of a payroll tax, and, in fairness to Nicky Kaldor, that is how this tax was conceived.

I believe that efficiency is a managerial function, and nothing promotes efficiency more than high wages. As wages go up, managements which wish to survive have to improve their efficiency. That has happened in agriculture, where wages have gone up by a higher proportion and where efficiency has increased at a rate twice as good as that of industry. This has been recognised by farmers, almost all of whom are paying well above minimum rates.

It has certainly been the case in America, where there are far more militant unions than we have in this country. Those militant unions cost, in strikes, something like four times the amount that ours do. But it is well worth it, because they force up wages and, in the process, force up efficiency.

We are suffering from inadequate militancy in the seeking of high wages. If at the moment, for reasons with which I do not altogether go along, we cannot afford to put the whole purchasing power of those higher wages into the consumer market, then a payroll tax is a highly effective manner of improving the efficiency of industry.

I part with this tax at the point where it becomes selective. It is a distortion which is caused by our obsession with exchange rates. We have to try to fudge the prices of anything which might be exported, because our obsession with a fixed exchange rate stops us adjusting export prices in the rational manner by a floating rate. So we have this selective tax.

It is perfectly true that this selective tax has saved labour in the distributive industries. Where we save labour in the manufacturing and productive industries there is almost, by definition, an increase in efficiency. Where we save it in the service industries it is often the opposite. Few of us can be unaware from personal experience of the amount of time lost to our community today by garages and other services which are grossly inefficient because they are inadequately staffed.

Service labour is not easy to redeploy into industry, and very little has been so deployed. The labour saved has largely gone into unemployment and self-employment. This has been particularly noticeable with the construction industries. This is the price of distortion. It produces the undesirable element of disguised employment without cards. The same thing has happened in the domestic service industries. I believe that this is a distortion.

I believe that this tax is so unfair as to offend. People will not stomach things which are blatantly unfair, as with the divisions between those who pay and those who give an interest-free loan to the Government and those who do not pay at all.

I instance a man who builds luxury yachts and also builds houses. He is energetically engaged in trying to persuade the tax authorities that he is really building luxury yachts, not building houses, because luxury yachts are to be encouraged and houses are to be discouraged. We cannot wear this kind of absurdity.

I now turn to a particular factor in the wealth-making process. Services are one of the factors in the wealth-making process. To select one of those factors from the whole system either for encouragement or for discouragement simply distorts the whole. In agriculture I have often criticised fertiliser grants and ploughing grants, particular things which seek to favour one aspect of production as against others, because they distort the process of production. To pick on the services as a factor in production, particularly at a time when, with automation increasing, the rôle of services in the total productive system becomes larger, is to distort the system. It also creates a motive and an interest in the producer to supply his own services instead of obtaining the services of specialists, although tax considerations apart, this would be a more efficient way to do it.

Finally, this tax is easy to collect because somebody else does the job of the Treasury in collecting it. The reasons against it seem to me much the same as against dope. It makes life too easy for the Treasury. It will always say that the easy way to get more money and the way to get somebody else to do the work is to slap it on S.E.T. A tax which does that wants looking at with a good deal of suspicion.

These are the main reasons why I am against the tax. I have already said that the case against making it a payroll tax is that it will put up, among other things, the prices of exports, but S.E.T. will come through the economy on to exports anyway. After all, exports tend to have a high element of transport in them. It will come through to exports eventually, but there may be some kind of short-run advantage. This is only made necessary because we are wedded to this superstition of a fixed exchange rate which governs the exchange of our imports. So we have one foolishness demanding another foolishness.

Frankly, I should not mind the fact that I regard this tax as foolish and ill-conceived as a reason for not supporting the Government. After all, one is constantly having to choose between alternatives one does not like. When I look at the alternative of financing agriculture by a food tax designed to force up food prices and then putting an added-value tax on top of that, in an economic mad-house I would reject that kind of dementia praecox in favour of a mild schizophrenia of my right hon. Friends. I should not find this unduly difficult.

I am more concerned about the interests of the Labour Party. I believe them to be profoundly important, not only from a narrow sectarian point of view but from the point of view of the nation. I am not talking about another Labour Government. That is for perorations. I am concerned whether we shall have an Opposition. If we had an election now there would not be an Opposition. There would be fewer than 100 Members on the Labour benches. That is not an alternative Government. That would be a disaster for the country, and the wiser men on the other side know that, too. If we are to prevent that kind of disaster before the next election—and we have not too long to do it—

Sir G. Nabarro

No, you have not.

Mr. Paget

—we have to rebuild something of the support which we have been losing. Through a measure of inconceivable folly we have antagonised the trade unions, and now we are proceeding to clobber the Co-op. There are about 39 organisations which we are not allowed to join because they are incompatible with the interests of the Labour Party. I am wondering a little whether the Parliamentary Labour Party will have to be added to that number. If we go on much longer it will, but my attitude is that I am not going to be plus royalists que le roi, or, from the Government's point of view, more unco-operative than the Co-op. I shall do as they do, because it is crazy to try to break up the support from one of the basic elements of the Labour Party, which is the Co-operative movement. That is how I stand on this, and that is how I shall vote.

6.0 p.m.

Mr. John Peyton (Yeovil)

I do not intend to follow the hon. and learned Member for Northampton (Mr. Paget) at great length. The hon. and learned Gentleman showed his kindness in trying to gather together one or two of the tattered remnants of Dr. Kaldor's reputation by saying that he was not wholly responsible for this abortion of a tax.

I was profoundly interested in the hon. and learned Gentleman's last remarks about the future of the Labour Party, on which I grant he is a greater expert than I am. One of the forbidden groups which no Labour Member ought to join for fear of damaging the party irreparably is to be found on that Front Bench. It is not the Parliamentary Labour Party but the Cabinet which is really showering death-blow after death-blow on the unfortunate party which the hon. and learned Gentleman supports.

Last year I took part in a discussion upstairs on this tax. It was less comfortable up there. It was more stuffy. But here we are repeating the same arguments about an increased tax. We are faced with the spectacle of the House discussing a tax where the weight of the argument is entirely against it. No hon. Member has advanced one word in favour of this monster. The best that the hon. and learned Member for Northampton could do at one moment was to adduce an example of a tax that would be more insane, more criminal than this one. That is the only shred of argument which has so far been adduced in its favour.

The right hon. and learned Member for Ipswich (Sir Dingle Foot) rightly denounced it as ill-considered and unjust. At its baptism we were told that farming was a service industry, that agriculture was not concerned with production. Had we not known Treasury Ministers better, we would have suspected a deep and twisted sense of humour, but we know that they do not have one at all.

The hon. and learned Member for Northampton went on to say that the tax was convenient to the Treasury. Do we not know it! Are we not constantly reminded that the convenience of the Treasury is now more important and more highly regarded than the welfare of the so-called sovereign people? What do people matter by comparison with the convenience of the Treasury?

If I had my way, every official of that Department would, as a matter of compulsion and duty, have to come here and listen to every word of the debate on this tax so that they could learn what the opinion of the House of Commons is about this creature. Come to think of it, that would have the added advantage that it would keep them out of other mischief. The fact that they were wholly occupied here, tied down in their seats, and faced with the mortification of having to listen to what hon. Members think about their creature would keep them out of other mischief.

How do we explain to hotel keepers, at a time when the Government are going through the motions—they are pretty silly motions—of trying to encourage the tourist industry, that they are to be at a disadvantage with hotel keepers on the Costa Brava? I have said before that the Government could not have done better if they had issued a glossy, gilt-edged invitation to the citizens of this country to go to the Costa Brava on a package holiday and keep away from English hotels.

I think that the patience of hoteliers in this country is remarkable because, like other people, they are poor, faithful creatures. They trust institutions to a certain extent. They send deputations to the Treasury. I do not doubt that they are civilly received by the Chief Secretary, but where does that get them? If they knew the Chief Secretary, Treasury Ministers, and that Department a little better, perhaps they would not be so foolishly optimistic as to go there. Instead—and I am afraid this is true—they would regard the House of Commons as their only hope, and yet they would be driven to despair by the fact that tonight we are debating this tax, and that during the debate the right hon. Gentleman will get no champions for his measure except himself, and politeness forbids me from commenting on that.

But if these hoteliers were to come here they would find it at the end of the day, following united and unanimous condemnations of the tax, the trumpets would sound and the docile sheep would tramp through the Government Lobby. The hon. Member for Willesden, West (Mr. Pavitt) is not in favour of this tax. He has been told what his co-operatives think about it. He has consistently opposed it, but he has no influence on Government policy, and I am a little disappointed that a combination of the magnetism of my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) and the force of the hon. Gentleman's argument is not going to get the hon. Gentleman into the Opposition Lobby. What a thing it is to infer that he cannot go through the Lobby with the Tories because he does not approve of the sort of things they would do. The hon. Gentleman has to face it, as have all Government supporters, that this tax is doing harm. It is regarded as harmful, and it is totally unwelcome in the country. Is not that fact going to influence hon. Gentlemen opposite at all?

People who already have sufficient suffering and pain resort to private nursing homes for some help and shelter, and yet the burden of this tax is placed on them irresponsibly and even cruelly.

I shall not refer in detail to laundries, though a strong appeal was made to me the other day by a man whose business is threatened as the result of laundries being one of the victims of the tax. One of my hon. Friends mentioned the nationalised industries. How in the name of conscience can the Government justify what they are doing? They always boast about nationalised industries trading fairly. Is it not a sheer travesty of justice when one considers that the nationalised industries are put in a specially privileged position compared with ordinary privately-owned businesses?

What of the building industry? We are told that because the building industry is not a production industry it must be one of the victims of S.E.T. I wish we could be provided with a glossary of Treasury terms so that we might relearn the language and modify our thinking to fit the convenience of our new masters.

On one occasion a Treasury spokesman with a little more imagination than veracity, suggested that the point of imposing this tax on the building industry was to improve its productivity. If so, why not impose it on every industry? What an extraordinary argument for discriminating against the building industry, which already faces sufficient problems. Our old friend, that hardened warrior, the Chief Secretary seems to swim in a sort of permanent reservoir of the spirit of the Treasury. He seems to maintain that spirit without fear of its being punctured, wounded or diminished. Without heeding our arguments, he maintains his position and returns to the Treasury with his armour unchipped.

I am sorry that each year we must listen to the right hon. Gentleman saying that the service industries do not pay enough and that a special form of misery must be found for them. The arguments which Treasury Ministers use in an effort to justify S.E.T. are a load of poppycock of the first magnitude, and that is a polite way of describing them.

I suggested that the whole staff of the Treasury should attend these debates. I have an even more positive suggestion. The matter should be referred to Mr. Aubrey Jones who, for several months, has been considering the steel industry's prices. We have been told that the industry, the Ministry of Power and the Treasury must have an increase in prices and, considering the matter, we gather that Mr. Jones is to give us his view in a few days' time. If Mr. Jones could be occupied with a careful consideration of S.E.T.—in the meantime, while he is undertaking that task, the tax should be suspended—the national interest would be abundantly well served in both respects.

It would be unfair to concentrate on the chief Secretary, who has the unpleasant task of defending S.E.T. Shortly after this tax was introduced he used some immortal words in its defence—if I am misinterpreting him I hope that he will intervene—when he said, "The uproar which greeted the introduction of S.E.T. showed just how necessary it was".

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

They were not my precise words, but the point is very much the same.

Mr. Peyton

I am obliged for the right hon. Gentleman's confirmation. Why uproar should justify it I do not know. In other words, unless the Government do something that is manifestly unjust, they are not serving the public interest. According to that criterion the Government deserve our most humble and united congratulations. On no other criterion, however, can they possibly deserve them.

The purpose of S.E.T. was not nearly as vulgar as the collection of revenue. It was a trumpet call which would summon workers from the barbers' shops and building sites and drive them in their hordes on a patriotic crusade for exports. The result has been just one more gloomy failure to add to the long list of failures for which the Government have been responsible. The only aspect which I find surprising now is the total, complete, utter and absolute inability of the Government either to admit the possibility of their being wrong or to learn from their unequalled record of shabby failure.

6.15 p.m.

Mr. Heffer

Although I shall be critical of the application of S.E.T. on the building industry, I wish to make it clear at the outset that I do not oppose this tax in principle.

I assure the hon. Member for Yeovil (Mr. Peyton) that my right hon. Friend the Chancellor of the Exchequer made it clear when S.E.T. was introduced that it had the major purpose of raising revenue. [HON. MEMBERS: "No."] I thought my hearing was good, and I distinctly recall that being the express purpose of S.E.T. The tax has the additional good feature of adding a new dimension, a broader base, to our tax system. It also has an effect on redistribution, though that is only a marginal advantage. Another point in favour of S.E.T. is that it is not as direct as, for example, purchase tax, although it has been used in certain circumstances when it should not have been used.

Since it cannot possibly be argued that the building industry is in any way a service industry, it is difficult to understand how it can be suggested that S.E.T. should apply to it because, it is said, it is concerned only with services. That suggestion is absurd, particularly when one realises that many of the ingredients that go to make up a factory are made by manufacturing industries. When those ingredients are brought together they are then called a service, even though the ultimate purpose of building a factory is to develop manufacturing. In other words, the building industry is an essential link in the production chain. I have never believed that S.E.T. should be applied to the building industry, and I beg my right hon. Friend the Chief Secretary to reconsider the matter.

Let us consider the financial effects of the tax on the building and construction industry. At pre-1968 Budget rates, up to 1st September 1968, the tax brought in £80 million. At pre-1969 Budget rates, from 2nd September 1968 to 6th July 1969, it brought in £120 million. At post-1969 Budget rates, from 7th July this year, it is estimated, the added burden to the building industry is likely to be between £152 million and £155 million. That is a colossal burden for any industry to carry, particularly when it is not a service industry. I will return later to the question of what has happened to some of the labour which, we are told, is being shuffled out of the building industry into other industries.

Let us consider the effect of S.E.T. on house building, for if there is an added burden on the building industry, part of it must fall on house building. In a Written Answer in HANSARD, 18th April, 1969, col. 309, my right hon. Friend now the Chief Whip said that after the increase in S.E.T., the additional cost on a £3,000 house will be £25 per house; but the total additional cost per house since S.E.T. was introduced is about £150 on a £3,000 house. I do not know where anyone can get a house built nowadays for £3,000. I am sure that most houses cost a lot more.

This means an added burden to local authorities which in turn put an increased burden on their ratepayers and rentpayers. It is passed on to the consumer. Consider, too, the problem for a young couple purchasing a new house for the first time. In any case that young couple may find some difficulty in raising a mortgage. The added cost of £200 may make the difference between their having to continue to live in rooms and their buying a house. My right hon. Friend must look at the whole question again.

At the Trades Union Congress a resolution was moved on the subject by George Lowthian, General Secretary of the Amalgamated Union of Building Trade Workers—the bricklayers. He was naturally concerned, in particular, with the construction industry. He described this as a bad tax, hastily thought out and, I would suggest, badly applied. The resolution which was passed was as follows: This Congress expresses its concern at the effect of the selective employment tax and in particular draws attenton to the undesirable consequences it has had in the field of self-employment. It therefore calls on the Government to examine the operation and the results of the tax and to review whether the tax should be modified or eliminated. That resolution was not carried by the Congress, for it was not put to the vote; it was remitted to the General Council, which stated that it would produce its own report on the selective employment tax I have checked up on what has happened. The General Council of the T.U.C., like everybody else in the country, has been awaiting the Reddaway Report. Its view was expressed by Mr. Victor Feather following the Budget proposals. He said that he was surprised that there had been an increase in the tax before the Reddaway Report was published. That was the authentic view of the T.U.C. It is not saying that there should not be a selective employment tax, but it is expressing its surprise.

The resolution which was remitted to the General Council was particularly concerned with the question of self-employment. Let us consider what has happened. A suggestion has been made that workers have left the building industry to go into other industries. We are told that that is part of the objective of S.E.T. Figures have been given that there was an increase in the numbers in the industry in the 1950's and 1960's and that in the last few years, particularly since the operation of the tax, the numbers in the building and construction industry have decreased. On the surface, that looks as though the tax is working—on the surface. But the reality is not that the workers have gone out of the industry. It is that they have become self-employed. They have become labour-only. They have become what are known in the industry as "gangs on the lump". The tax has not had the result which we were told it would have. It has the very opposite effect, and the numbers of self-employed have increased.

I refer hon. Members to the Phelps Brown Report—Cmnd. 3714, page 117. They will read: It is far from easy on the basis of a sample of firms to make any overall estimate of the present size of the labour-only sub-contracting labour force in construction; from the available evidence it looks as though the numbers involved might be in the region of 165,000–200,000. In view of the fact that there are fewer than 1½ million workers in the building and construction industry, we realise that the 200,000 of them who are labour-only represent a pretty good slice of the workers in that industry. I should like my right hon. Friend to look at the whole matter again. I assure him that my figures are accurate. I do not give figures in the House unless they are accurate. It seems to me that the time has come for the whole question of the application of S.E.T. to the building industry to be reconsidered by the Government.

Sir G. Nabarro

This year.

Mr. Heffer

Now, immediately.

Sir G. Nabarro

I quite agree.

Mr. Heffer

Later I shall move another Amendment. I will not at this stage go into the question of apprenticeships, but the tax has an important effect on apprenticeship and training and the whole development and future of the building industry.

I regard this as a vital matter. I therefore conclude by asking my right hon. Friend, apart from all the other arguments which have been used in the debate, specifically to have a further look at the bad effect which the tax is having on the building industry. I ask him to reverse the policy in relation to the building industry now. I ask him to recognise that building is an essential part of our productive process and our manufacturing process and cannot be considered as a service industry in the sense in which other industries are so regarded.

6.30 p.m.

Mr. R. H. Turton (Thirsk and Malton)

The hon. Member for Liverpool, Walton (Mr. Heffer) began his speech by trying to find some justification for this tax. I thought that what he was justifying was not selective employment tax but an employment tax.

All the speeches in this debate have shown that this tax has been proved unfair in its incidence and damaging to the economy. The Chancellor himself recognised that by appointing the Reddaway Committee to inquire into it. I find it hard to excuse the Chancellor because he has raised the tax by 28 per cent. before the Reddaway Committee had reported and while it is still considering this problem. This will have the effect of widening the disparities which at present exist, aggravating the inflationary effects, and hampering our attempts to correct our balance of payments position.

I want to concentrate my remarks on the effect on the balance of payments. If we are really determined to correct our balance of payments I am convinced that we have to concentrate far more than we have done on import saving, and especially on invisible exports. Figures for 1967, the last year for which I have figures available, show that in the private sector visible and invisible exports totalled £7,000 million. Of that, 70 per cent. was for visible exports and 30 per cent. for invisible exports.

Selective employment tax is levied on manufacture but visible exports have a refund while for invisible exports there is no refund. It is three years since Professor Reddaway drew attention to this and asked the Government to look at it, but so far as I know there has been no relief for invisible exports. Whether one is trying to sell goods, or insurance abroad or doing any form of export promotion, this tax is levied without refund. Although those manufacturing for home consumption bear this tax, they get the refund. This adds to what is going wrong in this country—very heavy consumption at home. It makes it more difficult to earn abroad, thus adding to our balance of payments difficulties.

I must not speak at length about the tourist industry because that will be dealt with when we come to other Amendments. If we are trying to get credit from abroad for the tourist industry it is senseless to say that an hotel in one area should be allowed a refund whereas an hotel in another area should get no refund. The object should be to attract foreign exchange to Britain as a whole. To select, as this tax does, between different areas for the tourist industry seems quite wrong.

I want to look at the very odd effect of this tax on education. I cannot understand why we should have this form of selective poll tax on education, nor, still more, why we have this curious division by which the tax falls on certain establishments but not on others. I should have thought that all of us wanted to try to keep the cost of educating our children as low as possible and also to encourage the education in Britain of children from overseas. That represents a very considerable invisible export at present.

The National Consultative Committee on Independent Education carried out a 3½ per cent. sample on this problem to find what is actually saved and brought in foreign currency to this country through independent education. The figures showed that in that 3½ per cent. sample there were 1,267 overseas pupils. Grossing that up, in the total for this country we have £37 million from boarding schools. In addition there are 2,000 day schools where the saving is not so great. It is clear that the actual import saving from independent education brings in a figure of over £40 million a year to this country. Why should we penalise that by this tax? I cannot understand why the tax is being increased.

Sir Harmar Nicholls (Peterborough)

My right hon. Friend said that he could not understand it. I think this is one issue on which the Chancellor has made himself perfectly clear. He has not attempted to justify the increase but said that he made it because this is the easiest form of tax collection and does not entail taking on more civil servants.

Mr. Turton

I hope that the Chancellor will give an explanation at the end of the debate, but I am delighted that my hon. Friend the Member for Peterborough (Sir Harmar Nicholls) has anticipated the Chancellor's reply. Raising the tax by 28 per cent. will have such an effect on education that some schools will close. The children who come to them from overseas will move to education establishments abroad. Then this money will not come to Britain, as a result of the Chancellor's action.

We have heard many speeches from hon. Members opposite—from those who dislike this tax. I know from long experience in this House that however much they dislike the tax they will not go into the Lobby against this Clause. I hope that this Clause will be defeated. I hope that the Chancellor will think again about increasing the tax while the Reddaway Committee is still considering the matter. There is a way in which he could deal with it. He could postpone the operation of the Clause until after he had received the Reddaway Report and adopted those recommendations of Professor Reddaway and his Committee with which he agrees. I hope he will consider that. Otherwise he will widen the disparities and damage the economy very much, particularly from the balance of payments point of view.

[Mr. HARRY GOURLAY in the Chair.]

Mr. Arthur Lewis (West Ham, North)

My hon. Friend the Member for Liverpool, Walton (Mr. Heffer), having first said that in principle he was not against the tax, spent almost the whole of the rest of his speech pointing out how unfair and ludicrous the tax was. I thought that he knew, as all of us on this side know, that there is doubt about its origin. The Chief Secretary intervened to say that the tax was originally introduced to raise revenue. I recollect that my right hon. Friend the present Home Secretary said that one of the main reasons for its introduction was to shake people out of non-productive, inessential industries into export industries. My right hon. Friend went on to explain that it was also a good and easy means of raising revenue. I shall explain why I do not think that the tax has achieved anything of the first and has had no effect on the second.

Mr. Mendelson

I know that my hon. Friend, whom I have known for many years, will want to be accurate, in fairness to the Government. When the present Home Secretary introduced this tax he said at great length that it was a revenue-raising measure in the first place. He said that he had looked at all the traditional possibilities—putting a little more on beer or on cigarettes—[Interruption.]—this is verbatim. Hon. Members do not like the truth. My hon. Friend said that he had decided on S.E.T. and that that was its purpose. He warned the House that, though it was hoped that there would be some transfer from service industries to other industries, no quick results could be expected.

Mr. Lewis

My hon. Friend and I must have been in different Houses at the time. I also heard the then Chancellor go on to explain how this would mean a shaking out of the inessentials into essential work. It has not happened. I agree that subsequently the raison d'être of the tax has shifted to that of being a revenue raiser.

Mr. Mendelson

My hon. Friend must tell the truth about the Government and about everybody else.

Mr. Lewis

I differ from my hon. Friend and can only state my impression. My hon. Friend is entitled to his view.

Mr. Mendelson

It is a fact, not a view.

Mr. Lewis

We can look it up in the OFFICIAL REPORT. My hon. Friend has agreed that one of the reasons for the introduction of the tax was to shake out inessentials.

Mr. Mendelson

That was a secondary reason.

Mr. Lewis

I will accept for the sake of the argument that it was secondary, but I do not think that the tax has had that secondary effect either. Far from transferring people from inessential industries to essential industries, the reverse has happened. The inessential industries—the candyfloss type of industries—are able to afford to pay the tax much more easily than industries engaged in the hard task of exporting.

I asked the hon. Member for Worcestershire, South (Sir G. Nabarro) the date of the Budget for the specific reason of getting confirmation of my recollection that it was 15th April. In the week following 15th April this very material letter appeared in the Daily Telegraph correspondence column: Sir, on April 14th I arrived back in the United Kingdom from North America bringing with me orders for over 600 million dollars of our products. Within 24 hours I am rewarded by the Chancellor with a £2,000 a year increase in selective employment tax on myself and my export staff. Does the Chancellor know anything about the important function of the export salesman or is the increased S.E.T. really, as stated. 'to encourage me to transfer all my export salesmen to the car production line'? If so, who will sell them? Surely the Chancellor must recognise that exporting is not a 'service industry' but the vital last part in the whole export production industry. That letter was written by Graham Arnold, the Group Sales Director of Lotus Car (Sales) Limited. Today that firm published its report. It has done an excellent job. It has achieved an 80 per cent. increase in export turnover over the year.

6.45 p.m.

Not only is the tax not helping industry. It is harming exports. The whole thing is ludicrous. I can quote an example of a firm which has a manufacturing depôt down by the Thames and an office in the City of London. In respect of the group of workers doing non-productive—service—work in the office there could be no refund. The firm has shifted its office workers out of the City down to the factory on the Thames, and now it does not have to pay the tax because they are working in a productive factory. This is crazy. The tax is not helping to promote exports, which is what the Government have stated as one of their foremost aims.

I must declare an interest here. I have been a Co-op member all my life. I have no financial interest with the Co-op; I am not sponsored. This organisation, which has done an enormous amount of work to help ordinary workers to purchase consumer goods, will be hit by the increase.

I am very concerned that people can get money to buy houses to live in. There are many difficulties strewn in their path. One of the most essential aspects is that building societies should as far as possible not have their costs increased. This is a very important service industry. I should like the Chancellor to work out a system of selective employment tax, if he must have it, on the basis of selecting those types of work, industry and service that can be and are of use to the well-being of the country and to the export trade.

The same is happening to hotels and restaurants. A friend of mine successfully runs a very luxurious restaurant in the West End.

Sir G. Nabarro

The hon. Gentleman's friend will indeed be successful if the hon. Gentleman is himself a customer.

Mr. Lewis

I shall do no advertising. My friend earns for Britain Swiss francs, Deutschmarks, dollars and other hard currency, but he must pay the tax with no refund. His brother, who has a firm that makes one-armed bandits and pin tables, gets a refund. What a crazy setup. Here we have people engaged in the manufacture of one-armed bandits, pin tables and so on. I am not moralising and saying whether we should or should not have these articles. All I am saying is that it seems crazy that the man who is earning hard currency and helping our balance of payments should have to pay this tax, whereas the man who manufactures goods which are inessential from the point of view of the country's economy is able to get a refund.

There should be some examination of this question. I hope the Chancellor will drop this tax but, even if he is wedded to it, he ought to work out a system whereby it is applied properly and does not have the exact opposite effect to that which was originally suggested as one of the purposes, if not the main purpose, of the tax. If the Chancellor does this, we may be able to look at the whole question of revenue raising and see whether there can be some alleviation of the effect on such industries as I have mentioned, including the Co-operative movement.

Mr. John Hall (Wycombe)

I suppose I have listened to all the debates on selective employment tax since the tax was introduced in September, 1966. I confess that I have found today's debate increasingly depressing, not because of the delivery of the speeches—we have had some powerful and interesting speeches from both sides of the Committee this afternoon—but because, although there has been almost complete agreement on both sides of the Committee that the selective employment tax is a bad tax which ought to be abolished, and although the number of Members who have raised even half a voice in defence of the tax could be numbered on the fingers of one hand over a period of three years, nevertheless the Treasury Bench has been able to impose its will each time. Hon. Members opposite have trooped obediently through the Lobby in support of their own Front Bench.

I know that this is common practice, and I have been in the House too long to expect that on most occasions when hon. Members on the Government side disagree with their Front Bench they will necessarily follow up their views with their votes. But there are times—and this is one—when the House as a whole should consider the national interest first and foremost. There are occasions when the back benchers on both sides, who show much more common sense in looking at matters before the House, should unite.

Mr. Mendelson

The hon. Gentleman ought to say something about the partisan policies that the right hon. Member for Enfield, West (Mr. Iain Macleod) is now preparing in order to shift over £1,000 million from direct to indirect taxation to help the rich and put more of the burden on the lower income groups. The hon. Gentleman should talk about that before he talks about hon. Members considering the national interest.

Mr. Hall

That shows what a mistake it is to give way to the hon. Member. I am trying to put forward a serious point. I am saying—and I think hon. Members on both sides agree—that we are now discussing the raising of about £613 million, and this is a very serious matter which affects many people in the country. It has been agreed, almost without contradiction on both sides of the Committee on many occasions, that the impact of this tax is uneven and unfair. It has produced hardship, it is damaging to the economy of the country and it jeopardises exports. There is general agreement on this, and we therefore agree that it is not in the national interest that we should have a tax of this kind.

I know the problems which face a Chancellor of any Government when dealing with opposition to a tax which raises a very large part of his revenue. I know also that the tradition has grown up over many years that one should not vote against one's Government's Finance Bill, or even a part of it. I have never been able to understand why one should not vote against a Clause in a Finance Bill without it being regarded as a vote of confidence against the Government. I can see no reason why, if the House is united against a particular proposal, hon. Members should not vote against a Government Measure and ask the Government to think again.

If we were all to vote against the Clause it would leave the Chancellor with £613 million to find somehow. This is the reason why he is resisting the opposition to the Clause, because he has got to find the money. We know this is the reason why the Clause was put in the Bill in the first place and also the reason why the Chancellor will ignore the Reddaway Report. If hon. Members opposite are genuinely concerned about this matter and are not just putting on a front, they should say to the Chancellor, "We do not like this tax. We realise you have got to raise a certain amount of money. Do it in one or two other ways." He could, for example, treat it as a payroll tax, as was suggested by the hon. and learned Member for Northampton (Mr. Paget), and spread it right across the board so that a much smaller percentage was paid by everybody. He should not give rebates to manufacturing industries. There should be a much smaller tax covering all industry so that it would have a fairer impact. He should do that now in place of the method he is now proposing, preparatory to finding a different form of taxation next year.

I ask hon. Members to defeat the Clause. Let the Government replace it with something which is much more just and spread across industry. This would be much more readily acceptable by the country. There are 18 Members representing the Co-operative movement. They know that the Co-operative movement is entirely opposed to this tax. Every time a Member representing the Co-operative movement has spoken he has given reasons why this is a bad tax. If those hon. Members had a completely free vote instead of feeling that it would a matter of grave embarrassment to the Government, they would accompany us in the Lobby against the Clause. I suggest that those 18 Members and, indeed, every other Member who has spoken out of genuine conviction, should put the national interest first and foremost. [Laughter]. The hon. Member for Penistone (Mr. Mendelson) laughs at the idea of putting the national interest first. I can imagine him doing that. I am putting this as a serious proposition. How does it sound to the electors of this country when hon. Members on the Government benches laugh at the idea of the national interest being put first?

Mr. Mendelson

I am laughing at the hon. Gentleman.

Mr. Hall

The hon. Gentleman may laugh at me if he likes. That is unimportant. I ask hon. Members to defeat the Clause. I ask them to consider their consciences and carry their convictions into the Lobby. I say to them: vote against the Clause, but, if you like, support other measures which will raise the same amount of money. It is not very much to ask people to have the courage of their convictions, although I know it is sometimes difficult to carry out. I hope that if we divide on the Clause, at least some hon. Members opposite will have the courage to follow us into the Lobby against this bad tax.

Mr. Roy Jenkins

I hasten to say that I am not rising with any desire to bring the debate to an end. It is a matter for the Committee to decide how it desires to use the time available, but it seems to me that, the debate having run for about three hours, it would be desirable that I should intervene briefly at this stage and that the right hon. Member for Enfield, West (Mr. Iain Macleod) might then wish to follow me.

Mr. Iain Macleod (Enfield, West)

indicated dissent.

Mr. Jenkins

That is entirely a matter for the right hon. Gentleman. I should like to express some views on the Clause, and then the debate can continue. That was a useful way in which to proceed in the debate on the income tax, and I think that it is useful now.

7.0 p.m.

The hon. Member for Wycombe (Mr. John Hall) might have been more persuasive—and we have heard some very persuasive speeches—if he had talked more about the merits of the point than about the consciences of my hon. Friends. It is true, and I have seen this happen many times, that the overwhelming majority of those who have spoken have spoken against the tax. This is not an unusual position for Chancellors of the Exchequer to find themselves in. Except when I was in another office, I have participated in Finance Bill debates in one form or another since 1948, and whenever an individual tax is being debated the situation is different from that when the Budget as a whole is being considered. Almost all those who speak are opposed to the tax rather than in favour of it. It is much more difficult to have unity in the Chamber as to how one would replace the tax one does not like. That is one reason why, from the point of view of sensible budgeting, votes sometimes reflect the position rather differently from speeches.

Mr. John Hall

I did not enter into the merits of the tax because I thought that they had been deployed so consistently in so many debates that it was not necessary to go into them again. I wished to be brief so as to give many other hon. Members an opportunity to speak.

Mr. Jenkins

I fully appreciate the hon. Gentleman's desire to be brief, and that the arguments have been deployed, and I do not wish to pursue that point any further.

Let me begin by trying to clear up a point which caused some dispute between my hon. Friends the Members for West Ham, North (Mr. Arthur Lewis) and Penistone (Mr. John Mendelson) on why the tax was first introduced. There always seems to be confusion about this, and I should like at least to be able to clear this up.

When the tax was first introduced it was stated quite clearly that there were three reasons: first, to raise a substantial amount of revenue without significantly adding to the cost of manufacturing industry; second, to broaden the basis of taxation; and, third, to encourage economy in the use of labour in the construction and service industries. To some extent it is within this framework that I wish to speak.

Mr. Ian MacArthur (Perth and East Perthshire)

The right hon. Gentleman will recall that the then Chancellor, in his speech on 3rd May, 1966, devoted the largest amount of the time he spent on those three reasons to the third, which was the redeployment of labour. He clearly regarded that as one of the most important reasons.

Mr. Jenkins

My right hon. Friend gave it as the third reason. He may well have thought it the one that needed arguing to the greatest extent. Some points can be put more succinctly than others.

I should like to clear up what seems to me to be a fallacy occasionally put from both sides, namely, that there must be a single reason for a tax, that if one says that there is reason A for a tax and also reasons B and C, one is contradicting oneself. This is not a sensible approach to taxation. When one seeks to justify a tax it is often necessary and desirable that there should be several supporting arguments, and several arguments to balance those on the other side. I certainly would not claim perfection for S.E.T. There is no tax which is perfect and which does not arouse opposition and does not have substantial arguments against it. I recognise that without question.

But choices have to be made between taxes and between varying courses, none of which is ideal. I have noticed in today's debate that while there have been many speeches against the tax they have varied a great deal. Some have been moderate and some have been less moderate. My hon. Friend the Member for Willesden, West (Mr. Pavitt) was moderate, as always, and was therefore extremely persuasive. I know the difficulties from which he feels the Co-operative movement suffers under the tax, and I know how faithful a spokesman of that movement he has been.

Some speeches have contradicted others, and some have contradicted themselves. The hon. Member for Worcestershire, South (Sir G. Nabarro) laid down as an absolute principle that the tax was always fully passed on. Indeed, he said that it was more than fully passed on. It is the case that if the tax were always fully passed on it might have undesirable consequences for the consumers. This might refute some of the arguments which have been put forward from this Bench, but that is totally incompatible with the view that the tax damages the competitive position of industries which have to try to absorb it. The argument cannot be had both ways. If it is fully passed on, without any difficulty, there is no problem from the point of view of the industries. The hon. Gentleman rather contradicted himself, because having announced that everything was passed on he proceeded to announce that the tax was extremely damaging to the cause of the private schools, many of which were closing down as a result.

Sir G. Nabarro

The right hon. Gentleman is attributing to me two propositions, neither of which did I make, as he will acknowledge when he reads my speech tomorrow. At no time did I refer to any school closing down. I merely drew attention to the inequity of the position that S.E.T. did not have to be paid in respect of State school staff but had to be paid in respect of private school staff. I did not make the point which the right hon. Gentleman said was mutually contradictory. I said that selective employment tax in the retail and distributive trades was wholly passed on, and indeed it is. I stand by that.

Mr. Jenkins

Of course. That is absolutely what I said the hon. Gentleman said; he said with great emphasis that it was more than fully passed on. This is within the recollection of the Committee, and I assume that the hon. Gentleman was serious for once in the point he was making. This somewhat contradicted other arguments which have been put forward.

If the hon. Gentleman did not say that damage was done to private schools, I am sorry if I misrepresented him, and I accept what he said. But on the main point there cannot be the slightest question that the hon. Gentleman made it abundantly clear that the tax was fully passed on.

I want to deal briefly with what seem to me to be some of the substantial arguments for the tax, which are ignored in discussion of it, though I say this in the context that, as I said earlier, no tax is perfect.

The right hon. Member for Thirsk and Malton (Mr. Turton) suggested that my setting up the Reddaway inquiry showed that I had no real faith in the tax. This is not a valid point. It is not sensible to say that a Chancellor cannot use a tax unless he is so dogmatic about it that he cannot possibly believe that any inquiry could shed new light upon it. One could argue by this analogy that it would have been wrong to use income tax while, in the middle 1950s, the Cohen Committee and later the Radcliffe Committee were sitting on the subject. I would have liked to have the Reddaway report before I had to raise the tax again. I am sure that my right hon. and learned Friend the Member for Ipswich (Sir Dingle Foot) and my hon. Friend the Member for Willesden, West will realise that the fact that I had used the tax further in no way means that my mind is closed to what Reddaway says. I shall consider very carefully what Reddaway says and will pay great attention to the conclusions of the report.

However, it does not follow from this that one could freeze the position in the meantime. The hon. Member for Worthing (Mr. Higgins) who always argues very closely and makes very perceptive points, raised one point which indicates why it would be perhaps particularly difficult to freeze S.E.T. for a period. He said almost as a criticism of the tax that it was not dynamic; its yield did not grow as the economy grew, as wages went up or the level of consumption rose, and in this respect it was different from income tax and most of the excise duties. That is true, and it follows that when it remains without any increase the proportionate burden of the tax falls. I have increased the tax a good deal more than proportionately, but no change in it would mean, unlike the case of income tax and many other taxes, that there would be an actual fall.

I want to put to the Committee what appear to me to be the main arguments for the tax. First, for any Chancellor the revenue-raising argument in favour of any tax is always very substantial. I do not see any of my predecessors in the Committee, but I am sure that none of them would deny that. This tax raises over £600 million at present and it would, indeed, be difficult to replace that revenue by other means. It is equivalent to an extra 2s. 9d. on income tax, to raising purchase tax all round by 60 per cent. or to 3s. extra on a gallon of petrol. Those are very substantial sums indeed. I will come a little later to the value added tax proposal which has been mentioned as a possible alternative.

Secondly, S.E.T. is undeniably easy and cheap and efficient to collect.

Sir Harmar Nicholls

That is the only reason.

Mr. Jenkins

I am giving the Committee five reasons. That may be the only reason that the hon. Gentleman can see but it is not the only one I am giving. Nevertheless, it would be foolish to ignore that reason entirely. Certainly, it would be foolish of the Opposition, who make great play about the number of civil servants and demand that it be reduced and that bureaucracy be avoided, if it were to ignore the argument that S.E.T. is cheap and efficient to collect.

Anyone in his right mind considering a tax is bound to have regard to whether collecting it raises or does not raise great administrative complexity. The fact is that S.E.T., to be collected, costs .4 of 1 per cent. of its yield as against 1 .4 per cent. of the yield of inland revenue taxes and just under 1 per cent. of the yield of customs and excise duties. I may add that, in the case of value-added tax, the collection costs might well exceed the inland revenue or customs and excise costs. The value-added tax would be very heavy in costs of collection, including the demands on the skilled manpower within the Civil Service. That fact must be faced.

I come now to the third reason for S.E.T. It appears to me that there is a substantial case for endeavouring to achieve some balance between taxation on services and taxation of goods. We can perhaps take as our starting point that no one likes taxation as such, but, so far as goods are concerned, this is an obvious fact which I, who have to read my mail each day, would be the last to ignore. The range of goods subject to purchase tax is very wide indeed, and the purchase tax varies between 13 ¾ per cent. at the lowest rate and 55 per cent. at the highest. The rates of tax for alcoholic drinks, tobacco and petrol are still higher.

The service industries, before S.E.T. was introduced, bore no taxation as such. The fact that S.E.T., by being introduced and increased, as it has been, steeply in two subsequent years, imposes taxation upon service industries does not mean—and here I disagree with the emphasis of my hon. Friend the Member for Willesden, West—that I begin to regard people engaged in the service industries as second-class citizens or that I regard "services" as a dirty word. If those who pay tax are to be regarded as second-class citizens, there are not going to be many first-class citizens left in this or any other country. Nor does it mean that, because one wishes to spread the burden of taxation, one is opposed to the activity upon which that taxation is being placed.

Mr. Arthur Palmer (Bristol, Central)

This is just the difficulty of the co-operative societies, since they concentrate largely on giving services rather than making a profit, and if they are taxed in this way all they can do in the end is to withdraw the services.

7.15 p.m.

Mr. Jenkins

My hon. Friend is using the word "services" in a rather different sense from that in which I am using it and in which it is generally used in this Committee. He is defining it as being something for community purposes rather than for profit purposes. I was defining it in the general meaning as a means of producing for people something which they will pay for in a tangible rather than an intangible form.

Sir Harmar Nichollsrose—

Mr. Jenkins

No. I really must get on. To be interrupted every other sentence is not conducive to rational argument or to the convenience of the House. I will give way to the hon. Gentleman later on.

So far from regarding the development of services as wrong or retrograde, I regard it as inevitable that as society advances, as our standard of living gets higher, so people will choose to devote a higher proportion of their income to services rather than to goods. If one looks around the world, one sees that it is undoubtedly the case that, the more advanced countries are, the higher their standard of living, the higher is the proportion of their national income spent upon services rather than goods. In very primitive communities, everyone spends mainly on goods. In more advanced communities, a very high proportion goes upon services. But this inevitable and desirable development means that it is desirable that services should contribute to their part of taxation. [HON. MEMBERS: "Why tax retailers?"] Because retailers add a service and because there can be a very great difference between the way in which one can buy something in the cheapest possible way and in another way which involves heavy service costs in delivery, elaborate premises, credit facilities and the rest. I may add here, since the Opposition are great advocates of the value added tax, that that tax would add a further stage of taxation at the retail outlet. It adds further taxation at each stage. So the argument against S.E.T. being levied on retailers applies just as much against the value added tax.

However, I was engaged in putting the case that societies as they develop and become richer and more advanced spend more of their national income on services. From this there follow two propositions. First, if one does not tax services at all and puts all one's taxation upon goods, one will be concentrating one's tax on proportionately a narrower basis of national income as time goes on; second, just as richer countries spend more of their income upon services than do poorer countries, so, within a given country at a given stage of development, richer people spend more on services than do poorer people.

One of the central arguments about our taxation problems at present appears to be that, on the whole, evidence suggests that people prefer paying indirect taxation to paying direct taxation but that, also on the whole—and these are broad propositions subject to qualifications—indirect taxation is more regressive than direct taxation. One of the problems of fiscal policy is to try to reconcile these differences, the fact that direct taxation tends to be fairer, but tends to be more resented because it bears more directly on the individual. This being so, to take the view that services should be exempt from taxation when goods bear a very heavy tax seems to be a foolish view for a fiscal policy. It is also the case that—while I fully accept the arguments that it is right, natural and inevitable that as society develops so more and more of our national income, proportionately, will go into services—it is possible for a community to see this happen too fast.

I suggest that in the days before S.E.T., the early 'sixties, running up to S.E.T., this is precisely what was happening here. Between 1960 and 1965, of a total number of 1,300,000 persons coming into employment only 142,000 went into manufacturing industries. This was too small a proportion and it has been reasonable, as has occurred, to tilt the proportion the other way. The growth of service industries is a development which will go on, rightly so. In those five years it was happening too fast for the health of our manufacturing industry and the health of our exports.

I was asked several questions about the cost of living. The hon. Member for Worthing asked me how much of this tax was passed on. I indicated in my Budget speech, and have stressed since, that as to the effect on the Retail Price Index, the effect of S.E.T. is only about a third of that of an increase in purchase tax or the traditional excise duties.

Mr. Burden

But this year we have them both.

Mr. Jenkins

I have caught the hon. Member's point, and appreciated its irrelevance. The effect on the Retail Price Index is very small, much smaller than any other form of indirect taxation. This does not mean that only a third of the tax is passed on. What is passed on, on the best estimate we can make, is something over one half. Certainly not as much as two-thirds. The rest is absorbed. This means that it is less heavy on the Retail Price Index. Why? Because it is much less regressive than other forms of taxation. It is almost invariable that forms of indirect taxation which are more regressive than average are heavy on the Retail Price Index and forms of indirect taxation which are less regressive than average are lighter on the index. This supports my earlier point.

Mr. Higgins

None the less the effect on prices in the country as a whole is just as great. It is simply that the index is more selective.

Mr. Jenkins

It is certainly the case that more than one-third is passed on in prices. I accept that. The effect on some prices is higher than would be indicated by the index alone. If we are considering the possible inflationary effect upon wages the index is far more sensitive than items which do not enter into the index. Broadly speaking there cannot be much criticism of the index.

I come now to some alternatives which have been put forward. My hon. and learned Friend the Member for Northampton (Mr. Paget) said that he would like a payroll tax. This has the advantage of not being selective. There is no difficulty of defending particular frontiers. Any selective tax leaves one with a difficult frontier to defend. There would be a significant effect on the level of wage costs in manufacturing industry as a result of this tax. They would be put up, if the present burden were to be spread across the whole of industry, by approximately 4 per cent. This would be a heavy burden to add to the export prices of our manufactured goods.

Contrary to some impressions which have been given weight, so far, partly as a result of a big spurt in productivity, partly as a result of the fact that some other countries have had their prices going up pretty fast, we have maintained the price advantage of devaluation over the past eighteen months to the full extent we expected—to the extent of about 7 per cent. which is always what we assumed. Our best estimates were that we would maintain this, largely for the two reasons I have given.

To take a 4 per cent. increase, additional to anything else, on the wage bill of manufacturing industry would be a fairly heavy burden. I am not underestimating the crucial importance of invisible earnings to this country. At times, in looking at our present position, we sometimes look too much at the visible trade balance and not enough at the invisible balance. The invisible balance has been doing very well for the past year, very well recently. Our traditional position as a country—the reverse of the United States—is that we have had a trade deficit balanced out by substantial invisible surpluses. The United States traditionally—it has disappeared recently—tends to have a huge trade surplus, though it has balanced out in recent years.

Sir Cyril Osborne (Louth)

It is not true. The right hon. Gentleman says that the visible is balanced by the invisible. Last year's White Paper showed that, allowing for the invisibles, we were still £419 million on the wrong side.

Mr. Jenkins

I wish the hon. Member would not interrupt the Committee on a point like that. I was endeavouring to discuss, and I thought the Committee was following me, the traditional position of this country over a sweep of several decades, going back over a hundred years. We have very rarely had a visible trade balance, only in two years in the last century I think.

I would not underestimate the importance of the invisible account. What I believe is undoubtedly the case is that our visible exports are far more price sensitive than our invisible earnings. I have no doubt at all that that is so. It is certainly the case that those sectors which pay S.E.T. have done strikingly well in invisible earnings since S.E.T. came into operation. It would very difficult indeed to reconcile this fact with the suggestions that they are staggering under the burden and ruined by it. This is undoubtedly the case, and if hon. Gentlemen wish to follow the argument they ought to appreciate this point.

Sir Harmar Nicholls

The right hon. Gentleman is forgetting that this new tax the 28 per cent., has not come in yet. This is the last straw. We are absorbing some of it but we are warning him that this cannot and will not be absorbed and that it will affect the invisible trade balance more than he imagines.

Mr. Jenkins

The hon. Gentleman is wrong in his approach to this matter. For instance, he will find that industries which do very well from this point of view—banking and insurance—are the one exception where labour has increased pretty substantially, raising costs. It is a relatively small proportion of their costs. Their earnings have also increased substantially.

I turn to the main alternative mentioned by the hon. Member for Worthing which I imagine is also in the mind of his right hon. Friend the Member for Enfield, West and which was also in the mind of the hon. Member for Worcestershire, South—T.V.A. The Opposition are putting a tremendous burden on T.V.A. I understand that they expect it to allow them to abolish S.E.T.—although I notice that they have moved from saying, "We will abolish it at once" to saying, "We will abolish it as soon as practicable"—to get rid of purchase tax, and to pay for a substantial reduction in direct taxation. This would involve a very formidable rate of T.V.A.

I wonder what the coverage would be. I understand that it may not go on food. That will be discriminatory. Will it be on restaurants? Will it be on fuel? Will it be on all or only some points of distribution? If it is on all points of distribution, it will be vastly expensive administratively. If it is on some points, it will be discriminatory. I doubt whether hon. Members opposite will have the opportunity of putting their ideas into effect, and that must be a substantial comfort to the more financially responsible among them. Were they by chance to have the opportunity of putting their ideas into effect, they would find T.V.A. less of a golden key to every fiscal problem than they assume.

I have given, not one reason, as the hon. Member for Peterborough said, but at least four or five reasons why selective employment tax, while not perfect—and, like many other taxes, it has deficiencies—has its virtues. Taxes must be considered not according to whether they are perfect, but according to whether there is something better to put in their place, and I have not yet heard a better alternative to S.E.T.

Mr. Peter Emery (Honiton)

Two of the major reasons for selective employment tax which were advanced by the then Chancellor of the Exchequer in his statement in May, 1966, have been dropped. Referring to the tax, the right hon. Gentleman said: … it will prove in future years to be a very valuable addition to the measures available, first, as a means of raising revenue, and also as an incentive for labour economies and manpower redeployment. Obviously that is not happening now. The right hon. Gentleman continued: The scheme will produce an easing in home demand this year, will open the way for a progressive strengthening of manufacturing industry, and will make more resources available for exports with a beneficial effect to our balance of payments."—[OFFICIAL REPORT, 3rd May, 1966; Vol. 727, c. 1458–9.] The latter argument is no longer propounded by the Chancellor. Therefore, two of the three main reasons for the tax put forward in 1966 have been dropped.

There can be little doubt that the tax is damaging and diabolic and is discredited in industry. It is a selective exploitation tax on taxpayers generally in one specific aspect of industry—[interruption]—

The Deputy Chairman (Mr. Harry Gourlay)

Order. There seems to be more than one Committee meeting taking place. Perhaps we could have some silence.

Mr. Emery

I should like to emphasise one fact referred to by my hon. Friend the Member for Worthing (Mr. Higgins). The drafting of the Money Resolution on S.E.T. this year has purposely limited the number of Amendments which could be tabled to try to alleviate the effects of the tax on certain sections of industry. The point of Amendment No. 61, which has not been called, but which can be debated on the Question, "That the Clause stand part"—

The Deputy Chairman

Order. The hon. Gentleman must neither debate the Money Resolution nor the Amendment which has not been called.

Mr. Emery

I accept that immediately, Mr. Gourlay. The Government have not allowed discussion of an Amendment which would have applied the tax to the tourist industry in September or October rather than from the due date in June.

The Deputy Chairman

Order. The debate on the Question, "That the Clause stand part of the Bill" is similar to a Third Reading debate. Hon. Members can discuss only that which is in the Clause and not something which they would like to be in the Clause.

Mr. Emery

I am endeavouring to do that, Mr. Gourlay. Bookings have been made as much as 12 months in advance in the tourist industry. Hotel and boarding house keepers will have to pay the tax at a different level from that on which their lettings were based. This must be wrong.

In other years we have been able to propose an alleviation of the situation in Amendments. But this year the Government have ensured that there could be no alleviation. By means of S.E.T. the Government are undoing what they proudly boast they are doing in the Committee on the Development of Tourism Bill. They are taking from the tourist industry another £10 million in S.E.T. and in the Committee on the Development of Tourism Bill are suggesting that they are giving £8 million to assist tourism generally.

The argument for S.E.T. was that it would encourage exports. Cannot members of the Treasury Bench get it through their thick skulls that tourism is one of our biggest dollar and foreign currency earning industries? This year it will bring in about £270 million. Is not that what the Chancellor wants? Is not this the type of industrial activity which he should be doing everything to encourage? In Committee Room No. 11, this is what the Government say their left hand is doing. But in this Committee the right hand of the Chancellor is milking the industry to a greater extent than ever before. This fact must be hammered home.

We should encourage tourism to maximise its foreign earnings and at the same time encourage people to take their holidays in this country rather than abroad. If that is what we are intending to do, the extra level of selective employment tax for this industry alone is so damaging that wherever the Chancellor goes he will be accused of paying no regard to the interests of the tourist industry. He does not have to take that from these benches. He can take it from the South-West Economic Development Council. The Council which was appointed by the Government, has said that S.E.T. is detrimental to the development of tourism.

There are a hundred and one other points that I could make, but many hon. Members wish to speak and, in fairness, I will deal only with the three points which I have made: first, the Chancellor has moved away from two of the main arguments used by the Chancellor of the Exchequer in 1966; secondly, by the Money Resolution he has limited proper and full debate on selective employment tax; and, lastly, he is taking steps which are entirely detrimental to tourism throughout the country.

Mr. Robert Maclennan (Caithness and Sutherland)

The hon. Member for Honiton (Mr. Emery) could find nothing good to say about the tax and for this reason he weakened his argument against it. This debate has fallen far short of other debates on this tax because of such sweeping and indiscriminate condemnation of the purpose and operation of the tax.

The speech of the hon. Member for Worthing (Mr. Higgins) was, as we are accustomed to from him, extremely careful and it must be studied with care since it reveals the intentions of the Opposition with regard to the tax. He, choosing his words carefully, presumably, like the right hon. Member for Enfield, West (Mr. Iain Macleod), informed us that a Conservative Government would remove the tax altogether when it had an opportunity to do so. These words are highly ambiguous and suggest that a wide door is being left open so that, in the unfortunate event of a Conservative Government being returned, it will be possible for the hon. Gentleman and his Friends to say that, because of the economic situation which they have inherited, the opportunity does not exist. The Opposition are putting forward an entirely fraudulent claim, to which the Committee should pay some attention, since the tax raises over £600 million, and we have had no clear evidence from the Opposition how the revenue is to be raised if not in this way.

Mr. W. R. Rees-Davies (Isle of Thanet)rose—

Mr. Maclennan

I will not give way to the Opposition on this point—

Mr. Rees-Davies

The hon. Gentleman is completely wrong—

Mr. Maclennan

If the hon. Gentleman's Friends wish to challenge this or to explain what they mean by it, I will gladly give way, but I am interested in the attitude to this tax of the official Opposition spokesmen.

Mr. Rees-Daviesrose—

The Deputy Chairman (Mr. Harry Couflay)

Order. If the hon. Gentleman does not give way, the hon. Member for the Isle of Thanet (Mr. Rees-Davies) must remain seated.

Mr. Maclennanrose—

Mr. Rees-Davies

I understand—

The Deputy Chairman

Order. When the occupant of the Chair is on his feet, both hon. Gentlemen must sit down. If the hon. Member for Caithness and Sutherland (Mr. Maclennan) does not seek to give way, the hon. Member for Thanet must not stand up.

Mr. Rees-Davies

If I may put my point to him—

The Deputy Chairman

Order. Mr. Maclennan.

Mr. Maclennan

I have been waiting for the official Opposition spokesmen to intervene. It is typical that they take refuge in this manner.

The hon. Member for Worthing attempted to answer before they were made the five points in defence of the tax which my right hon. Friend adumbrated. He did so not by confronting these arguments but by raising other objections. He did not deny that it was right to broaden the tax base, which has been put forward as a defence for the tax, but said that the tax was discriminatory. Any selective tax discriminates, this is inevitable. It is tautologous, and to say that the tax is discriminatory is saying nothing more than that it is selective.

He said that it raises revenue, and he accepts that it is necessary to raise revenue; but he avoids saying how he would raise revenue. He says that the tax is cheap to collect and no counter criticism to this could be put forward by the hon. Member for Worthing. Nevertheless, a point of considerable importance, which is made frequently by his hon. Friends opposite, is that it must be a major purpose of the Government to seek to cut down on the number of civil servants at every opportunity. Although this tax does this, we are not given the appropriate plaudits.

The argument about the cost of living has been thoroughly gone into by my right hon. Friend and I do not propose to deal with it again, as it would be repetitious to do so.

7.45 p.m.

His final point was about the economies which the tax provided in the use of labour. Here I find myself more in sympathy and agreement with what he said. The tax had a purpose of transferring labour from the service industries to the manufacturing industries—this is admitted—and whether that was of prime or secondary concern is a matter of academic interest. What is clear is that, while productivity has substantially increased in the service industries, no appreciable increase in employment has occurred in the manufacturing industries.

A further extremely unfortunate consequence of the tax is its effect on employment in areas which are heavily dependent upon the service industries. Representing as I do a part of the Highlands of Scotland, I am particularly concerned about this aspect. The artificial creation by fiscal means of a pool of unemployment is thoroughly unwelcome and works absolutely against the Government's policy of increasing employment in these areas through such means as it has established through the work of the Highlands and Islands Development Board.

It is time the Government and the Chancellor gave further consideration, not to the alternatives which have been proposed on a flat poll tax across the board, which would hit every part of the country, not to the value-added tax which would have equally damaging effects in the Highlands, which is proposed by the Opposition, but to further regional variations of the S.E.T.

This is one of the great innovations of this Government: we have looked to fiscal policy as a means of assisting the less developed parts of the country. This is an important weapon in our armoury in combating high levels of unemployment in the less prosperous parts of the country. The S.E.T. already discriminates in favour of parts of the country.

The hon. Member for Worthing seemed to think that there was something wrong with this. He said that it divided one part of a development area from another. I welcome that. It is only by making these divisions, by giving advantages to certain parts of the country, that we can possibly hope to increase the employment opportunities in these areas.

We must go further than we have in discriminating in favour of these areas which are so heavily dependent on the service industries. We have not done all we might in the form of fiscal reliefs and incentives to encourage the establishment of manufacturing and other industries in such areas.

The incidence of S.E.T. is heavy in the Highlands and it has had a number of damaging consequences of which I am aware. Since the introduction of the tax I have had representations made by hoteliers, until the Government responded to the pressures to ameliorate the situation in their favour, as well as from garage owners, laundries and all the other service industries in that area.

I would take issue with an argument which was put earlier by my hon. Friend the Minister of State, Treasury, about the alleviations which the Government have introduced to help the tourist trade within certain parts of the development areas. The Government rightly decided to remove the tax from hotels in those areas but they did not seek to make similar alleviations for other industries which serve the tourists.

The Deputy Chairman (Mr. Harry Gourlay)

Order. I think that the hon. Gentleman is now developing his argument on Clause 44 rather than on Clause 43.

Mr. Maclennan

I willingly confine my arguments to the general point. There is a strong case for treating all industries which serve the tourist trade in the same way in those parts of the development areas, like the Highlands, singled out for special relief, whether they be hotels, laundries, shops or garages.

The Chief Secretary referred to those who have said that unemployment has been created as a result of the tax as Luddites. The position in the Highlands is highly special. The Government have acknowledged this by many measures. They cannot leave out of account the possibility of using further fiscal differentiation to help the gross imbalance even within our Scottish economy.

The weaknesses of the Opposition's case on S.E.T. has been their absence of an alternative. In so far as they have put forward any alternative, the value-added tax, they have failed to show the Committee how it would fall more lightly on those very industries about which they make the greatest song and dance. Although I am unhappy about the effect of the tax within my own Highland area, I have not the slightest doubt that, speaking for the country and the economy as a whole, the tax is absolutely justifiable.

Mr. Alick Buchanan-Smith (North Angus and Mearns)

I am glad to follow the hon. Member for Caithness and Sutherland (Mr. Maclennan). I hope that what he has said and the line he has taken in the debate tonight will be noted in his part of Scotland. He realises the effect of the tax on his constituents, yet for the good of his constituency he is not prepared to carry his convictions forward by supporting us in the Lobby this evening.

I do not intend to deal fully with what the hon. Member said, except to deal with his accusation that we on this side of the Committee have merely used general arguments. I shall put particular points to him, as have many of my hon. Friends, to show that we are not relying on general statements.

I remind the hon. Member that S.E.T. takes out of Scotland every year a net sum of £45½ million. That is the extent of this iniquitous tax in Scotland. The increase in tax provided for in the Finance Bill will take out a further £12½ million. This is the burden which will fall upon Scotland.

I support what my hon. Friend the Member for Worthing (Mr. Higgins) said about the effect of the tax on the cost of living. I have been in close touch with the co-operative society in my area and it has shown me figures as to how the tax affects the society and its members. I refer to the Northern Co-operative Society with a membership of 86,000, with 170 shops in the City of Aberdeen and in the Counties of Aberdeenshire and Kincardineshire. Prior to the increase in the Budget the cost of S.E.T. to that co-operative society was £140,000 a year. This shows how costly the tax is to a large retail concern in my part of Scotland.

The society told me that it has managed to meet some of the tax out of profits. Some of it has been put on to costs. That, of course, has raised the cost of living in that part of Scotland. Even if the society absorbs some of the cost of the tax and does not put it on prices, it reduces the amount paid in dividend to members of the society. Whichever way one looks at the tax, it affects consumers generally, and it particularly affects members of that particular co-operative society.

I raised with the Minister of State the specific points raised by this co-operative society. The Minister answered me in a letter last summer, in which he set out three main objectives of this tax. I will go into them and try to show how the objectives of this tax are not being achieved in Scotland.

The Minister of State in his letter said that one objective of the tax was to raise revenue without adding to the cost of manufacturing industry. What about the costs to the building industry and the costs to the transport industry? Every item that comes into our part of Scotland requires transport, including raw materials. Finished articles on their way out of Scotland require transport, as do the agriculture and fishing industries. It is therefore nonsense to say that the selective employment tax does not add to the cost of manufacturing industry.

8.0 p.m.

Second, the Minister of State said that the tax would improve the structure of the tax system by redressing the balance between services and manufacturing. However, I would remind him of the Scottish plan produced by his colleagues in the Scottish Office. That referred to the direct contribution to the development of Scotland's economy which the service industries could make; yet, here again, a great sector of employment and potential development in Scotland is being clobbered by the Government's action.

Third, the Minister of State said that this tax should make more labour available for the expansion of manufacturing industry on which exports depend I appreciate that in the North-East of Scotland we have a number of firms with very good export records, and I am sure that we wish them well. But where are all these exporting industries in the small villages and towns of the North-East of Scotland? Where does the Minister expect to see labour shaken out of the service industries into exporting industries?

When I passed his letter on to the Northern Co-operative Society, it would not accept any of his points and thought that they were completely inapplicable to the situation in our part of Scotland.

A letter from the Scottish Co-operative Wholesale Society says: We believe that S.E.T. is a bad tax. It is undiscriminating in its effect and must result in increased prices for food and essentials. S.E.T. can only add to inflationary pressures which must affect the sections of the community least able to carry additional burdens. I turn briefly to one other point, and it relates to the building industry. The hon. Member for Liverpool, Walton (Mr. Heffer) spoke about this with great feeling. I am sorry that he is not in his place at the moment. We are grateful to him for raising a number of points, though the Chancellor did not answer any of them. The reason why he did not answer them is that he could not. The building and construction industry of Scotland finds itself saddled with another £5 million as a result of this increase in S.E.T. at a time when we have a drive for new housing and the improvement and replacement of old houses.

This increase has no relevance to the economy of Scotland, whether one has in mind the remoter areas which are dependant on service industries or the industrial areas. When one considers the effect on the cost of living and on building costs, to take only two examples, it is hitting against the development of the economy of Scotland. For that reason, I am opposed to, and continue to oppose, the tax and any further increases proposed by the Government.

Mr. Tony Gardner (Rushcliffe)

I will not follow the hon. Member for North Angus and Mearns (Mr. Buchanan-Smith), since he was concerned with the problem of Scotland, except to say as a mere Englishman that he should bear in mind the considerable subsidy which English taxpayers can be shown to make to their counterparts in Scotland. The hon. Gentleman quotes the figures of taxation taken out of Scotland. However, he should relate them to the share of social and other services gained by Scotland at the expense of those of us south of the Border.

Nor do I want to follow the passions of the hon. Member for Honiton (Mr. Emery), who waxed eloquent about the effects of the selective employment tax on tourism. It is strange that the hon. Gentleman should make this impassioned speech at a time when we have just received a report by an independent tourist body showing that London, at any rate, is one of the cheapest tourist cities in the world. Taking an average hotel in London, despite swingeing increases in taxation, our prices are still among the lowest in Europe.

It is customary to declare an interest, and I ought to declare mine. My hon. Friends who are Co-operative Members, have been taunted by right hon. and hon. Gentlemen opposite. Although I am not a Co-operative Member, for about seven years I worked for the Co-operative Union and learned a little about the problems of retail distribution and serving consumers. I only wish that the Treasury contained more people with experience in retail distribution. If it did, I am sure that selective employment tax in its present form would never have been introduced.

We have been taunted about the way in which we shall exercise our votes this evening. Certainly I shall not support right hon. and hon. Gentlemen opposite, and I am prepared to give my reason. It is that, once again, they are engaged in their usual exercise of complaining about every increase in taxation during the passage of the Finance Bill and, for the rest of the year, making demands on the Government to spend more in the interests of their constituents. That is fair enough. But hon. Gentlemen who do it consistently cannot complain if hon. Members on these benches do not support them.

I listened to the speech of my right hon. Friend with great care, but he did not wholly convince me. Very many people have tried to elicit criteria by which one should judge whether the tax is worth while. I do not like consumer taxes, because I believe that there is still a vast area of untapped direct taxation, which is unquestionably fair. If we are to have consumer taxation—and it may be that this is the climate of public opinion—there are a number of criteria rather similar to, though not quite the same as, those suggested by the Chancellor.

The first criterion for any tax is whether it raises revenue efficiently. I do not think that anyone will deny that this is the case with selective employment tax. It is very much more efficient than other forms of consumer taxes.

The second criterion is whether it is increasingly productive. Again, that is generally true of S.E.T. If one seeks to put a burden of taxation on services, one is seeking to tax an area where personal expenditure is increasing all the time. However, that is not true of the services as a whole. It is true of a vast range of them, but it is not true, for example, about food and fuel distribution. I think that the figures will show that, while spending on food and fuel continues to rise, the share of personal income spent on those services goes down relatively every year. On that basis, the tax imposed on food and fuel distribution is not likely to be increasingly productive.

The third criterion is whether it is likely to bring about increasing efficiency. Since a substantial amount of the tax is absorbed, it must create greater efficiency. But the extent to which this operates depends upon the degree of inefficiency existing in the service industry which is being taxed and the margins which it has to absorb greater efficiency. It is true of some aspects of distribution. In some services, there is, first, increasing spending, secondly, a great deal of inefficiency and, thirdly, very substantial profit margins. That is not true of food distribution. In the last 10 or 15 years, there has been a revolution in food distribution with the result that, in many areas, gross retail margins are now so low that they hardly meet the labour costs involved, so that there is no room for manœuvre and, inevitably, prices rise.

The fourth criterion is perhaps the most important of all. It is whether the tax bears most heavily on those who have the greatest ability to pay. Again, the reasons given by my right hon. Friend the present Home Secretary in introducing selective employment tax are generally true. On the whole, the services are demanded more by more wealthy people. But it is not true of certain of them. It is not true of food distribution, and certainly it is not true of those who require special services because, for example, they are old or happen to live in remote areas.

Incidentally, these are usually the poorest people of the community, so the effect of selective employment tax, if it impinges heavily on food distribution, has the result of impinging heavily on those least able to pay. Therefore, many of us have argued—I appreciate we cannot go into these things—that the Chancellor should look not at S.E.T. as a whole, but at the way that it operates in particular circumstances. If he wants alternatives—he mentioned this during his contribution earlier—we can suggest them.

There are certainly areas in services—I will not bore the Committee by reading them out—where the profit margins are very high, where expenditure is growing all the time, and where, by no stretch of the imagination, are they consumed by the poorest people in the community.

We can look at the question raised by my hon. Friend the Member for Liverpool, Walton (Mr. Heffer). I have never yet heard a decent argument against having selective employment tax imposed on the self-employed. The Chancellor in reply to a Written Question from me, told us that this would net an additional £75 million to the revenue. That would give my right hon. Friend a great deal of room for manœuvre in exempting other things.

Finally, I accept the argument put forward by some hon. Members on both sides that it does not necessarily follow that it makes industry more efficient by making labour cheap. Therefore, I suggest that in this general review, which we hope the Chancellor will make, he will look again at the possibility of a moderate overall payroll tax which would overcome many of the problems and criticisms which have been raised today. Although he needs the revenue, I hope that my right hon. Friend will look seriously again at the way that selective employment tax is operating, and that he or his spokesman will give an assurance tonight that, before the Finance Bill is completed, he will have a serious look at the effects of S.E.T. and perhaps come forward with some proposal for change.

Mr. Paul Hawkins (Norfolk, South-West)

I should like first to consider the effect of this tax on a rural constituency namely, Norfolk, South-West. This high taxation, of which S.E.T. is one part, seems to be a belief of Socialism. What hon. Gentlemen opposite do not seem to realise is that we have to create greater wealth in the country. We will not need so much taxation if we can create wealth. This seems to be wholly against the principles of Socialism. The ghost of Sir Stafford Cripps seems to be sitting on the Government Front Bench all through the debate.

Selective employment tax is definitely a tax on food. It hits the farmer, because he has to lend money to the Government. It is a tremendous burden on transport, on shop workers, and on wholesalers. Because the housewife today goes out to work far more than the housewife of 20 to 30 years ago, she wants greater services. She wants the goods delivered to her door, because she has not the time to go out and get them herself. But delivery costs are hit by this iniquitous tax. It is a tax on the countryside. It suffers far more than anywhere else, because the population of the countryside, including hotels, relies far more on the distributive service trades.

I have had many complaints about the distribution of milk in my constituency. The distributive costs on a rural round outside a market town have now got so high that they are adding to the cost of the milk, yet the distributor is not allowed to charge more.

8.15 p.m.

The elderly and disabled are hit by this tax. Many elderly people who have been doing a useful job have been paid off by firms because of this tax. The firms have to take on fully able-bodied men to do the jobs if they are paying this proportion of tax out of the wages. It is a most unfair tax because it creates hardship on certain sections of the community.

I have never yet understood how selective employment tax can be added to the building industry. A building firm has to pay S.E.T. on every man that it employs building houses. The building societies, which do the financing, have to pay selective employment tax. Estate agents—and here I declare an interest—have to pay selective employment tax on their staff, as do the lawyers and solicitors who do the conveyancing work.

I turn now to hotels and restaurants. This is a tax upon the person who, as we learned from the Chancellor today, demands more service. In a highly civilised country, such as ours, service industries are becoming more and more important. People want to get out occasionally and enjoy a meal. If they are harried in this way by this sort of Government, which seems to delight in taxing them and making life miserable for them, they will not be able to enjoy a meal out, because S.E.T. has added to the cost of that enjoyment. It means that they can go out less.

Professional men and women, office workers, small shopkeepers and many others have been badly hit by this tax. A survey of about 70 firms, each employing over 20 people, was undertaken in my constituency three months ago. We do not have many large firms. There is one famous firm which builds tractors and containers, but most of the firms are quite small, being engaged in light industry. About 50 firms replied. They were asked several questions.

First, Has it caused an increase in price? Thirty said "Yes"; 18 said "No".

Secondly, If you recover S.E.T. or get it paid to you, do you think you have recruited labour from employers who do not? The answer was: "Yes", 3; "No", 35.

Thirdly, Do you think it has caused labour movements from non-productive to productive work in your area? Answer: "Yes", 5; "No", 37.

Fourthly, Do you believe it has had an inflationary influence on trade by locking up cash which could otherwise be used for trade purposes? Answer: "Yes", 44; "No", 4.

Finally, Has the imposition of S.E.T. caused your firm to require increased bank overdraft either to pay the tax or finance the three months borrowing period? Answer: "Yes", 32; "No", 11.

This proves that this tax is not doing what the Chancellor expected it to do. It has added costs to manufactured articles in many cases because of the distributive costs of transport and otherwise. It has meant that workers have not been driven from non-productive industries, as they are called, into the productive industries. The tax is a great mistake, like everything else that this Government touch.

Mr. W. T. Williams (Warrington)

Ever since selective employment tax was introduced I have been an avowed opponent of it, as have those of my hon. Friends who are members, as I am, of the Co-operative Party.

Mr. MacArthur

Which Lobby?

Mr. Williams

The Government, therefore, will not be surprised to learn that the increase in selective employment tax wins no support from us. On the other hand, do not subscribe to the doctrine that S.E.T. raises any great issue of principle when it comes to taxation. We are not opposed to a selective employment tax as such. We are opposed to this one; and the reason for that is that this tax fails, on the one side, in that it is not selective enough, and, on the other, in that it is too selective.

Many years ago I learned that the via media was a snare and a delusion. This is true of this tax. In the first place it is too selective, in the sense that it makes a total distinction between manufacturing and service industries, in a way that does little more than further distort the economy. The Government have made it part of their case that the services in this country have been too lightly taxed in comparison with manufactured goods. In that "light taxation of services" they include distribution services.

That seems to me to be little more than political sophistry. The reality is that all forms of indirect taxation, either wholly or for the greater part, are always passed on to the consumer. For that reason it is the bounden duty of any Government, when they impose indirect taxation, and especially new indirect taxation, to have regard to the social consequences of that taxation. When one looks at a tax which declares itself to be selective and concerned about particular aspects of employment, it seems that the Government are mistaken to believe that they can include in it categories of employment which by their very nature are wholly different and lump them together as though they were the same.

Our criticism of the tax in its present form is that it is a blunt, indiscriminate tax which makes no attempt to differentiate between what is socially desirable and what is socially undesirable. Indeed, it makes no attempt, even within different aspects of goods and services, to differentiate between what is of value and what is not. Unless the Government are saying—and the Chancellor said again this evening that they are not—that goods are good and services are bad, it seems that the Government have been too lax, too unready to differentiate between what is regressive in this tax and what is progressive in it.

If the Government were to do what I think is essential with a tax of this kind—namely, distinguish between what are pure services and what are really no more than an extension of manufacture—they would not fall into the trap into which they have fallen, and for which they have earned such bitter opposition on these benches.

There are on the one hand, pure services: lawyers, accountants, hairdressers, and people of that kind contribute a pure service, often of end products which are not otherwise taxed. These people, offering a pure service, can properly be expected to make a contribution to the general taxation through SET, and no criticisms can be made of the imposition of that taxation. In the context of such services, people who are engaged in them, whether as self-employed persons or as employing other persons, need have no distinction drawn between them. I have never understood why it is regarded as somehow an essential part of this tax that self-employed persons shall escape from it altogether.

On the other hand, when one considers the position of those persons engaged in what is really a continuation of the manufacturing process—that is in the distribution of goods, and especially essential goods—the Government must be under an obligation to ensure that taxation where it is imposed, is imposed on those who are best able to bear it. It ought not to be spread across the board, as S.E.T. is in its present structure.

In the light of that, I find myself in disagreement with the Chancellor when he talks about this tax being less regressive than purchase tax. From the point of view of its ability to impose the taxation at the point at which it can most usefully and properly be borne, purchase tax is to be preferred to a tax of this kind if only because it directs its tax to particular goods.

By the present use of S.E.T. the cost of living is increased because it increases the cost of basic foods and fuels. Hitherto this has been an area of need which successive Governments have avoided taxing as far as it has been in their power to do so. Until this tax was introduced, the sale of untaxed goods amounted to about £8,370 million. Of that figure, more than £5,000 million represented foodstuffs, and £1,000 million was taken up in the provision of fuels of various kinds. The criticism of S.E.T. however, in its present form is that it does not apply only to people who are distributing non essential goods. A person who works in a grocer's shop or provides necessary foodstuffs for people is subject to S.E.T. in the same way as a girl who sells expensive tobaccos or expensive perfumes.

Our criticism of S.E.T., then, is not directed against it where it hits the pure services to which I have referred and which are profitable in themselves. When it applies to those dealing with commodities with which the poorest sections of the community are not concerned, it does not earn our condemnation. We criticise S.E.T. because of the way in which pure services have been confused in its application with distributive services, the latter being really a part of the chain of the production process. It is because the Government persist in this confusion that we persist in criticism of S.E.T.

We feel justified in urging the Government even now quickly to end this fallacy in the theoretical basis of S.E.T. and to ensure, even though it results in an increase in the tax that must be placed on the pure services of which I have spoken, that relief is given to those services which form part of the distributive process of essential goods.

8.30 p.m.

Mr. Iain Macleod

I intend to be extremely brief. We have had an excellent debate, perhaps the best that we have had on this subject in the three years during which we have been discussing S.E.T.

With the exception of half a speech, every speech has been devoted to tearing this tax to pieces. The exception in what the Committee regarded, I believe rightly, as a pathetic contribution came from the hon. Member for Caithness and Sutherland (Mr. Maclennan) who, halfway through his speech in support of the Government, realised that he represented a Highland constituency, and then did his best to reconcile the two contradictory positions. With that solitary exception of half a speech, every speech has been devoted to the destruction of S.E.T.

Individual Amendments to the tax are virtually out of order because of the way in which the Budget Resolution has been drawn. I protest over this, and I hope that the Chancellor of the Exchequer will take this seriously should this point arise again. This procedure has become a sort of childish game between the Treasury and the House of Commons, and I should have thought that both sides of the Committee had something better to do. The net result of this procedure is that instead of speaking to individual Amendments, points are made in a diffuse debate on the Question, That the Clause stand part of the Bill, so that no time is saved and a great deal of inconvenience is caused. I trust, therefore, that the Chancellor will consider the wording of the Resolution. Although we have had fun trying to get round the Resolution in the recent past, we have reached the point when it would be as well if Parliament could debate these matters in the ordinary way.

The attitude of the Conservative Party towards S.E.T. has always been clear. We intend to abolish it as soon as we can. There are no "ifs" and "buts" about that position, and there never have been. Nor do we intend to replace it with an employment tax. However, we are conscious, as a responsible party, of the vast size of the revenue that is collected from S.E.T.—now more than £600 million—and I have therefore always made it clear, as the Chancellor will acknowledge, that we are giving deep study to the value-added tax. When we are ready to make a pronouncement one way or another on that, we will make it. There is no dubiety about our position, and we shall, in due course, put it forward in detail, but with respect, working to our timetable rather than to that of the Labour Party.

From the first moment when S.E.T. was announced one began to see flaws in it I recall how it emerged. It came right at the end of the Budget, in which the Chancellor had gone out of his way to say that he needed a considerable amount of money—I think it was £220 million in the year in question—and he ruled out all the recognised methods. One knew, therefore, that something completely fresh was coming. It came, in the last few moments of his speech.

The right hon. Gentleman mentioned the position of agriculture and said that he intended to recoup S.E.T. through the Annual Price Review. I remember distinctly turning to my right hon. Friend the Leader of the Opposition and saying, "That simply will not work." It is obvious that it could not work, because we cannot recompense an individual farmer through the national Price Review. Within a few hours my hon. Friend the Member for Macclesfield (Sir A. V. Harvey) was making that point in debate, and in a very short time the position in respect of agriculture was conceded.

So it has been for the last three years on all these issues, including that of charities. Every Amendment which has been made has first been put forward by the Opposition, or sometimes by the Liberal Party, has been opposed from the Treasury Bench and in due course has found its way into the Finance Bill of a subsequent year as an Amendment.

I said that I should be brief, for I hope that we can soon move to a Division. In our view it is a tax founded completely on wrong principles. It is not even being collected sensibly. The work is farmed out to half-a-dozen different Departments. The origin of the discrimination was the industrial classification, which I remember having responsibility for drawing up in 1958 when I was Minister of Labour. I have not the slightest doubt that as an exercise in statistics it made a good deal of sense then and that, revised, it makes a good deal of sense today, but as an exercise in discrimination in taxation it was an absurdity then and it is an absurdity today. The examples have grown and multiplied over the years.

One or two of my hon. Friends appealed to those who support co-operative interests to vote on this Clause. I make no such appeal to them. This is a matter for them. As someone who has had the very great honour of being a Leader of the House, I well recognise the difficult position they are in. But when the hon. Member for Willesden, West (Mr. Pavitt), whom we respect so much on these matters, says that the whole Clause is unacceptable, I simply do not understand how he can reconcile that with an abstention, which I gather is the most that he contemplates. In what I thought was an extremely good speech, the hon. Member for Rushcliffe (Mr. Gardner) sought to avoid the dilemma by saying that they did not like the proposition which the Opposition put forward—perhaps more simply, that they do not like the possibility of a Conservative Government. But I remind the Committee that when we divide the Question will be put, That Clause 43 stand part of the Bill. That is the only issue before the Committee. It may comfort the consciences of hon. Members to pretend that some other issue, such as the value-added tax, or whatever it may be, is before the Committee. The day will come no doubt when such an issue is before the House. But the one and sole issue on which we vote tonight is whether Clause 43 should stand part of the Bill. Clause 43 embodies in it the whole of the most hated tax in fiscal history. Our position on it is absolutely clear: we long to get rid of it, we shall get rid of it as soon as we can, and we shall take the opportunity of again voting against it tonight.

Several Hon. Membersrose—

The Deputy-Chairman

Order. I thought that the Committee wished to come to a conclusion.

Hon. Members

No.

The Deputy-Chairman

Very well. Mr. Ednyfed Hudson Davies.

Mr. Ednyfed Hudson Davies (Conway)

I should like to give my reasons why I cannot give my support to the Clause as it stands. I should however point out that my objection is not to a tax on services in principle. I see clearly that in any advanced and sophisticated economy there is a tendency for services of all kinds to develop out of proportion to manufacturing activities.

If manufactured goods were to be taxed in an economy and services were allowed to remain tax free an imbalance would in time develop. Most European economies have a tax on services. Consequently I think that the introduction of this tax in principle in the first place fulfilled an important function. It would be to the long-term harm particularly of our balance of payments situation that there should be a tendency to growth in the service sector as against the manufacturing and strictly productive sector of industry.

I have given on a previous occasion, and shall not repeat them, figures relating to taxes on services in other countries. I am fully convinced that the Conservative alternative of a value-added tax—were we to get the full details of how such a tax would operate, which we have not done—would turn out to be far more of the removal of the name "selective employment tax" than of the principle of the taxation of services.

I see the Chancellor's predicament. In a situation where he wanted to draw out of the consumer demand of our society and was faced with the alternatives of increases in purchase tax or direct taxation, there was a very strong case for him to make this increase. However, in certain sectors, particularly in retail distribution, this tax has been beneficial—although one could perhaps attribute the increase in productivity in retail trades to changes which were anyway taking place in those sectors.

My objection, consequently, is not to the principle of such a tax but to the fact that it has not been selective enough, that certain kinds of areas and certain kinds of industries have not been graded in respect of the particular form of taxation. I am concerned about the area of my constituency in North Wales where the difficulty is that a very high proportion of the activity which takes place is in the service sector. In that context it means very little indeed to talk of the form of taxation which would perhaps lead to greater productivity in the service sector and release employment for manufacturing opportunities. This facet of the tax has been disregarded very largely, but in that kind of area it could not have operated in that way because there were not the opportunities into which people could move if they were displaced from service activities.

I am concerned about areas, and more particularly about certain kinds of services in areas of that kind. My main concern is for a particular industry in my constituency, the tourist industry. There are two problems here. One is that this is a service activity of a highly seasonal nature. I should be less concerned if I could look at hotels in my constituency and see that they were busy throughout the year. My worry is that for well over seven months of the year the activity which takes place there is minimal.

Hoteliers in that constituency are in a situation in which they find that they have to employ staff if they can get hold of good staff and keep them throughout the winter, not only paying selective employment tax but having to pay this additional taxation for employees whom they do not need throughout the winter because they must keep them or they will not be able to get them back when the next season comes.

Mr. Iain Macleod

Does not the hon. Gentleman realise that there is an Amendment dealing with hotels which has been selected and on which his observations would be precisely in order?

[Sir BERESFORD CRADDOCK in the Chair]

8.45 p.m.

Mr. Davies

Yes. However, I am following points which have already been made by colleagues of the right hon. Gentleman and I intend to touch on those points briefly. Hotel tariffs were fixed before the announcement of this proposed increase, and, although the costs of hoteliers will rise as a result of the increase, hoteliers are committed to the prices they have fixed. These increases increase a differential within certain areas. I am particularly concerned about a town such as Llandudno which is outside a development area. Exemptions have been made to certain hotels within development areas.

The Temporary Chairman (Sir Beresford Craddock)

Order. I am sorry to interrupt the hon. Gentleman, but he is going far too wide of the debate on the Question, That the Clause stand part of the Bill. He must keep his remarks much narrower than they are at the moment.

Mr. Davies

I apologise, Sir Beresford, if I am going outside the ambit of the debate. I want to point out briefly that I am concerned about the anomalies within and outside development areas. I will not pursue that point further.

I want now to make a general point. This is why, although I shall not be able to support the Government tonight, I shall not be able to support the Opposition either. I want to quote a brief and relevant passage from a debate which took place on 27th February. It relates to tourism, but the point is a general one. The hon. Member for Moray and Nairn (Mr. Gordon Campbell) was asked this question by my hon. Friend the Member for Merioneth (Mr. William Edwards): Could the hon. Gentleman assure us that should the hotel industry have a sales tax imposed on it"— that is, by the Opposition should they come to power— which would be far more iniquitous and difficult to administer in areas which now get relief from S.E.T., it would get relief from the imposition of a sales tax?"—[OFFICIAL REPORT, 27th February, 1969; Vol. 778, c. 1956.]

The Temporary Chairman

Order. Again I am sorry to interrupt, but there is a later Amendment on this point. I must ask the hon. Gentleman to return to the Question before the Committee.

Mr. Davies

I accept that, Sir Beresford. As I sit down I merely point out that, following that question, there was a discussion between the occupant of the Chair and the right hon. Member for Leeds, North-East (Sir K. Joseph). No answer was forthcoming. Hence, although in the interests of my constituency I shall not be able to support the Clause tonight, because I believe that there is no alternative I shall not be able to support the Opposition either.

Mr. H. P. G. Channon (Southend West)

To save the time of the Committee, I shall not comment on the speech of the hon. Member for Conway (Mr. Ednyfed Hudson Davies), which could have been made on another occasion. Unfortunately, owing to the tightness of the drafting of the Resolution the few remarks I wish to make cannot be made on another occasion. The fact that I shall be brief tonight does not mean that I could not have said more or that I do not mean these remarks sincerely. I hope that the Treasury Bench will take note of what I say.

I want to draw attention to the very serious effect the imposition of S.E.T. will have on the commercial theatre, a question which has not been mentioned in the debate but about which there has been much publicity outside Parliament. Even arguing on the basis that there should be a selective employment tax, it is wrong to class the commercial theatre as a service. It can be a manufacturing activity of the highest order.

To consider the practical aspect of the tax on the subsidised theatre, paying the selective employment tax and then having to reclaim it costs hundreds of pounds in bank interest. I leave that aside, because the serious aspect is the burden the commercial theatre has to face in view of the imposition of this tax and the large increase which is now proposed. The real difficulty is this. The commercial theatre is in competition with the subsidised theatre. I know that many Members support the idea of a subsidised theatre but it is bound to create competition with the commercial theatre. For the commercial theatre to be penalised in addition by the selective employment tax seems to me to be the final straw.

There are serious worries about the future of the commercial theatre not only in London but also in the provinces. I could quote a list of many commercial theatres in the provinces—I will not do so—which have had to be closed down in recent years. An Arts Council inquiry is at the moment examining the future of the commercial theatre about which, as I say, there is grave worry.

On the most prosaic grounds—including the enormous amount of foreign currency which comes into London as a result of the operation of the commercial theatre—this tax should be carefully examined. It is estimated that in one theatre alone 75 per cent. of the audience are tourists, and even in January, which is not in the tourist season, the figure is as high as 25 per cent. There is a danger that it may not be possible to put on productions which earn many millions of dollars in film rights and by being transferred to Broadway.

Since the war there has been this serious threat to the commercial theatre. In one typical theatre where a reasonably successful play is being produced at the moment, the selective employment tax costs £200 a week and it will be infinitely more when the new rates are imposed. If something is not done soon to help the commercial theatre the risks will be far too great and the commercial theatre both outside and in London will be seriously threatened. There are very few other industries—the theatre is one—where the subsidised area does not have to pay selective employment tax.

I hope the Government will seriously consider this case, which I could have amplified, on the grounds of practical value, bearing in mind the foreign currency which is being brought into the country and the fact that the commercial theatre is a living entity which should be preserved.

Mr. Palmer

I appreciate that the Committee is anxious to come to a conclusion and I shall not be too long, but I have been present from the beginning of the debate and I have heard practically every previous speech. I therefore intend to exercise my rights so long as I am in order.

I realise that many hon. Members think that it is not easy to squeeze out yet another critical speech on this topic. I listened very carefully to my right hon. Friend the Chancellor of the Exchequer, and I thought that, as one would expect, he made a very able speech in defence of a bad case. He argued that no tax is popular, that there were arguments against all taxes including the selective employment tax, but on balance he thought that at the moment the argument was rather in favour of the selective empuloyment tax. I think that states his argument fairly.

I do not entirely agree with my right hon. Friend about taxes and their acceptability in a modern setting. It may be true of very primitive societies that they detest the tax collector—I believe that was true even of St. Matthew—but in modern sophisticated societies it is surely at least accepted that if society is to carry on there must be a measure of taxation and that on occasions that taxation may even be high. For instance, I should have thought that most people today expect that there will be income tax because it is socially just apart from much else besides. Most people also accept today that with high personal consumption we must have a measure of purchase tax.

The trouble about S.E.T. is that it is undoubtedly universally detested. It has certainly been detested on both sides of the Committee this afternoon. I do not think that any one will ever love this tax, poor creature, or take it to his bosom.

Its effect on the Co-operative movement, which reflects a desirable social principle, has been deplorable. This is largely because the Co-operative movement concentrates on giving a service rather than making a profit in the accepted sense. If it is giving a service, such as distributing milk in rural areas, it cannot withdraw that service. It can only reduce it.

This fact has been reflected in the financial position of the movement. Since the introduction of S.E.T. the dividend distribution has fallen by 25 per cent. It is a harsh thing for me, as a supporter of the present Government, to say, but I do not think that the Co-operative movement has ever been taxed so heavily as it is now. I cannot believe that the heavy additional burden of taxation which has been placed on the Cooperative movement and distributive services generally can be right or socially desirable.

My right hon. Friend, the Chancellor, gave us the history of how S.E.T. came into being and the justifications for it. He said it was primarily to raise revenue and an attempt to redistribute labour within industry—which has not been conspicuously successful. But if hon. Members think back to 1966 they will recall that it was a time when the new, more deflationary policies of the Government were started. The Government were searching then for a relatively painless but effective, as they thought, way of taking excess purchasing power out of the economy and removing an excessive inflationary tendency, without resorting to the old orthodox methods.

I suggest, in the light of experience, that it has been an interesting experiment, but it has not worked out well and in the meantime it has undoubtedly done the Government great political harm. I hope that in due course they will recognise their mistake and change their policy over this tax.

The right hon. Member for Enfield, West (Mr. Iain Macleod) very neatly and decently tried to tempt some of us on this side of the Committee into the Opposition Lobby tonight. I would answer him by referring to the earlier speech of his hon. Friend the Member for Wycombe (Mr. John Hall), who boldly suggested that it was in the national interest—rather pompous words in the context in which he used them—that we should go into the Lobby with the Conservatives. I and my hon. Friends who share my point of view dislike the tax intensely. We have given many arguments why, and, therefore, why we cannot support the Government on the Clause. But we do not believe that it would be in the national interest for us to vote with the Conservatives and in that way help them to power. The distinction in our behaviour is well understood in the Committee and has many precedents. If we abstain tonight rather than vote in the Opposition Lobby it is because we have the long-term national interest in mind and work for change in policy and not for the Government's defeat.

9.0 p.m.

Mr. Burden

I have been a Member of the House of Commons for 18 years and have never before heard such wholehearted and widespread condemnation of any proposal put forward in a Finance Bill. The Chancellor, while he has been present, has listened to a condemnation of the Clause from both sides. Only one hon. Member opposite has even teetered on the edge of supporting the Clause and S.E.T. generally but when he realised the effect his speech would have on his constituency relations if he spoke wholeheartedly for it, he withdrew very hastily. Thus, not one speech has been made from the benches opposite in support of S.E.T.

The Chancellor must have had some doubt about the tax to have referred it to Professor Reddaway for report. If he had such fears, or if he was uncertain, why did he make this increase? Why did he not await the Reddaway Report? It was probably because he was fearful of the replies which Professor Reddaway had received to a questionnaire he sent out and decided that he had better get in with his increase before they were published.

I do not understand the Chancellor of the Exchequer in this matter. One would have thought that he would know what the effect of the tax would be and what the reaction would be from the distributive trades. For some years he was adviser to one of the biggest retail groups of stores in the country. If he had asked its opinion, I am sure that it would have told him firmly not to go ahead with it.

Why is there such reaction? It is because we are not dealing with chickenfeed but with £613 million in taxation. That is what S.E.T. means. It is idle for the Government to say that it will all be absorbed by trade and industry and will not put up prices. They know that it will put up prices, and this year not only is S.E.T. being increased but also purchase tax.

The Home Secretary, when he introduced S.E.T., said that one of the chief aims was to ensure that people left the distributive trades for manufacturing industries. Unemployment in the manufacturing industries in the Midlands is increasing substantially and because of S.E.T. the distributive trades are not only unable to retain their present level of employment, but cannot take up some of the slack in employment being created by the manufacturing industries.

I wonder why the Chancellor has not done another exercise, which would be very useful. Why has he not made an inquiry among the retail trade generally to find out just how profitable it is? If he were to make a study of this he would find that employers in the retail trade are lucky if they get a return of more than £200 net per annum on each employee. This present increase in S.E.T. alone means that £26 of that £200 will be taken away. These close margins of profit, cut further as the result of S.E.T., will make it impossible for employers in the distributive industries to improve the lot of their employees.

The Government are taking more and more away from them. Many will not only be unable to improve the conditions and wages of their employees as prices rise; price rises deliberately created by the Government, but they will be unable even to keep them on their payroll. Not only will the tax raise the cost of living generally and depress the standard of living of people in the distributive industries, but it will also make it impossible for many employers in those industries to increase the wages of their employees as prices rise, and it will also add more to unemployment which is already growing as a result of other Measures that the Government have introduced. I believe that the Government are coming to an end much sooner than hon. Members believe.

Mr. Hugh Jenkins (Putney)

My hon. Friend the Member for Bristol, Central (Mr. Palmer) described the tax as an unlovable one. Very few taxes are loved. I do not know of any form of taxation which people really take to. Accepting the fact that we have to have taxation in modern society, direct taxation is preferable to indirect taxation in my opinion. I also recognise that a number of people do not think this and on the whole accept indirect taxation more easily than direct taxation.

Sir W. Bromley-Davenport

On a point of order. Sir Beresford. Is it not tedious repetition to talk about no one loving taxes? Everybody knows that. Cannot the hon. Member wash these bromides out of his speech and talk some sense?

Mr. Jenkins

The hon. Gentleman has merely lengthened my speech—

Sir W. Bromley-Davenport

The hon. Gentleman is a bore.

Mr. Jenkins

The hon. Gentleman is using a description that most of us would think applied to him. Perhaps he would allow me to say what I have to say, which is of interest—more than can be said of his contributions.

Mr. William Price (Rugby)

Go to the bar.

Hon. Members

He is going.

Mr. Jenkins

Now that we have been relieved of our comedian perhaps I can get on. If we accept it as a form of indirect taxation, I am not among those who say that S.E.T. is an undesirable form of taxation. If it is true—and I think that it is to some extent—that there has been little support in principle for the Government on this side of the Committee, it will be a pleasant surprise for them to have some support, if critical support, from a slightly unusual source. The tax does not seem to me to be especially offensive. The value-added tax proposed by the Opposition would be very much more objectionable than S.E.T.

The trouble with S.E.T. is that it is insufficiently selective. The Government have not taken the opportunity to avail themselves of the discrimination which it affords and use it in favour of, say, the socially desirable Co-operative movement. They have not taken advantage of the possibility of removing the tax from the theatre. The hon. Member for Southend, West (Mr. Channon) spoke about the commercial theatre as distinct from the supported theatre.

I wish to make a suggestion to my hon. Friends on the Front Bench. In considering the future of this tax, cannot they be sufficiently selective to say that they will continue the tax on the profitable West End theatre but relieve the theatre outside the West End of it? If my right hon. and hon. Friends chose, they could do that. It would be possible to introduce on Report an Amendment to take the tax off the commercial theatre outside London. I recommend that course to them.

Sir Fitzroy Maclean (Bute and North Ayrshire)

My excuse for intervening briefly at this late stage is that I believe that the Scottish point of view should be well and truly hammered home. We have heard only two speeches from Scottish Members—the excellent speech of my hon. Friend the Member for North Angus and Mearns (Mr. Buchanan-Smith) and the speech of the hon. Member for Caithness and Sutherland (Mr. Maclennan), the two parts of which neatly cancelled each other out.

If the Government had wished to find a means of hitting Scotland hard, it would have been difficult for them to find a more effective instrument than S.E.T. It represents one of those decisions from Whitehall which show total ignorance of conditions and feeling in Scotland and give gratuitous ammunition to the separatists. It is surprising that the hon. Lady the Member for Hamilton (Mrs. Ewing) should have graced our proceedings for only about three and a half minutes. She arrived wearing a hat which would have done credit to a Tory women's conference and then went away. She must be as out of touch with feeling in Scotland as are the Government.

It has been said again and again that Scotland is heavily dependent on the service industries. In the Highlands, only one man in ten is employed in manufacturing industry. Although I did not think much of his speech, the hon. Member for Caithness and Sutherland, as a Highland Member, must either be very brave or have the death wish politically to take the line he did. In Scotland as a whole, about 50 per cent. of the employed men and women are employed in service industries. Because of this, S.E.T. adds yet another handicap to our existing handicaps of remoteness, difficult communications, and so on; and in Scotland, as elsewhere, S.E.T. drives up the cost of living. As one hon. Member said, it is the housewife who pays.

9.15 p.m.

Hon. Members on both sides have dwelt at length on the demerits of S.E.T. Its basic fault, in my opinion, is its attempt to discriminate against the so-called service industries. It has been called purely arbitrary. The right hon. and learned Member for Ipswich (Sir Dingle Foot) called it capricious in its operation. All this is true. What it leaves out of account is that manufacturing industries often contribute precious little to the economy, and are extremely wasteful of labour. It is ridiculous that a factory making bubble gum or playing cards should have all the advantages under the scheme, whereas service industries, many of which make an important contribution to the economy and would make an even bigger contribution if they were given the chance, are simply clobbered. Instead of trying to help them, the Government hit them as hard as they can.

It is becoming increasingly evident that the inadequacy of many necessary services is beginning to represent a serious

weakness in our economy. The hon. Member for Willesden, West (Mr. Pavitt) asked "Since when has 'service' become a dirty word?" It is perfectly true that it has become a dirty word, and the Government must take responsibility for this.

The aims of this iniquitous tax have been discussed at length, Some claim that its primary aim is to raise revenue; others that it is to redistribute labour, to shift it from one part of the country to another. One thing is certain. It cannot do both. If it succeeded in the second aim of putting all available labour into manufacturing industries, it would raise no revenue, and the measure of how little it has succeded in doing that is that it raises £600 million a year.

There is no better illustration of the disastrous effect of the tax than the hotel industry. It suffers from a 20 per cent. shortage of skilled staff, a 46,000 shortfall out of a total of 250,000. One cannot shift labour from the hotel industry because it is already short of labour, and so the industry is faced with a choice between increasing its charges or reducing its service. This can only depress and discourage an industry which is one of our biggest and most important dollar earners.

We on our side have fought this tax from the first, and I am glad to say that we are committed to abolishing it. The present administration, we hope, will not be in office for much longer. Selective employment tax has already done much harm but it could do more harm still even in the short time remaining before the next election. I know that it is hopeless to ask the Chancellor to abolish his Department's favourite tax, but at least we can ask him not to increase it by 28 per cent.

Question put, That the Clause stand part of the Bill:—

The Committee divided: Ayes 263, Noes 234.

Division No. 224.]	AYES	[9.20 p.m.
Albu, Austen	Beaney, Alan	Bradley, Tom
Alldritt, Walter	Bence, Cyril	Bray, Dr. Jeremy
Anderson, Donald	Benn, Rt. Hn. Anthony Wedgwood	Brooks, Edwin
Archer, Peter	Bidwell, Sydney	Brown, Rt. Hn. George (Belper)
Ashley, Jack	Binns, John	Brown, Hugh D. (G'gow, Provan)
Ashton, Joe (Bassetlaw)	Bishop, E. S.	Brown, Bob (N'c'tle-upon-Tyne, W.)
Atkins, Ronald (Preston, N.)	Blackburn, F.	Brown, R. W. (Shoreditch & F'bury)
Atkinson, Norman (Tottenham)	Blenkinsop, Arthur	Buchan, Norman
Bacon, Rt. Hn. Alice	Booth, Albert	Buchanan, Richard (G'gow, Sp'burn)
Bagier, Gordon A. T.	Bottomley, Rt. Hn. Arthur	Butler, Herbert (Hackney, C.)
Barnett, Joel	Boyden, James	Callaghan, Rt. Hn. James
Cant, R. B.	Hoy, James	Orbach, Maurice
Carmichael, Neil	Huckfield, Leslie	Orme, Stanley
Carter-Jones, Lewis	Hughes, Rt. Hn. Cledwyn (Anglesey)	Oswald, Thomas
Castle, Rt. Hn. Barbara	Hughes, Hector (Aberdeen, N.)	Owen, Dr. David (Plymouth, S'tn)
Chapman, Donald	Hughes, Roy (Newport)	Pannell, Rt. Hn. Charles
Coe, Denis	Hunter, Adam	Parker, John (Dagenham)
Coleman, Donald	Hynd, John	Parkin, Ben (Paddington, N.)
Corbet, Mrs. Freda	Irvine, Sir Arthur (Edge Hill)	Parkyn, Brian (Bedford)
Crawshaw, Richard	Janner, Sir Barnett	Pearson, Arthur (Pontypridd)
Crosland, Rt. Hn. Anthony	Jay, Rt. Hn. Douglas	Peart, Rt. Hn. Fred
Crossman, Rt. Hn. Richard	Jeger, George (Goole)	Pentland, Norman
Davidson, Arthur (Accrington)	Jeger, Mrs. Lena (H'b'n & St. P'cras, S)	Perry, George H. (Nottingham, S.)
Davies, G. Elfed (Rhondda, E.)	Jenkins, Hugh (Putney)	Prentice, Rt. Hn. R. E.
Davies, Dr. Ernest (Stretford)	Jenkins, Rt. Hn. Roy (Stechford)	Price, Christopher (Perry Barr)
Davies, Rt. Hn. Harold (Leek)	Johnson, Carol (Lewisham, S.)	Price, Thomas (Westhoughton)
Davies, Ifor (Gower)	Johnson, James (K'ston-on-Hull, W.)	Price, William (Rugby)
de Freitas, Rt. Hn. Sir Geoffrey	Jones, Dan (Burnley)	Probert, Arthur
Delargy, Hugh	Jones, Rt. Hn. Sir Elwyn (W. Ham, S.)	Rankin, John
Dempsey, James	Jones, J. Idwal (Wrexham)	Rees, Merlyn
Dewar, Donald	Jones, T. Alec (Rhondda, West)	Roberts, Albert (Normanton)
Diamond, Rt Hn. John	Judd, Frank	Roberts, Rt. Hn. Goronwy
Dickens, James	Kelley, Richard	Roberts, Gwilym (Bedfordshire, S.)
Dobson Ray	Kerr, Dr. David (W'worth, Central)	Robertson, John (Paisley)
Doig, Peter	Kerr, Russell (Feltham)	Robinson, Rt. Hn. Kenneth (St. P'c'as)
Dunn, James A.	Lawson, George	Rodgers, William (Stockton)
Dunnett, Jack	Lee, Rt. Hn. Frederick (Newton)	Roebuck, Roy
Dunwoody, Mrs. Gwyneth (Exeter)	Lee, Rt. Hn. Jennie (Cannock)	Rogers, George (Kensington, N.)
Dunwoody, Dr. John (F'th & C'b'e)	Lestor, Miss Joan	Rose, Paul
Eadie, Alex	Lever, Harold (Cheetham)	Shaw, Arnold (Ilford, S.)
Edwards, William (Merioneth)	Lever, L. M, (Ardwick)	Sheldon, Robert
Ellis, John	Lewis, Ron (Carlisle)	Shinwell, Rt. Hn. E.
English, Michael	Lipton, Marcus	Shore, Rt. Hn. Peter (Stepney)
Ennals, David	Lomas, Kenneth	Silkin, Rt. Hn. John (Deptford)
Ensor, David	Loughlin, Charles	Silverman, Julius
Evans, Fred (Caerphilly)	Luard, Evan	Skeffington, Arthur
Evans, Ioan L. (Birm'h'm, Yardley)	Lyon, Alexander W. (York)	Slater, Joseph
Faulds, Andrew	Lyons, Edward (Bradford, E.)	Small, William
Fernyhough, E.	Mabon, Dr. J. Dickson	Snow, Julian
Finch, Harold	McBride, Neil	Spriggs, Leslie
Fitch, Alan (Wigan)	MacColl, James	Steele, Thomas (Dunbartonshire, W.)
Fletcher, Rt. Hn. Sir Eric (Islington, E.)	Macdonald, A. H.	Stewart, Rt. Hn. Michael
Fletcher, Raymond (Ilkeston)	McGuire, Michael	Stonehouse, Rt. Hn. John
Fletcher, Ted (Darlington)	Mckay, Mrs. Margaret	Strauss, Rt. Hn. G. R.
Foley, Maurice	Mackenzie, Gregor (Rutherglen)	Summerskill, Hn. Dr. Shirley
Ford, Ben	Mackie, John	Taverne, Dick
Forrester, John	Mackintosh, John P.	Thomas, Rt. Hn. George
Fowler, Gerry	Maclennan, Robert	Thomson, Rt. Hn. George
Fraser, John (Norwood)	MacMillan, Malcolm (Western Isles)	Thornton, Ernest
Fressson, Reginald	McMillan, Tom (Glasgow, C.)	Tinn, James
Galpern, Sir Myer	McNamara, J. Kevin	Tomney, Frank
Gardner, Tony	MacPherson, Malcolm	Tuck, Raphael
Garrett, W. E.	Mahon, Peter (Preston, S.)	Urwin, T. W.
Ginsburg, David	Mahon, Simon (Bootle)	Wainwright, Edwin (Dearne Valley)
Gordon Walker, Rt. Hn. P. C.
Gray, Dr. Hugh (Yarmouth)	Mallalieu, J. P. W. (Huddersfield, E.)	Walker, Harold (Doncaster)
Gregory, Arnold	Manuel, Archie	Wallace, George
Grey, Charles (Durham)	Mapp, Charles	Watkins, David (Consett)
Griffiths, David (Rother Valley)	Marks, Kenneth	Watkins, Tudor (Brecon & Radnor)
Griffiths, Eddie (Brightside)	Marquand, David	Weitzman, David
Griffiths, Rt. Hn. James (Llanelly)	Marsh, Rt. Hn. Richard	Wellbeloved, James
Griffiths, Will (Exchange)	Mason, Rt. Hn. Roy	Wells, William (Walsall, N.)
Gunter, Rt. Hn. R. J.	Maxwell, Robert	Whitaker, Ben
Hamilton, James (Bothwell)	Mayhew, Christopher	White, Mrs. Eirene
Hamling William	Mellish, Rt. Hn. Robert	Wilkins, W. A.
Hannan, William	Mendelson, John	Willey, Rt. Hn. Frederick
Harrison, Walter (Wakefield)	Millan, Bruce	Williams, Alan (Swansea. W.)
Hart, Rt. Hn. Judith	Miller, Dr. M. S.	Williams, Alan Lee (Hornchurch)
Hattersley, Roy	Milne, Edward (Blyth)	Williams, Clifford (Abertillery)
Hazell, Bert	Mitchell, R. C. (S'th'pton, Test)	Williams, Mrs. Shilley (Hitchin)
Healey, Rt. Hn. Denis	Morgan, Elystan (Cardiganshire)	Willis, Rt. Hn. George
Heffer, Eric S.	Morris, Charles R. (Openshaw)	Wilson, William (Coventry, S.)
Henig, Stanley	Morris, John (Aberavon)	Winnick, David
Herbison, Rt. Hn. Margaret	Moyle, Roland	Woodburn, Rt. Hn. A.
Hobden, Dennis	Mulley, Rt. Hn. Frederick	Woof, Robert
Hooley, Frank	Neal, Harold
Horner, John	Noel-Baker, Rt. Hn. Philip	TELLERS FOR THE AYES:
Houghton, Rt. Hn. Douglas	Oakes, Gordon	Mr. Ernest G. Perry and
Howell, Denis (Small Heath)	Ogden, Eric	Mr. Joseph Harper.
Howie, W.	Oram, Albert E.

NOES
Alison, Michael (Barkston Ash)	Goodhew, Victor	Nabarro, Sir Gerald
Allason, Jabes (Hemel Hempstead)	Gower, Raymond	Neave, Airey
Amery, Rt. Hn. Julian	Grant, Anthony	Nicholls, Sir Harmar
Astor, John	Grant-Ferris, R.	Nott, John
Atkins, Humphrey (M't'n & M'd'n)	Gresham Cooke, R.	Onslow, Cranley
Awdry, Daniel	Grieve, Percy	Orr, Capt. L. P. S.
Baker, Kenneth (Acton)	Griffiths, Eldon (Bury St. Edmunds)	Orr-Ewing, Sir Ian
Baker, W, H. K. (Banff)	Gurden, Harold	Osborn, John (Hallam)
Balniel, Lord	Hall, John (Wycombe)	Osborne, Sir Cyril (Louth)
Barber, Rt. Hn. Anthony	Hall-Davis, A. G. F.	Page, Graham (Crosby)
Batsford, Brian	Hamilton, Lord (Fermanagh)	Page, John (Harrow, W.)
Beamish, Col. Sir Tufton	Hamilton, Michael (Salisbury)	Pardoe, John
Bell, Ronald	Harris, Frederic (Croydon, N. W.)	Peel, John
Bennett, Sir Freredic (Torquay)	Harris, Reader (Heston)	Percival, Ian
Bennett, Dr. Regonald (Glos. & Fhm)	Harrison, Brian (Maldon)	Peyton, John
Berry, Hn. Anthony	Harrison, Col. Sir Harwood (Eye)	Pike, Miss Mervyn
Bessell, Peter	Harvey, Sir Arthur Vere	Pounder, Rafton
Biffen, John	Harvie Anderson, Miss	Price, David (Eastleigh)
Biggs-Davison, John	Hawkins, Paul	Pym, Francis
Birch, Rt. Hn. Nigel	Hay, John	Quennell, Miss J. M.
Black, Sir Cyril	Heald, Rt. Hn. Sir Lionel	Ramsden, Rt. Hn. James
Blaker, Peter	Heath, Rt. Hn. Edward	Rawlinson, Rt. Hn. Sir Peter
Boardman, Tom (Leicester, S. W.)	Heseltine, Michael	Rees-Davies, W. R.
Body, Richard	Higgins, Terence L.	Rhys Williams, Sir Brandon
Boyd-Carpenter, Rt. Hn. John	Hiley, Joseph	Ridley, Hn. Nicholas
Boyle, Rt. Hn. Sir Edward	Hill, J. E. B.	Ridsdale, Julian
Braine, Bernard	Hogg, Rt. Hn. Quintin	Robson Brown, Sir William
Brewis, John	Holland, Philip	Rossi, Hugh (Hornsey)
Brinton, Sir Tatton	Hooson, Emlyn	Royle, Anthony
Bromley-Davenport, Lt.-Col. Sir Walter	Hordern, Peter	Russell, Sir Ronald
Brown, Sir Edward (Bath)	Hornby, Richard	St. John-Stevas, Norman
Bruce-Gardyne, J.	Hunt, John	Sandys, Rt. Hn. D.
Buchanan-Smith, Alick (Angus, N & M)	Hutchison, Michael Clark	Scott, Nicholas
Buck, Antony (Colchester)	Jenkin, Patrick (Woodford)	Scott-Hopkins, James
Bullus, Sir Eric	Johnson Smith, G. (E. Grinstead)	Sharples, Richard
Burden, F. A.	Johnston, Russell (Inverness)	Shaw, Michael (Sc'b'gh & Whitby)
Campbell, B. (Oldham, W.)	Jones, Arthur (Northants, S.)	Silvester, Frederick
Campbell, Gordon (Moray & Nairn)
Carlisle, Mark	Jopling, Michael	Sinclair, Sir George
Channon, H. P. G.	Joseph, Rt. Hn. Sir Keith	Smith, Dudley (W'wick & L'mington)
Chichester-Clark, R.	Kaberry, Sir Donald	Smith, John (London & W'minster)
Clark, Henry	Kerby, Capt, Henry	Speed, Keith
Clegg, Walter	Kershaw, Anthony	Stainton, Keith
Cooke, Robert	King, Evelyn (Dorset, S.)	Steel, David (Roxburgh)
Cooper-Key, Sir Neill	Kirk, Peter	Stodart, Anthony
Cordle, John	Kitson, Timothy	Stoddart-Scott, Col. Sir M.
Corfield, F. v.	Knight, Mrs. Jill	Summers, Sir Spencer
Costain, A. P.	Lambton, Viscount	Tapsell, Peter
Crouch, David	Lancaster, Col. C. G.	Taylor, Sir Charles (Eastbourne)
Crowder, F. P.	Lane, David	Taylor, Edward M. (G'gow, Cathcart)
Cunningham, Sir Knox	Lewis, Kenneth (Rutland)	Taylor, Frank (Moss Side)
Currie, G. B. H.	Lloyd, Rt. Hn. Geoffrey (Sut'n C'dfield)	Temple, John M.
Dalkeith, Earl of	Lloyd, Ian (P'tsm'th, Langstone)	Thorpe, Rt. Hn. Jeremy
Dance, James	Lloyd, Rt. Hn. Selwyn (Wirral)	Tilney, John
d'Avigdor-Goldsmid, Sir Henry	Longden, Gilbert	Turton, Rt. Hn. R. H.
Dean, Paul	Lubbock, Eric	Van Straubenzee, W. R.
Deedes, Rt. Hn. W. F. (Ashford)	McAdden, Sir Stephen	Vaughan-Morgan, Rt. Hn. Sir John
Digby, Simon Wingfield	MacArthur, Ian	Vickers, Dame Joan
Dodds-Paker, Douglas	Maclean, Sir Fitzroy	Waddington, David
Doughty, Charles	Macleod, Rt. Hn. Iain	Wainwright, Richard (Colne Valley)
Douglas-Home, Rt. Hn. Sir Alec	McMaster, Stanley	Walker-Smith, Rt. Hn. Sir Derek
Drayson, G. B,	Macmillan, Maurice (Farnham)	Wall, Patrick
du Cann, Rt. Hn. Edward	McNair-Wilson, Michael (W'stow, E.)	Walters, Dennis
Eden, Sir John	McNair-Wilson, Patrick (New Forest)	Ward, Dame Irene
Elliot, Capt. Walter (Carshalton)	Maddan, Martin	Weatherill, Bernard
Emery, Peter	Maginnis, John E.	Wells, John (Maidstone)
Errington, Sir Eric	Marples, Rt. Hn. Ernest	Whitelaw, Rt. Hn. William
Evans, Gwynfor (C'marthen)	Maude, Angus	Wiggin, A. W.
Ewing, Mrs. Winifred	Mawby, Ray	Williams, Donald (Dudley)
Eyre, Reginald	Maxwell-Hyslop, R. J.	Wilson, Geoffrey (Truro)
Farr, John	Maydon, Lt.-Cmdr. S. L. C.	Wolrige-Gordon, Patrick
Fisher, Nigel	Mills, Peter (Torrington)	Wood, Rt. Hn. Richard
Fortescue, Tim	Mills, Stratton (Belfast, N.)	Woodnutt, Mark
Foster, Sir John	Miscampbell, Norman	Worsley, Marcus
Galbraith, Hn. T. G.	Mitchell, David (Basingstoke)	Wright, Esmond
Gilmour, Ian (Norfolk, C.)	Monro, Hector	Younger, Hn. George
Glover, Sir Douglas	Morgan, Geraint (Denbigh)
Glyn, Sir Richard	Morrison, Charles (Devizes)	TELLERS FOR THE NOES:
Godber, Rt. Hn. J. B.	Munro-Lucas-Tooth, Sir Hugh	Mr. R. W. Elliott and
Goodhart, Philip	Murton, Oscar	Mr. Jasper More.

Clause ordered to stand part of the Bill.