HC Deb 05 May 1970 vol 801 cc271-326

Order for Second Reading read.

7.7 p.m.

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

I beg to move, That the Bill be now read a Second time.

As the hour is somewhat later than we had expected, I hope to speak reasonably shortly.

The Bill gives effect to the recent Budget proposals, and nothing which has happened or has been said since Budget day alters my right hon. Friend's Budget judgment. Discussion has on the whole centred on wages and salaries. My right hon. Friend dealt with this during his Budget speech and particularly in his Budget broadcast. He explained that the various reliefs given in the Budget took into account the likely pressure of demand during the year. He sees no reason to alter the views which he then expressed.

As to the speech of the noble Lord, Lord Shawcross, which, unfortunately, I have not had the privilege of reading in full—I have had to rely on newspaper reports—I am happy to say that the day following his speech was on unusually good day for sterling in foreign exchange markets. I can only assume, therefore, that informed opinion abroad paid the same regard to the more imaginative parts of that speech as did informed opinion at home.

The modest size of the Bill is explained by the reasons which I gave in my speech in the Budget debate, namely that, for the most part, taxes are working well. We naturally seek—and this is the occasion—to simplify the tax structure, to improve the administration, to remove any injustice which comes to light and, particularly, to smooth the path of industry. A number of provisions are, therefore, devoted to those ends. Nevertheless, within the broad Budget strategy, no substantial amendments are required this year, because the taxes are working, on the whole, well and efficiently. When I say "efficiently" I am relying on the definition to be found in the textbooks on mechanics, namely, the carrying out of a task with least friction.

It may at first sight sound a little difficult to reconcile that report of the way in which the taxes are working with the cases which have come to light where things have certainly gone wrong in dealing with the individual's tax affairs. The Parliamentary Commissioner found that there were 26 such cases last year. That by itself sounds a lot, but when this is put against the total number of people on the Inland Revenue's books—some 25 million—a better perspective is gained and one sees that the real situation is that the likelihood of a taxpayer's affairs being maladministered are one in a million.

Of course, no one should regard such a figure with complacency, but the experience any one of us may have had in administration in the private sector would lead one to agree that one in a million constitutes a highly creditable performance.

Mr. Patrick Jenkin (Wanstead and Woodford)

Would the right hon. Gentleman like to make it two in a million, because I have had occasion to complain about both my coding notices? Both were wrong, although I did not put in a claim to the Ombudsman.

Mr. Diamond

Of course, the hon. Member did not put in a claim to the Ombudsman because there was no reason for him to do so. I am drawing attention to cases of maladministration which has a definite meaning in our parliamentary language. I repeat that case of maladministration, this was where things have seriously gone wrong, were one in a million.

Sir Douglas Glover (Ormskirk)

The right hon. Gentleman is not being quite fair. There have been 26 cases with the Ombudsman, but the Financial Secretary to the Treasury has been very helpful to one of my constituents. I must have had half a dozen cases in which the Treasury has admitted that it was wrong and has put the matter right. There must be far more than 26 cases.

Mr. Diamond

I repeat what I said, although I am sure the hon. Member heard me say it, that in terms of maladministration the number of cases is one in a million. It is right that we should recognise that and that I should put the matter in perspective. That is the number of cases where they have been serious mistakes so far as concerns administration by the Inland Revenue. I express my appreciation both of the Inland Revenue and of the Customs Department for the way in which they carry out a very heavy and onerous task which we in this House lay upon them.

Mr. Richard Wainwright (Colne Valley)

Will the right hon. Gentleman give way?

Mr. Diamond

I have given way twice and I have covered about half a page of my notes. Perhaps the hon. Member will allow me to get on further. I am still on the same point.

As the Commissioner's report made clear, and as others have underlined, these problems have arisen mainly as a result of pressure of work. I should, therefore, say that we have in this year's Finance Bill, as in previous ones, paid special regard to the likely impact of our proposals on the volume of work in the Inland Revenue and Customs Departments. Although this year we are taking on additional responsibilities to assist other Departments, such as, for example, the task of collecting a levy in connection with sub-contracting, arising out of a Bill the Second Reading of which the House passed without a Division only last week, nevertheless there is an overall saving, due mainly to the new surtax provisions. We estimate that there is a net saving of the work of about 300 staff. This should help materially towards dealing with the Revenue's staffing problems, to which the Estimates Committee has drawn attention.

I turn to procedure, as to which there is a Motion on the Order Paper. The Bill is, of course, smaller than last year —indeed it is only about one third of the size of last year's Bill—but in character it contains, as one would expect, the same variety of topics some of which are of a general nature and, therefore, suitable for debate in the Chamber, others of a more detailed nature which would call for rather closer examination in Committee upstairs.

As an example of the former, one can think immediately of the rates provided for in the Bill which have to be fixed each year. The fact that we are proposing no alteration in the rates does not mean that different people might not hold different views and want to discuss them.

Some might want the rates reduced; others, like the Opposition, might wish to argue for an increase in the rates so as to provide for the finance to meet additional defence expenditure.

Whichever point of view is taken, these are matters of major interest and there may well be hon. Members other than those who wish to involve themselves in the detail of the financial provisions who might wish to put forward their constituents' points of view in the Chamber. It is right that they should have an opportunity of doing so.

Mr. Speaker

With respect, we shall have the procedural Motion later, when it will be in order for one hon. Member to speak for it and one against briefly.

Mr. Diamond

I hope that I was not doing more than indicate that there would be an opportunity for doing this later in our proceedings. As that point has been so well taken, I can now turn to the content of the Bill itself.

This year's Bill is devoted to two things, to the provision of relief to the individual and assistance to industry. In both cases we have endeavoured to achieve our ends in the simplest possible way. As to the first, relief to the individual, all the provisions of Clause 14, which incorporate the reliefs, have been fully described by my right hon. Friend the Chancellor in his Budget speech. They amount all told to very widespread relief, including the freeing of 2 million people from tax completely.

I will say a few words about the method chosen of concentrating relief on those whose need is greatest, which method involved the withdrawal of reduced rate relief. This in itself is a considerable simplification of our tax procedures which will be of assistance to both employers and employees. But the fact of moving straight into the standard rate of tax instead of approaching it by two or three steps naturally gives rise to questions as to the deterrent effect of what one is proposing. I have looked into this matter many times and of course have reconsidered it in relation to the proposal to remove the reduced rate relief. We can, of course, discuss this matter in full detail when we discuss the relevant Clause in Committee, but I ought to say at this stage that I am satisfied that the advantages of what we are doing, both in terms of giving the available relief on a just basis and in simplifying the structure of taxation, outweigh any possible disadvantage due to an alleged increased deterrent effect.

I have to use the word "alleged" because all the inquiries and studies to which I have referred on previous occasions, and there are at least seven of them—some broad, some narrow, but all authoritative—have always reached the negative conclusion that there is no evidence to substantiate the allegation that the propensity to work harder is affected by the marginal rate of income tax. There is a positive conclusion which came out of one report, which appeals to my common sense and tallies precisely with the experience which I had time and time again in the early days of pay-as-you-earn, when I had to invite factory workers to work overtime and took note of those who responded and those who did not. This conclusion was, "Overtime was worked in response to financial needs irrespective of whether the rate of taxation was high or low".

I recognise that that does not deal with the situation where there is no financial need. I recognise that different individuals no doubt react differently to a given set of circumstances. I recognise, also, that motivation is virtually impossible to determine with precision. So I do not wish to be dogmatic.

But there is a fact—not a theory—which should be borne in mind in considering the effect of direct taxation. I mention it because it does not seem to be generally referred to. It is that, having regard to the way in which a wage earner's tax is computed, namely, that it depends on his total income, including overtime, bonuses, deductions for short-time working, and on his total personal circumstances and consequential personal allowances, including subsequent additions to the family, for example, for most wage earners the effective rate, and for many also the marginal rate, of income tax cannot possibly be ascertained during the course of the year.

It just is not possible for an individual to determine precisely, even with an accountant sitting at his side, what the future will hold for him for the rest of the year in terms of remuneration, and possibly also in terms of allowances. The theory, therefore, that a man can say, "I know how my tax will be affected if I work three hours' overtime tonight, and, therefore, I shall work only two hours' overtime" cannot be sustained.

I recognise that such a man may be deterred not by the facts of the situation, but by his misconception of them. Indeed, one of the conclusions of the study carried out by the Radcliffe Commission on the Taxation of Profits and Income read— Our evidence suggests that if productivity is related to income tax in any way it can only be related to misconceptions about the system. … The present structure and what people now know about it do not have any significant effect on the productivity of industrial workers. What people do under a misconception, however, is an entirely different point; and that we are meeting as best we can by publicising information relating to both effective and marginal rates of taxation.

Turning now to assistance to industry, the Bill contains one major and several minor proposals. The major one, which has already been fully described, is the increase in initial allowances for industrial buildings. As examples of the minor contributions, I mention the Clause on tobacco, which enables research on tobacco substitutes to go ahead; the Clause on hovercraft, which facilitates development of this British invention; and Clauses 5 and 34, which affect Customs duties on goods coming through airports and stamp duties on Stock Exchange transactions in such a way as to enable computerisation to take place.

Then there is Clause 9, which extends the use of vehicle trade licences so as to correspond with the change in the use of the vehicles concerned and to assist in research and development; and Clause 29, which exempts certain company transactions from capital gains tax in circumstances where they would otherwise have been liable on a merger.

In doing this, we are endeavouring to keep pace with developments in business practices, as I think that the Opposition would agree we have been anxious to do year by year. I have always taken the common-sense view that businesses should not be impeded by out-of-date tax provisions from taking the steps that they think would be most likely to lead to a successful result and would thereby produce the greater profits for their own enjoyment and that of the Inland Revenue.

Finally, there are provisions in Clause 20 and Schedule 4 for simplifying the arrangements governing the manner in which companies account for income tax on distributions and other payments they make. This should reduce the administrative burden, both on companies and on the Revenue.

The tax which bears directly on companies is corporation tax. Although I imagine that we shall in Committee be discussing the burden of corporation tax, I thought it would be helpful if I set the discussion in context by describing very shortly how that burden has varied over the last decade.

The conclusion to which I am leading is a very simple one, namely, that companies are paying no greater proportion of their income in tax now than they did 10 years ago. In 1960 the proportion of companies' gross income taken by tax was 25.1 per cent. The provisional figure for 1969 is 23.1 per cent. If tax on dividends is included, the 1969 figure was exactly 34 per cent. compared with 34.7 per cent. in 1960. I repeat—the conclusion is the same whether one talks of gross profits or of profits after depreciation—that companies are paying no greater proportion of their income in tax now than they did 10 years ago.

I want now to refer to one matter which does not yet appear in the Finance Bill, namely, the taxation of mineral royalties. The Government have been considering the implication of recent developments in the exploitation of minerals for the tax liabilities of the mineral owner. At present, that liability can arise in one of two ways. The minerals may be sold for a fixed capital sum. Alternatively, where it is not possible to calculate in advance the amount payable, a lease is granted in return for royalties which are related to the quantities of minerals extracted. In that event, the royalties received are, and always have been, treated as income.

The recent developments to which I referred are essentially twofold. First, new mineral deposits have been discovered, particularly in the development areas, which, because they lie so deep, could for practical purposes be exploited only on a royalty basis, which attracts income tax and surtax where an individual owner is concerned. Second, modern methods of working are very much quicker, with the result that large amounts of royalty may be received over quite a short period of time, with a consequent sharp increase in the rate of surtax.

My right hon. Friend has decided that this new situation, which faced landowners with the choice of either releasing their minerals for a negligible after-tax sum or holding on to them and so denying the country a significant contribution to our balance of payments, called for a review of the tax provisions.

We therefore propose for the future the following treatment of mineral royalties. For the mineral operator who pays the royalty, there will be no change. The recipient of the royalty will, however, have his tax liability calculated on the basis of treating half the royalty as an income receipt, with the normal tax consequences, and the other half as if it were a receipt of capital. Where the granting of the mineral lease has not been subject to betterment levy, this latter half will be treated as a chargeable gain and will, therefore, normally be subject to capital gains tax at the 30 per cent. rate year by year as it is received. Where the levy applies, there will be rules to secure that the combined incidence of capital gains tax and levy on this half will normally be between 30 and 40 per cent. depending on the amount of the levy. There are several points of detail which we shall need to discuss with the interests concerned.

Our consideration of this matter was not far enough advanced for my right hon. Friend to be able to refer to it in his Budget speech, and for full details I must ask the House to await the Clause which we shall be bringing forward for consideration in Committee; but the effect of the new arrangement in reducing the marginal rate of combined taxation where large mineral royalties are payable for a short time will be appreciable. Although this new tax treatment will apply to minerals generally, the main benefit of it will go to deep-mined minerals, where it is not normally possible for the deposits to be sold outright to the would-be operator as a capital transaction.

In practice this means, I am glad to say, that the new tax treatment will be of special benefit to the mineral deposits being discovered in development areas. It was because of this help to our development area policy, and the importance of mineral development in the national economy as a whole, that I thought it right to make today this statement in principle about our decisions.

Mr. Patrick Jenkin

Can the right hon. Gentleman say from when the new treatment will be applicable?

Mr. Diamond

The answer is not straightforward, because there are leases already in existence. I would prefer the hon. Gentleman to wait until the details are published. I can promise him a favourable reply.

Mr. Robert Sheldon (Ashton-under-Lyne)

What will be the cost this year and in a full year?

Mr. Diamond

It is not possible to give an exact calculation of what the cost will be in a full year.

Mr. Edward du Cann (Taunton)

The right hon. Gentleman will know that many people have been waiting for this announcement and will study it with great interest. He was good enough to say that he would consult the interests concerned over a period. He will also know that many hon. Members have a deep and continuous interest in the matter. Would I be right in assuming that it could be discussed on the Floor of the House rather than in privacy upstairs?

Mr. Diamond

It is a matter of considerable detail. The fact that something goes to a Committee stage upstairs does not of itself debar the right of subsequent discussion on the Floor of the House on Report, if that is the desire of Members and the wish of the Chair at the time.

Perhaps I should add this to my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) who was obviously asking about the cost in taxation. There is the other side, which he will not have failed to grasp immediately—the additional benefit accruing to the country, and to an extent to the Treasury and the Revenue, from the exploitation of minerals that would otherwise not be ex- ploited. It is virtually impossible to say what lies deep under the ground, nor the speed with which it will be exploited, and to give a responsible answer.

I have explained that matter in some detail because it is not in the Bill. Nor is there anything in the Bill dealing with negative income tax, a topic on which there has been much discussion recently. Negative income tax involves a method of approach which at first sight is very attractive. I was several years ago much attracted by the possibility, as it seemed to me, of combining a selective method of relieving poverty with great administrative savings and simplification. It goes without saying that the Government, naturally, examined the various alternatives which people have in mind when negative income tax is referred to, in the hope that it would be possible to make some improvement along these lines.

The conclusion we reached is broadly the same as that reached by most others who have examined these proposals in depth, and there is nothing that has since happened to alter it, namely, that I do not believe that we will be able to move in this direction in the foreseeable future. The various schemes of negative income tax all suffer from one or more major defects, some of which were outlined in paragraph 108 of the White Paper, "National Superannuation and Social Insurance" (Cmnd. 3883), namely, the inability to respond quickly to individuals' new needs; complexity; the great cost of any effective scheme; and the substantial unresolved problems of incentives.

To the extent that one seeks to avoid complexity, one comes up against in-equity: and inequity in dealing with the varying needs of individuals becomes, of course, much greater when one moves from tax allowances to cash payments, and on a much broader scale. So, regretfully, I have reached that conclusion. I should be very interested to hear the views of other hon. Members. I know that there are many who have given substantial attention to this topic.

The Bill does, as usual, include other Clauses designed to improve the machinery of taxation, give relief and to follow up the consequences of other legislation. But most of the provisions in the Bill have now been, I think, sufficiently mentioned either by the Chancellor or by myself, and as time is short I think that the remaining detail can appropriately be dealt with in Committee. I would sum up by saying that this is a relieving Bill, and that there is no Clause which should put up prices by as much as one penny.

7.36 p.m.

Mr. Terence L. Higgins (Worthing)

The debate this year is likely to be somewhat different from Second Reading debates on the Finance Bill in recent years, first, because it starts much later than normal, and, second, because despite the efforts of the Chief Secretary it is a very thin Finance Bill. In some ways it could almost be described as an angostura bitter and tobacco-substitute Finance Bill.

But there is also a danger that the discussion will become more partisan than before, despite the lateness of the hour. In this respect we were grateful for the perhaps subdued way in which the Chief Secretary put forward his arguments. I found it preferable to the extraordinary speeches by the Prime Minister in the past few days, against the background of which this debate is taking place. One wonders how any Prime Minister can make a speech in which he says that Conservatives would increase unemployment the day before the figures come out showing that unemployment has reached a 22-year peak, or say that the Conservative Government would let prices rip on the day when the £ in our pockets, which he assured us glibly on the day of devaluation would not be devalued, had fallen in real purchasing power to 17s. 6d.

I was sorry that the Chancellor omitted from his speech this year the hopes he had previously expressed that we should have full, detailed and open discussion of the Finance Bill. This was significantly missing. That being so, I hope to confine my remarks to fairly technical matters.

But I cannot help commenting on the rather extraordinary proposal by the Prime Minister last weekend, when he offered to instruct the Chief Secretary to assist the Conservative Party in its tax proposals. He described the right hon. Gentleman in glowing terms as the greatest authority on public expenditure and taxation that any party could produce. I therefore feel bound to make one or two comments, and I assure the Chief Secretary that if he blushed then I hope that he will not do so now.

First, I recall the famous occasion with regard to the charge on corporation tax when my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) pointed out that the Chief Secretary had made what he described as a schoolboy howler. The details are recounted at great length in cols. 1149–51 of the OFFICIAL REPORT of 7th June, 1967. I had resolved never to mention this again, but in view of the Prime Minister's glowing account I thought it right at least to bring it to his attention, and, I hope, to the attention of the Press, which has clearly forgotten about it. To do the Chief Secretary justice, he eventually—admittedly a year or more after the event —admitted that he had made a mistake. It was, indeed, a schoolboy howler.

The second point comes up in the interesting debate on the vote on Account on 18th March 1968. Then we took the Government to task because the Supplementary Estimates were £440 million over the original Estimates. To take one passage from HANSARD during the debate on the Civil Defence Estimates, when I quoted from the Third Report from the Estimates Committee on the Spring Supplementary Estimates: As your Committee stressed last year, the objective should be to ensure that the out-turn should be as near as possible to the original Budget Estimate. This year the Treasury estimate provisionally that there will be an increase of about £440 million."—[OFFICIAL REPORT, 18th March, 1968; Vol. 761, c. 128.] This again is an indication of the efficiency of the Chief Secretary's arithmetic.

Mr. Diamond

By how much did public expenditure go up compared with the Estimate?

Mr. Higgins

I cannot remember the figure correctly but I think £1,107,000. But I may be wrong. The whole basis of the suggestion that the Prime Minister has made is that the Chief Secretary is the right man to forecast how changes of taxation are liable to take place. My point is that on that occasion the Chief Secretary and his Department were £440 million out. I do not feel that this is an occasion when we need the right hon. Gentleman's assistance.

To turn to a more fundamental point, the Chief Secretary would be better employed in telling the Prime Minister how his sums have worked out. Let us take the Prime Minister's statement that he could carry out his policies with no general increase in taxation over the life of the Parliament. My right hon. Friend the Leader of the Opposition said during the Budget debate: Let me tell the Chancellor of the Exchequer what he has to do in April, 1970, to fulfil the Prime Minister's prophecy. … He must cut purchase tax by £352 million. He must take 6d. off Income Tax, is. 9d. off petrol, £10 off road fund licences, 3d. off beer. 13s. I ld. off whisky, 3s. 6d. off port, 2s. 10d. off wine, Is. Id. off cigarettes, £11 million off Estate Duty, and £5 million off short-term Capital Gains Tax, and some £615 million off S.E.T."—[OFFICIAL REPORT, 15th April, 1970; Vol. 781, c. 1047–9.] Given that this is so and that all that the Chancellor has really done, in the words of Samuel Brittan in the Financial Times is to offset the disproportionate growth of revenue from a progressive income tax in a world of rising incomes by selective concessions at the lower end of the incomes scale, and given that the whole of the Finance Bill must be put in the context of the Prime Minister's promise and the subsequent events, the Chief Secretary's undoubted talents—and he knows that we have great respect for him —would be better devoted to correcting the Prime Minister rather than offering advice to anyone else.

The most important thing is that we must put this Bill against the general economic background. The Chief Secretary said that the Chancellor had dealt with the question of prices and incomes in his Budget speech. He did so, to the extent of about one sentence. We must look at this carefully if we are to appraise the actual place of this Finance Bill in our general economic affairs and examine what the principles underlying it are. It is a curious thing that in the debate so far very few speeches have asked why it is that the Government's fiscal and monetary policies, their policies of restraint, have failed to work.

There must be a reason, and I believe that the answer is that people think that because the Government have imposed massive fiscal and monetary restraints and the balance of payments has improved, one is the result of the other; that is, the balance of payments has improved as a result of the Government's restraint policies. The truth is that the argument for restraint improving the balance of payments has always been that if we take measures of restraint they will depress the level of demand and prevent prices rising and that this will make exports more competitive and release resources, so far as devaluation goes, and, therefore, the balance of payments will grow. That argument cannot be used if the middle item of the syllogism is that prices and incomes have continued to rise. In that case the balance of payments effect is largely the delayed effect of devaluation, but it does not have the result of keeping prices and incomes down. They clearly have been going up at a rapid rate.

We have to ask: why have the Government's measures to keep prices and costs down failed? I suggested in the Budget debate that the key to this must lie with the public sector. To put it more technically, what we are saying is: what has happened to the Phillips curve, showing the relationship between unemployment and prices and incomes? It seems to have been behaving in a very odd way. The Chief Secretary has tended to learn from his mistakes, and there have been a great many of those. What happened was that we started from the position where the Government took tough fiscal measures but not sufficient monetary measures. Now they have taken both fiscal and monetary measures, but at the same time the Government as a whole have not taken steps to ensure that the public sector does not use its monopoly powers to increase prices, with the result that revenue is taken away through increased incomes. I referred to that in the Budget debate, as did my right hon. Friend the Member for Enfield, West. It is wide open to misrepresentation, and sure enough the Prime Minister sought to misrepresent what I and my right hon. Friend said then.

It is still very important from an analytical point of view to be clear about what has happened. We are not suggesting for one moment that the right course of action is to have a situation in which the public sector is discriminated against. However, it is the public sector which has been taking the lead with increases in prices and wages. This has inevitably led to a situation when private industry, to retain its labour force, has to put up its wages, and it has often been possible for particular firms to pass increased costs on in the form of higher prices despite the general economic situation.

The Chancellor can go on adopting tougher fiscal and monetary measures, but if he lets the cat out of the bag on the other side then inevitably his measures will be frustrated. He knows perfectly well that this is what has been happening, and it is clear that he is not prepared to take the necessary action which is all that will make his other measures effective.

No one on the other side of the House could accuse me of being in favour of a statutory prices and incomes policy. I have lost count of the number of debates when we have attacked that policy, from both sides of the House. But hon. and right hon. Gentlemen opposite should consider whether if they do not include the third aspect of the problem which I have mentioned they will not go on increasing unemployment more and more, with prices and wages still rising. This will have a serious effect on the workers.

It was extraordinary for the Prime Minister to suggest last weekend that we would have to choose whether to have deflation or roaring inflation when the present Government have both. The Chief Secretary spoke about the effect of eliminating graduated bonding on the income tax scale. He asserted, as on many occasions, that the disincentive effect was negligible or outweighed by other effects. He used the expression "a deterrent effect" and resorted to the extraordinary argument that people could not actually calculate their tax. He should not believe that if the attitude which people take to the tax burden is based on misconceptions, none the less those misconceptions do not have a significant effect.

On the point which the Chief Secretary makes about people not knowing what their tax burden is, some of them will take the trouble to estimate when they actually come into tax, and therefore if there is a single step effect, there will be people in the group who will realise that they will have to pay tax whereas they did not previously. Although there may be a lag, the general attitutde towards overtime will be affected.

An article in the Industry Week of 24th April says: The psychological effect of paving that first lot of tax is out of all proportion to the real value of the money lost. The workers really hate it! The difference between 23p and 32p may not look much to a manager on £3,000 per annum accustomed to paying heavy tax, but to the worker on say, £9 a week it looks a lot. So the effects will be: (a) It will be harder to get people to work overtime, if overtime pay is going to be suffering 32 per cent. tax; (b) it will be harder to get part-time workers to put in a few extra hours to meet seasonal pressures; (c) a rise which takes a worker into the tax zone will need to be about 12 per cent. larger if it is to compensate for the tax. The change which the Government have made has a retrograde effect on the overall pattern of the tax structure, and at the surtax stage we are developing a kinky tax system of the most extreme kind, which is also a retrograde step.

Mr. Sheldon

I am interested in the hon. Gentleman's argument about the disincentive effect of coming into and going out of taxation, but surely my right hon. Friend the Chancellor of the Exchequer has widened the non-taxpaying area.

Mr. Higgins

There are two points here. First, there is the whole question of whether they are the same people, or a similar number of people, who are going in and out of taxation as a result of inflation. The second point is that a grading system is likely to have a less dramatic effect on people's attitude to taxation than a system which has a sudden kink in it. This is not a difficult point to understand or to make, and it is one which is generally appreciated.

My hon. Friend the Member for Wan-stead and Woodford (Mr. Patrick Jenkin) will be dealing with the Clauses concerned with pensions. I have one point on the Clause dealing with decimalisation, which is something that people are concerned about. I have received from my hon. Friend the Member for Working (Mr. Onslow) a letter from a manufacturer who is trying to implement decimalisation well in advance, on 5th April, 1970. He says that he is disgusted at the unprepared state of the relevant public departments and boards, and that the local tax and social security offices were generally in the dark. He goes on to say: Tax tables are not available in decimal currency thus making conversion, reconversion and re-reconversion necessary for each calculation. These tables will have to be ready soon, why not now? The Government might bear in mind that the time has come, or is overdue, for these points to be followed up.

I take up the point made by the Chief Secretary in the Budget debate in answer to the claim which was made by my right hon. Friend the Leader of the Opposition and my right hon. Friend the Member for Enfield, West that this is a one-month Budget in the sense that the effect of the tax reductions will be cancelled out by inflation within that period. The Chief Secretary went to considerable lengths in cols. 43–5 on 20th April, 1970, to try to rebut the argument of my right hon. Friend.

Essentially, the argument of my right hon. Friend was that the Government had reduced taxation by a certain amount, but that this would be cancelled out by the rise in prices within a very short period. The Chief Secretary embarked on a rather complicated argument, and attempted to rebut this on the ground that one had only to look at the figures in table 4 of the Red Book to see that this was untrue because, he asserted, the forecast in the Red Book was that consumption would go up in real terms during the coming year, although he did not specify the exact year, by 3.9 per cent. He said that this was a clear rebuttal of the view that real incomes would not rise. This is an extraordinarily naive argument, and I will try to persuade him of this.

The Chief Secretary says that the facts are available from the published figures. That is untrue, because time and time again we have asked the Government to publish their forecast before the tax changes and their forecast after the tax changes. They have never done so, and they have not done so on this occasion. It is, therefore, not possible to ascertain, as the Chief Secretary said, what exact impact on consumption the Budget changes are likely to have. He says that instead of the figure being £700 million it has been raised to £900 million by the tax changes. This cannot be ascertained from the published figures. If both sets of forecasts could be published we could then see what are the facts. It is most unlikely that a change in taxation of the amount which the Chancellor has in mind, of £220 million roughly in a full year, will be reflected in a £200 million increase in consumption, because it does not all go direct to consumption expenditure, and there are some very odd assumptions about the propensity to save if that is so. We hope that the Chief Secretary will make the figures available.

The Chief Secretary's argument is that the Finance Bill will increase consumption by £200 million in real terms. If we look at this in greater detail we see that demand can still be choked off by rising prices, and that this is very likely to happen. Therefore—if I dare to use the expression—all else being equal, although the measures of the Chancellor of the Exchequer may increase demand by, say, £200 million, if prices rise this will choke off demand, so that the increase in real output which the Chief Secretary asserted would take place will be frustrated, because his forecast will not come to pass. It is always possible that the forecast may come to pass for quite different reasons, in particular the tremendous increase in demand which we believe will occur because of the wage inflation. But the Chief Secretary cannot sustain the argument which he made in his Budget speech for the reasons which I have given. I know this is a complicated matter, but if the Chief Secretary gives us advice we must examine his arguments closely.

The Finance Bill is against a background of inflation which is increasing at a very rapid rate. Since October, 1964, we have had 14 Budgets and mini-Budgets, some of the mini-Budgets being larger than some of the Conservative main Budgets. This is the last Finance Bill which the Government are likely to bring in. Over the years we have been burdened by one new tax after another—corporation tax, long-term capital gains tax, S.E.T., the aggregation of minor's incomes, the disallowance of interest, and the rest. Therefore, although this is a thin Bill, it shows no real change in the Government's attitude. Their basic philosophy is still that one should bring in as much as possible in taxation from individuals and corporations, and that the Government shall decide who shall have the money back, whether it be individuals or corporations. This is a fundamental difference of approach between the two sides of the House of which the Government seem totally unaware.

The Government can best be described by a notice which was seen in a building near London commented on by the new American judge of the International Court. It read: Between scepticism on the one hand and dogmatism on the other there is a middle way which is our way, open-minded certainty. It is true to say that the Government in all their proposals believe with open-minded certainty that what they say is right. My own view is that there is one thing for certain about this Government and indeed about this Finance Bill. It is that for this Government it is the end of the road. I do not doubt that the only real answer is a fundamental change in our approach to taxation problems. The sooner this happens the better.

8.0 p.m.

Mr. Alfred Morris (Manchester, Wythenshawe)

It has been the somewhat melancholy practice in recent Parliaments to accuse Governments in their final year before an election of using the Finance Bill to disburse electoral bribes. The hon. Member for Worthing (Mr. Higgins) said that in his view this is the last Finance Bill before a Dissolution. But the Bill is a happy exception to the practice I mentioned in recent Parliaments. This year the Budget is everywhere seen to have had more to do with national needs than with electoral considerations.

My brief intervention in this debate will not be concerned with the broader questions of financial policy. I wish to make one proposal for improving the Bill. My proposal is one for removing a social injustice that works to the disadvantage of some very severely disabled people. Under the Finance Act, 1964, the burden of excise duty was lifted from disabled persons who drive their own vehicles. This was a gesture of much value to many of the disabled. But persons who are too grievously disabled to drive themselves yet nevertheless own cars driven for them by their wives or husbands were left out of the benefit conferred by the Finance Act, 1964. Such people are frequently referred to as "disabled passengers"; that is to say persons who must always be passengers in their own cars. If they are to get about at all—and remarkably enough many of them do get about, even to work —they must pay the whole of their mobility costs. But at the same time others who are much less severely disabled receive help with their transport.

It will be said, with justice, that this problem raises serious administrative difficulty. It will be pointed out that any extension of the present exemptions from excise duty to vehicles in which the controls are perfectly normal and have not been converted for use by a disabled person would be extremely difficult to delimit. I have given the matter a great deal of attention, for, as the House knows, I have spent much time recently with hon. Members on both sides in pressing forward the Chronically Sick and Disabled Persons Bill. I do not believe, nor is it the view of those hon. Members with whom I have been working on my Private Member's Bill, that the administrative problem is insuperable. It will be my intention if and when this Finance Bill receives a Second Reading—and one must be careful not to speak with too much certainty about any Bill these days receiving a Second Reading—to move a new Clause under the heading: Exemption from vehicle excise duty of vehicle used by husband or wife of disabled person ". The provisions will be as follows: (1) Vehicle excise duty shall not be chargeable in respect of any vehicle included in the Fifth Schedule to the Vehicles (Excise) Act, 1962 which is registered in the name of a registered disabled person or of that person's husband or wife, and which is for the time being used by that person's husband or wife. (2) Exemption under subsection (1) above shall not be allowable on more than one vehicle registered in the name of any of the above-mentioned persons. I hope that my right hon. Friend the Chancellor will greet this proposed new Clause with the maximum understanding and sympathy. I believe that the problems referred to in previous debates are met by the drafting I have suggested. We can, of course, confidently claim in this country to be well ahead of other countries in the provision of free vehicles to the disabled. But there is still a long way to go if we are to increase the mobility of those who are much too disabled to drive themselves. I cannot see why they should be treated less favourably than people with disablements which are not as severe and who, under present arrangements, are given cars to assist their mobility. I think it was Robert Lowe who said in this House when speaking, as it were, as Minister of Education before there were Ministers of Education, that: What is not efficient shall be cheap, and what is not cheap shall be efficient. He was taking part in an angry debate in the 1860s about payment by results for teachers. I would argue that much of our expenditure at present is neither cheap nor efficient. There are people who may think that if the House does not accede to my proposed new Clause it. will save a small amount of public money. That is not my view. There are supplementary pensioners today who would like to be taxpayers. There are people who are severely handicapped as individuals who feel that they have also social handicap imposed over and above their personal physical handicaps. We must, in my view, deal urgently with the problem of helping the blind man as well as the legless man to be as mobile as possible with his own family. It is simply a matter of social justice. We shall not only be acting with social decency but also spending money more effectively.

I hope the House will realise that every organisation concerned with the mobility of disabled people attaches considerable importance to this new Clause. They would like S.E.T. to be lifted from registered disabled persons. They would like the category known as disabled mothers to be helped to become more mobile. The suggested new Clause is the least we can do in this Finance Bill to help some courageous people who want to become more active members of society.

8.10 p.m.

Mr. Edward du Cann (Taunton)

The hon. Member for Manchester, Wythenshawe (Mr. Alfred Morris) has made a single point clearly and well. I shall not be alone in saying that I hope he gets a clear and full reply this evening. All of us in our constituencies in dealing with correspondence and in meeting people are only too well aware that, however much the system may have improved in recent years, there can still be unhappiness about allocation of transport, and so on. I repeat that I wish the hon. Gentleman success in what he is trying to do.

If I may, I will follow his theme. There can be few hon. Members who neither respect nor like the Chancellor. After all, he has style and intellectual competence. But, holding those generous opinions, it is inevitable that one should find his Budget and this Finance Bill disappointing, particularly as they are both so lacking in imagination.

I am not surprised that the right hon. Gentleman is silent about this Finance Bill. He would not be the first father to be modest about his offspring. As my hon. Friend the Member for Worthing (Mr. Higgins) said, we all respect the Chief Secretary, but, if the right hon. Gentleman does not mind my saying so, he made an extraordinary speech this afternoon. I was not sure to which Finance Bill he was referring. It could not have been the one to which we are supposed to be giving a Second Reading today.

The right hon. Gentleman spoke of the Budget judgment, and the Finance Bill is all about the Budget judgment. I do not make my main comments on the Budget judgment, because the £200 million figure is largely artificial. However, I want to make three brief comments on it, since the Chief Secretary constantly referred to it with some pride and pleasure during the Budget debates.

My three comments are these. First, it is high time that the Treasury appreciated that every tax relief does not necessarily mean increased consumption to exactly that amount. Secondly, as my hon. Friend the Member for Worthing has pointed out, we have heard only a sentence or two about incomes increases. It would be honourable if Treasury Ministers admitted that the reason why there cannot be a general tax relief this year lies in the very substantial increases that there have been in some incomes. Thirdly, I am not sure whether my hon. Friend has not already made the point obliquely that the £200 million figure will be belied by events and the so-called buoyancy of revenue, which is just a euphemism for inflation and the wage explosion.

I agree with the Chief Secretary that there are some good points in the Bill, and I agree those matters with pleasure. I am especially pleased with Clause 6 which is concerned with angostura bitters. This is a matter for which I and other hon. Members have argued for a long time. However, by and large it was an empty Budget, and this is an empty Finance Bill.

Picking up the theme of the hon. Member for Wythenshawe, I want to try to give some examples of the missed opportunities which I see. I do not agree with the general tone of the Chief Secretary's remarks, because I think that it is common ground in this House that our tax system is extremely complex. I would go further and argue that it is finicky in many particulars. Assuredly, there are many uncertainties in the law at present which impose a burden on the public and on the public's counsellors. What is more significant they bring the law increasingly into disrepute.

The Chancellor of the Exchequer seemingly began to acknowledge this in practical terms when he arranged that a number of surtax payers should be freed from liability to the tax. We know that the number of surtax payers has doubled in the last seven or eight years. That, again, is an example of inflation. It is good that the new arrangement will free almost a third of the total, bringing staff savings and a comparatively small cost in its train. There are other instances which are equally to be applauded. For example, 2 million people will be removed altogether from the payment of income tax. But what put them in if it was not the Government's self-imposed inflation?

So far, so good, but these are mere pecks at the problem. What is disappointing is that man-sized bites have not been taken. The Chancellor of the Exchequer admitted the deficiencies of our tax system in clear terms last year. He is equipped by instinct and ability to undertake reforms. Instead, he has done virtually nothing.

Let us take the example of income tax. I associate myself warmly with what the Chief Secretary said about the devotion of officials in the Customs and Excise and the Inland Revenue. We all know that to be so. Nonetheless, the statement he made that there is only one complaint made through the Ombudsman in every million income tax cases shows only the tip of the iceberg, and I am sure that he knows that as well as I do. I do not argue that it is the fault of officials. We all know that they are grossly over-burdened. However, the other day the Economist commented: There is a high proportion of individual assessments which is incorrect. I have the honour to be a director of a company which has on its staff a number of highly-qualified tax advisers, as the Chief Secretary knows. I am told by their senior man that, of the assessments with which they deal, only one in 20 is correct. Many people do not receive repayments to which they are entitled. The policing of returns is elementary. No one knows how many potential taxpayers do not make and are not called upon to make returns of their income.

It is a matter of the utmost regret that the Chancellor's brave words of yesteryear are followed by a failure to act this year on any significant scale. I realise that, in arguing for a simplification of our tax laws, I am naturally asking for a good deal. I do not under-estimate the difficulties. But it must be right for this House constantly to argue that our tax system should be better understood, as a consequence, should be more sympathetically viewed by the public than it is at present, and that it should be more effective and fair. Year after year in these Finance Bill debates we talk about simplification. In the event, we do very little. A start has to be made some time. If not this year, will it be next year or some time, or will it perhaps be never?

I turn now to certain smaller but no less significant areas. I am sure that the House associates itself with the tribute paid by the Chancellor of the Exchequer to the National Savings Movement. We all respect my very old friend Sir Miles Thomas, and we wish his successor well. However, everyone knows that national savings are in a parlous state and that in real terms they continue to decline. Were it not for the support of the surtax payer, they would present a picture which is very different from that which we see today.

Would it have been so difficult in this Budget to have rationalised the concessions to the different savings media? Is there any more urgent task than that of increasing the total amount of national savings by whatever means which may be used? Is it sensible to put shackles on the clearing banks while allowing the near-banks to lend as they please? Where is the logic in these matters?

Was it really impossible in this Budget to simplify purchase tax rates? My hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) has done more than anyone to argue for sense in purchase tax matters. Was it really impossible to simplify the capital gains tax? Was it really impossible to simplify further the stamp duties beyond the mere abolition of the duty on cheques? Again, I and others of my hon. Friends have argued for this in Budget after Budget. There are numerous other duties which yield less than stamp duties. All these pettifogging duties should go.

The Chancellor, in the Chief Secretary, the Financial Secretary and the Minister of State, has most competent lieutenants —no one would deny that. Even now he could get some credit for doing something in simplification, such as setting up a Select Committee on Taxation, as my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) has suggested. What I cannot understand is why, when there is so much obvious competence in Ministers at the Treasury, they do not do more than they have.

I take another subject on which the Chancellor has spoken in the past, including last year. This is the disincentive of high marginal rates. Can anyone deny that it is essential to act with resolution in an endeavour to reduce these high marginal rates to more realistic levels and to put them on a par with comparable nations? The cost, as we know, would not be great. Why should a successful or ambitious businessman be penalised for his efforts, and penalised only because he is British? These problems, and the consequences they bring in their train, do not vanish because they are not faced. Nor will they.

I am not teasing the Government because we are in a pre-election period—I leave it to competent colleagues like my hon. Friends the Members for Worthing and Wanstead and Woodford (Mr. Patrick Jenkin). I am not teasing the Government because we are in that period, but criticise them because of their failure to act where the country knows that action is overdue. Such failure to act makes others besides myself question the Chancellor's Budget judgment—indeed, his judgment altogether—and also breeds increasingly cynicism among thinking people.

Clause 16 raises another question and one which is perhaps of the greatest significance for the future. Is industrial investment adequate at this time? I venture to judge that it is not. Could it be greater? I venture to judge that it could. Should it be greater? There is no doubt that the answer is unhesitating, "Yes". Back in mid-March, the Chancellor said that of all the major factors in the economic situation, this is the one about which there is the most conflicting advice. The Budget showed that unhappy uncertainty. Last year showed a good increase in industrial investment, although less perhaps than expected, but one must have doubt about 1970, particularly in the context of the C.B.I. survey of investment intentions.

I know that one can argue—as I fancy the Chief Secretary argued tonight—that minor cuts in Bank Rate, although Bank Rate and interest rates in general remain far too high, and no corporation tax increase and the new bank lending restraints, which are still nevertheless restraints, are together a negative encouragement to invest. We take the point, but per contra the substantial fall in share prices for which the Chancellor argued last year, led unhappily by gilt-edged, will make financing much more difficult in 1970 than it should be.

It is not satisfactory, surely, that a company can raise money more easily and in larger amounts in the Eurodollar market than it can begin to in the United Kingdom. I am sure that the Chancellor and his colleagues agree that the United Kingdom needs the highest possible level of investment in productive industry. We shall win this competitive international battle for prosperity only by putting the maximum capacity at the workers' elbow.

The Chief Secretary said that he had seen nothing which would cause the Chancellor to alter his Budget judgment. He should see it. The signs that appear to me are that this year there will be an important squeeze on company liquidity. The signs are that investment is and will be lower than it should be, and it follows equally that it must be a criticism of the Chancellor that he did nothing to increase it.

The Chancellor is getting credit for the Government's improved standing in the popular opinion polls. I suppose he deserves it as much as he did the credit for Britain's showing after his predecessor had been forced to devalue the £. I doubt whether the Bill will earn him much long-term credit. Nor should any Finance Bill which gives more benefit to the teenager than to the really poor.

The Chancellor was concerned in his Budget speech to give the impression that the Budget might not be his last word. Perhaps that is as well. My mind goes back to the 1966 General Election campaign, in which I had some responsibility. I remember my right hon. Friend the Leader of the Opposition stating that 9–5–1 was not a very satisfactory formula in the national interest—9 per cent. increase in incomes, 5 per cent. increase in prices and 1 per cent. increase in production.

I recall how a distinguished newspaper correspondent said to me, "That is a bad argument, for there, surely, is the formula which will spell for the Labour Party electoral victory". So it might, but who was the real winner after that election? What is the situation now? A 10 per cent. increase in incomes, a 5 or 6 per cent. increase in prices and the cost of living and a 4 to 5 per cent. increase in consumption—larger even than in 1966. When the election comes, who again will be the real winner?

Immediately after the Budget, I asked the opinion of a prominent friend of mine on the benches opposite. He told me, "The Chancellor has done well. I think that he has snatched defeat from disaster". I do not know about that, but this theoretically neutral Budget is a highly political affair and nothing else, because it does so little of what so badly needs doing. It is disappointing, but it is dangerous, too, because there is not a single item in it of real significance.

One does not need to be a genius to prophesy that there will be by the end of next year another currency crisis in the world, or to reflect that the 14 Budgets we have had from the Government are likely to be followed by another in 12 months. The Bill raises many questions which, unhappily, it does not answer. How many unemployed will there be this winter? If money incomes rise by 10 per cent. and money supply by only 4 or 5 per cent, someone must be squeezed.

When I first came to this House, I asked an older and wiser Member how one could tell whether or not there would be a vote on any subject. He replied, "It is easy. Any Bill which gives money away will not be voted against". I suppose that that is just about true of this Measure, except, as my hon. Friend the Member for Worthing pointed out, what it does give away will soon be eaten up by inflation. I am sorry that we are not voting against the Bill. It is a poor little Bill. It is unworthy of its authors and in the long term it cannot but be bad for the country.

8.28 p.m.

Mr. Joel Barnett (Heywood and Royton)

I found the remarks of the right hon. Member for Taunton (Mr. du Cann) about the Bill giving something away rather odd. I had the feeling that we were taking out about £15,000 million, but I think we took the point the right hon. Gentleman was trying to make.

The right hon. Gentleman had much to say about inflation. His hon. Friend the Member for Worthing (Mr. Higgins), as always, was more honest with the House. As Agnew is to Nixon so, in the best possible way, is the hon. Gentleman to the right hon. Member for Enfield, West (Mr. kin Macleod). The hon. Gentleman was honest enough to say that in following an incomes policy he would put his squeeze directly on the public sector. The hon. Gentleman made it clear what he would do. His right hon. Friend the Member for Enfield, West, the Leader of the Opposition, and other Opposition Front Bench spokesmen are not prepared to be quite so open with us. It is therefore always pleasant to hear the hon. Member for Worthing giving us an honest view of how he would deal with the situation.

Mr. Higgins

I think that that was a terribly unfair remark. Both during my Budget speech and today I stressed that it is a question of looking at each claim on its merits, and one cannot have a situation in which the Government say that they do not have any responsibility. That would be absurd.

Mr. Barnett

I think that the hon. Gentleman knows that I was not being unkind to him. He knows that I hold him in great respect. I said what I did in the nicest possible way.

I am sorry that my right hon. Friend the Chancellor of the Exchequer did not open the debate. I find it significant that my right hon. Friend decided that the Second Reading debate on this, his third, Finance Bill was not important enough for him to open. I find it significant because it shows either a lack of interest in tax problems generally, or that he has decided that nothing can be done about the major and fundamental tax problems which confront us. For those reasons I am sad that my right hon. Friend did not open today's debate.

Mr. Diamond

I am grateful to my hon. Friend for giving way. I rise on a question of fact. It is nothing unusual for a Chancellor not to open the Second Reading debate on a Finance Bill. It is some time since a Chancellor on this side of the House has done so.

Mr. Barnett

I do not dispute that this has happened on many occasions, but after six years of Labour Government I should have thought that it was important to do something about our tax system. When the right hon. Gentleman said that this was an empty Bill, my right hon. Friend the Chief Secretary said that everything was working well and that there was the least possible amount of friction. The fact that no changes have been made does not mean that the tax situation is not serious. I say that it is very serious, because by this so-called empty Bill we are perpetuating our tax system, but I take exception to anyone saying that because it does not make many changes, and because it is a small Bill, it is not an important Measure.

I want, now, to take up the point made in the House and elsewhere by right hon. and hon. Members on both sides of the House. It is said that there should be a major switch from direct to indirect taxation or, as the hon. Gentleman said at the end of his speech, cuts in public expenditure. I want to examine whether this is really a practical proposition, at least for us on this side of the House, because I believe that the public are in danger of having a confidence trick perpetrated upon them if they are allowed to believe that there is some way in which one can make a major switch from direct to indirect taxation, and also cuts in public expenditure, which will somehow not hurt them at all; that it will all be done in a simple way, that we shall have a simple tax system, and everything will be fine.

It is said that people prefer to pay indirect taxes rather than pay taxes direct. I challenge that. Who would prefer to do that? Certainly not the millions of people who pay no direct taxes at all. It is only those, and there are now a substantial number of them, who pay direct taxes at the standard rate, and I shall deal with this later.

It is those people who would prefer to switch to indirect taxation, but if one took an opinion poll one would find that they prefer that only because they feel that they would not be hurt by such a switch. Once they found that they would be hurt very much I am not sure that they would still prefer to change the system. A reduction of is. in the standard rate of tax—a fairly substantial cut—would mean an extra 5d. a week for a married man, with two children, earning £20 a week. A man earning £100 a week would be affected considerably more. The difference to him would be about £1 12s. 8d. But the cost of that Is. reduction, which would amount to about £450 million, would be the equivalent of a 35 per cent. increase in all purchase tax rates. I wonder for how long the bulk of direct taxpayers would prefer such a switch.

I think that the proposition advanced for making a change assumes that by some sleight of hand one can pull the wool over people's eyes, and this was referred to by the right hon. Gentleman in another context. Therefore, I certainly do not accept that this is something which people would prefer if they understood precisely what is intended. Neither do I accept that collection under a direct taxation system would be simpler, unless one were simply to splash 35 per cent. across the board on all purchase tax rates—an impossible thing for any Government to propose.

Certainly if one were to propose an added-value tax along the lines of that operated in Europe that would not be easier to collect. It might do all kinds of other things related to incentives to exporters and so on; but no one has argued that an added-value tax is a simpler method of collecting than direct taxation. It would not be simpler for the staff of Customs and Inland Revenue; nor would it be simpler for businessmen, particularly small businessmen who would need to have a set of books very different from those they have at present.

Then there is the argument that we need a switch to indirect taxation in order to provide an incentive to saving. Some useful points were made by the right hon. Gentleman about methods that the Government could have adopted to increase the amount of savings. We all know that there is much constant criticism of the Government for having done this or that, that National Savings have dropped and so on. But we all know that particular incentives are not going to increase real savings. We can have a particular new gimmick one year and get a switch of savings from one kind to another; but at the end of the day any real increase in overall saving, not just National Savings, would come only from increased growth in incomes when it is also possible for something to be done about consumption.

To argue that the Government have done nothing, in this Bill or in the past, to encourage savings is really to look very superficially at the problem. In past debates I have said that even the Save-As-You-Earn scheme introduced last year is one to be welcomed as a small help in this direction. But that could have only a modest effect on the general level of savings, because who are we trying to reach for real savings as opposed to switched savings? If we switch to indirect taxation we shall not be able to get more from the millions of people not now paying income tax. Nor shall we get more savings from the millions to whom we shall give a modest reduction in direct taxation while asking them to pay anything but modest increases in prices due to increased indirect taxation. Therefore, it would be only the small number of people earning above £5,000 a year who would really be given any incentive to save. These are the people we are discussing.

I acknowledge that people in these income groups would probably be given some incentive to save by a reduction in taxation, but it is important to understand that if we are making a net switch from direct to indirect taxation of, let us assume, perhaps £200 million, really affecting those at the lower end of the scale—because if it is not a real switch it would have no meaning—at the expense of a reduction in consumption for those at the lower end, those at the higher end will have perhaps £200 million available for savings. I would not argue—and I would be interested to hear anyone who advocates it—that the whole of that £200 million could be saved. There are other factors such as estate duty involved, making those at the higher end of the scale reluctant to save too much, and making them consume rather than save.

It is, therefore, impossible to measure this. While one would get some saving as a proportion of that £200 million it would be a very modest proportion; and it would and could be only at the expense of taking an equal sum away from the consumption of those at the lower end of the scale. This, therefore, is another argument against the idea of a major switch from direct to indirect taxation.

It is then said that one could safeguard those at the lower end of the scale. I agree that one could safeguard a small number of them, through supplementary benefits and so on. But if one made a real switch, then, by the nature of things, substantial numbers of people at the lower end of the scale—I am thinking of those on, say, £20 a week, who would gain only 5d. from a Is. reduction in the standard rate of income tax—would be very much worse off. Thus, that argument does not stand up.

One comes to the major argument which is always put forward, an argument which, it is claimed, answers all objections. It is that by making a big reduction in direct taxation one would provide a major incentive to increase production. Even if one made a major cut —if it was as large as Is. off the standard rate of income tax—for the average worker it would not be a major incentive and it would not make him decide suddenly to work harder or longer, simply because it would affect him to such a small extent.

I did not go along with the argument of the Chief Secretary. Indeed, I thought that the Chancellor of the Exchequer contradicted him on the question of not having a reduced rate. However, I take the Chief Secretary's point that it may not necessarily have a disincentive effect and that to remove this progression could not be welcomed in a tax system. I thought that the Chief Secretary was trying to have it both ways when he said, first, that the removal of the reduced rate band would not have a disincentive effect and when he said, secondly, in relation to negative income tax, that the major argument against the negative proposal was the disincentive argument. He cannot have it both ways.

I agreed with him on the major point, about the disincentive factor. The same point has been made by many people who have conducted genuine research into the disincentive question, one of which stands out. I refer to the P.E.P. broadsheet of January, 1969, which gave an analysis of the research done on this issue. It showed that even with a substantial cut—it referred to a "feasible alternative" and considered a cut of much more than the ls. off the standard rate to which I have referred—one could not expect more than perhaps a 1 per cent. increase in productivity.

Such an increase in production would be useful, but it is important to consider the price and to realise that it would result only from a cut of substantially more than ls. off the standard rate. My reason for being uncertain on the negative income tax question arises because of the fact that, no matter how one juggles with the figures, at the end of the day, if one is to make a substantial switch, large sums of money will have to be switched to indirect taxation. If that is not done, one will be left with a negative income tax system. The only way to avoid such a state of affairs is at the same time to make a major switch to indirect taxation.

I come to the major point that is always made about the disincentive effect of such a change on those at the higher end of the scale, by which I take those earning above £6,000 a year. Up to that sort of level a married man has an effective rate of 31.8 per cent., whereas the marginal rate is 53 per cent. Above the £6,000 a year level one starts getting into the higher reaches of progressive taxation.

Whereas, by comparison with most of our international competitors, our direct taxation rates, as a percentage of either income or of the g.n.p., are not higher than theirs, at the higher levels which I am considering they are higher. About 64,000 people in this country are earning above £5,000 a year.

It is said these are the people who are most affected. They are affected in the following ways. One, they do not work as hard as they would like to. Two, they will not move or accept promotion. Three, they are emigrating in large numbers. Four, the entrepreneur and professional man will not be bothered to expand to any great extent. These are serious arguments and I think they are worth looking at, although, in my view, it is only a small percentage of the 64,000 people who are affected by these arguments, because I frankly find it difficult to accept the suggestion that people certainly would not work as hard.

A young executive—shall we say, at £6,000 a year?—will be affected by the tax level while he still sees prospects of advancement. Of course there will be cases of such young executives not wanting to take advancement, but very often this is for quite different reasons. One may not move to another town or another country because he finds his family do not want him to. Certainly, that there will be some young executives who will be affected I do not deny; there clearly will be some; but it will be a very small number, in my view.

My own view is that something should be done for that type of person in the way of share option schemes, but it will have to be done in the context of a much fairer Budget than any we have had. I was myself not in favour of doing anything about share option schemes while at the same time many workers at the lower end of the scale were still badly off in real terms, but certainly a share option scheme is something one should look at.

Then there is the argument about emigration because of the levels of tax.

I thought that argument was dealt with once for all in the Jones Report on the brain drain, and it has been made clearer now by the numbers of our scientists and others who are returning from the United States to Britain because of opportunities no longer being available there and some opportunities being available here, indicating clearly that it is not the tax level which was forcing them to go in the first instance.

So one comes finally to the entrepreneur and professional man. Clearly, in this sphere there is particular disincentive at the very highest level. But again I would like to qualify that substantially. Where we have a small private company making. perhaps, £200,000 a year profits, or likely to achieve that sort of level, the owner will not be deterred by levels of direct taxation because he may see a sale or flotation which will give him a capital gain. Therefore, levels of direct taxation will not really be a disincentive to that sort of man, although it is a disincentive after he has sold if he no longer has any incentive to work in that company, or sees nothing left for him, so that he may say it is not worth bothering to work any more because he cannot get anything out of it worth bothering about. This sort of person loses his drive and further ambition, but it is that rather than tax which affects him.

So the man who is particularly affected in this category is the man a little lower down, making perhaps £20,000 a year, who could well go on if it were not for a particular level of tax. He is not big enough to float or sell, and he decides he will not go on just to earn a few thousand more a year. It is that type of man who will start taking it easier, and it could well be that it is that sort of man starting to take it easier that we should be missing unhappily, even though a small percentage of the 64,000 people.

Mr. du Cann

I am following the hon. Gentleman's point, and the whole House is interested in it. Would he not agree, however, that there is another result of high marginal rates of tax which he has not mentioned, and that that is what is developing today, the increasingly unhealthy development of fringe benefits?

Mr. Barnett

I accept that because of the direct taxation system we have a high percentage of fringe benefits. Compared with the United States, where there are very few fringe benefits, there is a substantial difference in this country. But the chance of moving away from our direct tax system on a big enough scale to be able to do away with fringe benefits is very slight.

I sum up the disincentive argument. The effects are tiny, but important, on a small number of people. It is difficult, if not impossible, to help a few while being fair without giving large sums to people who would not be affected by the disincentive argument. I should be prepared to abolish the highest levels of surtax and have an amalgamation of surtax and income tax, which I am surprised we have not done before. But I would do that at the same time as introducing a wealth tax and a gift tax, which the Opposition do not cheer in the same way. While introducing those two taxes, I would reduce estate duty, which might do something about increasing the incentive to save.

The thing about which I really wanted the Chancellor of the Exchequer to do something is the level of personal income tax. This would have involved substantial changes such as the removal of the earned income relief and coming to a clear understanding of the tax charge on the average taxpayers. This would have involved in turn a substantial change in the scale of personal allowances and a big upheaval in the structure of the income tax system.

It is a little sad that after six years in office the Government have not recast the personal taxation structure. I do not know whether that is because the Chancellor of the Exchequer has accepted the argument about the administrative difficulty of the Inland Revenue finding the staff. If that is so, I am sorry, because we have had some years in which to prepare and to make sure that that was not a reason for making such a change. The Government should not use the argument that they cannot change the tax system simply because the Inland Revenue. or whatever branch of the Civil Service may be involved, would be incapable of coping. If that is not the reason. it is just as sad, because it means that insufficient attention has been given to the need for a radical upheaval of the direct tax system.

I have never suggested, and I do not suggest now, that there is a magical formula. Unlike the Opposition, I do not believe that we can make major switches from direct to indirect taxation without being very unfair. But we can start with being honest and devising a system which is more readily understood. I hope that before long we shall have such a system from the Government.

8.53 p.m.

Sir Gerald Nabarro (Worcestershire, South)

The Chief Secretary to the Treasury concluded his speech by talking about "a relieving Budget". Were I not a Member of the House, I would refer to that as monstrous mendacity. Nothing has been relieved. On the contrary, we are all burdened more heavily than ever before by a rising scale of taxation, which will be evident as the months go by during this financial year.

During the period of Labour government of six years, the total central Government revenue from all forms of taxation has almost doubled. Nobody has yet quoted in the debate the extent of the rise in taxation for which the Labour Government have been responsible. I propose to put it on the record. In their first year of office, 1964–65, they raised £7,431 million in taxation. Their estimate for this year, 1970–71, is £14,553 million—practically double. Those figures are incontrovertible: they derive from Treasury sources. They may involve a couple of tiny qualifications about the method of calculation, but margins of error as to perhaps 0.1 of 1 per cent. only. Substantially, Labour has doubled the taxation of the country in five years. Has the nation got doubled value for its money? Of course not.

When I say that taxation will not be relieved by this Finance Bill, I remind the Chief Secretary and the Chancellor, who is never here and never pays the House the courtesy—it is no good the F.S.T. shaking his head in dissent; he is making one of his rare incursions into a financial debate—of listening to later speeches—the Chancellor loves listening to himself, but to none others—that rising prices of manufactured goods, which themselves attract indirect taxation in the process of price increases, then attract more indirect taxation.

I will give the Chief Secretary the best example to hand at the moment. If the right hon. Gentleman went away and looked up the records he would find that the principal contributor of revenue to purchase tax is the motor car. Out of £1,100 million raised through purchase tax, about £200 million comes from motor cars. Every time the prices of cars go up the Chancellor takes more revenue. The prices of cars have gone up right across the board about four times over the last 18 months, and not just marginally. They have gone up by £15, £20, £30 and £40 per car. Whenever the wholesale price goes up by perhaps £40 per motor car, of that £40 the Chancellor's grab—"grab" is the correct term—is 36⅔ per cent. That process will be enlivened and accelerated during the passage of this financial year as inflation hastens.

Therefore, for the Chancellor of the Exchequer or his principal lieutenant to talk about relief is like a piddle from a full bladder, if the right hon. Gentleman understands the analogy. Let us be just. We all have bladders and we all do piddles, so perhaps we can understand the analogy. For the Chief Secretary to talk of relieving himself in this Budget is surely exactly what I described at the outset as being monstrous mendacity. Prices will rise ever upwards during this year.

I want to draw attention to an even more damning indictment of Labour rule during the last six years in the context of taxation by pointing to the percentage of the gross national product taken by Labour in taxes since 1964–65.

In 1964, central Government taxation took 24.5 per cent.; in 1969, it took 34.1 per cent. In 1964, National Insurance contributions took 4.9 per cent.; in 1969, they took 5.8 per cent. In 1964, the local authority rates took 3.7 per cent.; in 1969, they took 4.4 per cent.

The total taken in 1964, as a percentage of gross national product at factor cost, was 33.1 per cent. and in 1969 44.3 per cent. So Labour has put up the percentage of gross national product taken by taxation by no less than one-third in six years. Indeed, that is the epitome of the election peroration I shall use on every platform in a few months' time. It is that the Labour Party is the party of increased and increasing taxation. The Tory Party is the party of reduced and reducing taxation. Let that be learnt throughout the nation as a first precept of true electioneering and be studied closely by all the new electors on the roll.

I turn to the second feature of the Budget. I condemn it absolutely and this Finance Bill which implements it, because there is nothing in it to reduce high unemployment which we shall debate tomorrow. On 13th April last there were 616,000 unemployed, including 89,500, or 4 per cent. in Scotland—a record in all the years since 1940 for April returns. There is nothing to prevent the precipitate rise in prices we have experienced in the last 12 months. And there is nothing whatever to prevent prices continuing to rise at the same rate throughout the year in prospect.

Third, there is nothing to promote additional exports or to reduce imports or to further a policy—or a non-policy perhaps would be a better description—of import substitution.

Fourth, there are no production incentives in this Bill. Fifth, there is nothing in the Bill for 94 per cent. of pensioners. There is a modicum of help for the 6 per cent. paying income tax, but 94 per cent. of pensioners do not pay income tax.

Sixth, and last, there is nothing to relieve—I am sorry to use the Chief Secretary's word again—the inordinately high interest rates which afflict all those who take on hire purchase or seek loans for the purchase of houses or capital equipment.

I turn to indict the Government in perhaps a novel fashion. I would remind my own Front Bench that the Government, through a principal agency, namely, the Post Office Giro, are now offering loans at an interest rate of 1½ per cent. per month, or 18 per cent. per annum. That is what the Government itself regard as a norm for lending money through that principal agency. I call those usurious rates. If a private enterprise lending establishment had charged 18 per cent., what would the Fabians and Socialists opposite have dubbed them?—gnomes of Zurich if they were bankers, Shylocks if they were small traders. Yet here are the Government. through the Giro, charging 18 per cent.—an unpardonable rate for lending money. I promise that the Treasury will hear more about this matter from me in the next few months.

I turn to the much-vaunted income tax reliefs. I thought my constituents had got the matter right. One gentleman from Malvern wrote me thus: Every tax-paying voter in the country has read the banner headlines proclaiming increases in personal allowances. But not one in 10,000 seems to have been made aware that the 6s. rate has been replaced by the flat rate. The result is that most people to whom I have spoken on the subject simply will not believe that married couples are only approximately £7 10s. a year better off while the single ones have a small increase in taxation. He has got it right. That is what people have not yet realised-3s. 0½d. a week is what this Budget is worth to married couples all over the country. I have a word for it, nugatory—trifling, if you like. I spent my £7 17s. 6d. on a good "blow out" on Budget night.

I went to the research department of the Library here to have some figures prepared for me in preparation for this speech on income tax matters. I asked the lady there how she fared and she said gloomily, "My tax has been increased." I said, "I don't believe you." She said, "My tax has been increased by 7s. 6d. a year." Not all people are thanking the Chancellor. They have to pay all the extra increases in indirect taxes. They receive no extra benefit from income tax relief. The trifling reduction for married couples will have no influence whatever on the price of goods in the shops. I condemn absolutely what the Chancellor has done with the application of any money he could afford for tax relief.

Let me put the tax relief in proper perspective [Interruption]. I am not sure, Mr. Deputy Speaker, whether I am making a speech or one is being made from below the Bar of the House. I will put this in correct perspective. The total of tax relief is £220 million and the increase in taxation under Labour Governments is about £3,300 million per annum—repeat, per annum. One-fifteenth part of £1 is ls. 4d. So that on every extra—repeat extra—£1 on taxes levied by Labour since 1964, the Chancellor, in this Budget, has given back ls. 4d. The swag in the Chancellor's bag is 18s. 8d. [Laughter.] Stop laughing. The swag is 18s. 8d. and the relief, the piddle, is 1 s. 4d. That is how serious the position is. The country will hear about it from me, if not from the Leader of the Opposition.

I do not need the Chief Secretary from Gloucester to work out my sums for me. My mental arithmetic is twice as good and twice as fast without a computer. I hesitate to estimate what the result would be with a computer. Probably the first cousin of the Government computer at East Kilbride, if hon. Members understand what I mean, which churns out more mistakes than right answers. The Under-Secretary of State for Scotland does not know that the principal income tax computer is at East Kilbride and that the main complaint north of the Border is that more mistakes have been made in the computation of P.A.Y.E. since they went on to the computer at East Kilbride than when they were done at local income tax offices. The hon. Gentleman should go there to smarten up the computer.

The Joint Under-Secretary of State for Scotland (Mr. Norman Buchan)

We did observe the circus tour that the hon. Member made in Scotland when those remarks were made. I think that they were made more by the hon. Member than anyone in Scotland.

Sir G. Nabarro

That seemed to be a rather irrelevant intervention—characteristic of feebleness.

Let us now talk about the pensioners. I could not get the Minister of State, Treasury, to give way to me on 15th April. He is not one of those people like the Chief Secretary, who frequently gives way. The Minister of State said this: This Budget gives the best tax relief where it was needed—to the old-age pensioners …" —[OFFICIAL REPORT, 15th April, 1970; Vol. 799, c. 1415.] Oh, indeed. Let us have a look at the old-age pensioners and have the truth of the situation dragged out. The number of people drawing State pensions at the last count was 7,015,000; that is the last figure available to researchers in the Library. Of that total, 5.7 per cent., or 400,000, were paying income tax and will benefit by the Chancellor's provisions in the Bill. Therefore, 94.3 per cent. of pensioners are no better off and 5.7 per cent. are slightly better off. That is the degree of the exaggeration from the Treasury Bench of which the Minister of State was guilty. I do not wonder that he would not give way to me on 15th April. He knew that I was going to shoot him. I shall return to this point in Committee.

I shall address myself now to the question of tobacco—an unusual topic, but an important one in a Finance Bill. I will give the House the relevant figures so that they can be put in the correct perspective. The Chancellor raises from tobacco duty approximately £1,125 million. Of that figure approximately £985 million is in respect of tobacco in cigarettes. This is a massive sum.

Smoking cigarettes is very bad for the health. I endeavoured to take through the House a Bill entitled Cigarettes (Health Hazards) Bill, designed to secure the bold and lurid labelling of every cigarette packet with a health warning. But the responsible Minister—the Secretary of State for Social Services—blocked the Bill. He would not like a Tory to have the credit of taking it through, though it is backed by four doctors who are Members of the House and an equal number of Labour and Tory Members.

The real reason the Secretary of State blocked it is that the Treasury advised him to do so: it is afraid of losing revenue; it is afraid of suffering a loss of revenue from the £985 million. The Treasury is afraid that, if people are warned of the dangers of lung cancer by lurid health warnings being displayed on cigarette packets, sales of cigarettes will fall off and the Chancellor's revenue will also fall off. That is the Secretary of State's reason for blocking the Bill.

Clause 4 of the Finance Bill deals with something rather new—synthetic tobacco. We are within sight of inventing a substitution for tobacco leaf to put in cigarettes which will amelioriate—I put it no higher than that—the health hazards from smoking cigarettes. To expedite the processes of research, Clause 4 at this stage postulates—I hope that it will become law—first, that this synthetic material may be manufactured; second, that when it is used for research purposes the tobacco duty will not be applied to the synthetic material; third, that if and when the synthetic material is used for production cigarettes—cigarettes that are not for research purposes—it will attract the same duty as an ordinary cigarette made out of tobacco leaf. That principle is wholly wrong, and I shall endeavour to alter it later.

I have found out exactly what tobacco does in terms of our balance of payments. During the four years before devaluation of sterling, our average imports of tobacco were £85 million per annum. That is the average in four years 1964–67 inclusive. During the two years 1968 and 1969 the average import was £110.5 million a year. Not only, therefore, have tobacco imports increased by the expected margin arising from devaluation, but they have also increased by a further equivalent sum due to increased consumption of tobacco in this country, so that the overall increase of tobacco consumption during 1968 and 1969 is at the rate of 30 per cent. compared with the average of the four years before devaluation in 1968.

These are very serious figures. It is manifestly in the national interest to try to diminish the volume of imports of tobacco, especially as—and this is not a party political point—I remind the Chief Secretary that out of the £110.5 million of tobacco imports in 1969, £59½ million came from the United States of America and were paid for substantially in dollars. The balance of £50 million came from many foreign countries, and to a very small extent from Commonwealth countries, due to the elimination, I am sad to say, of Rhodesian leaf. But the total of £110 million, I should have thought, is an import figure that we would all be anxious to diminish.

I suggest to the Chief Secretary that what we should do is this. We should amend Clause 4 at a later stage to provide not only for relief from duty of synthetic tobacco on the application of that synthetic material to research purposes, but also of synthetic tobacco used for production purposes, knowing that the latter would be a direct substitution of pure tobacco leaf imported most largely from the United States of America.

With those few words I wish to conclude, and say to the hon. Member for Heywood and Royton (Mr. Barnett) that I will deal with him in Committee as usual on Clauses 11 and 12, respectively, income tax and surtax. As before, I shall seek to reduce the standard rate of income tax from 8s. 3d. in the £ to 7s. 6d. in the £ and the top rate of surtax to a maximum of 7s. 6d. in the £, so that no direct taxpayer, however great his earnings, will ever pay more than 15s. in the £, will never pay more than £3 out of £4, always retaining £1 out of the last £4 he earns, somewhat worse than the United States of America, where the richest earner pays 70 cents. out of the last dollar he earns and retains 30 cents. Those are true incentives at which we ought to aim.

I remind the hon. Gentleman that I am not a fly-by-night, changing my ground every year to a different aspect of taxation and becoming more and more righteous and "pro-Nabarro" in my fiscal outlook, as the right hon. Gentleman does year by year as the General Election approaches. Mine is an utterly consistent theme. This will be the fourth consecutive year that I shall have moved the reduction of the standard rate of income tax accompanied by the reduction of surtax rates which I regard as utterly indispensable to the restoration of incentives throughout industry, trade and commerce.

This is a loathsome Bill, a horrible, bad, smelly joke of a Bill. If I had my way I would join my righ hon. Friend the Member for Taunton (Mr. du Cann) in the Lobby in voting against the Bill. All that it does is to give back ls. 4d. of the taxpayers' money out of every extra £1 of taxes which the Labour Governments since 1964 have taken. I allow the Chancellor, by my silence and my failure to vote, to keep 18s. 8d. of my money in the form of swag. If my right hon. Friend decides to change his mind and would like to tell with me, let Taunton and South Worcestershire be the fiscal purities in this House; and I should be delighted to accompany him into the Lobby.

9.22 p.m.

Mr. Robert Sheldon (Ashton-under-Lyne)

In a speech some tame last year the hon. Member for Worcestershire, South (Sir G. Nabarro) said what a good comedian he would have been had he not entered this House. Since then I have found that this was the key to an understanding of him, and I have enjoyed his performances ever since, not least that of today, when he excelled himself.

Sir G. Nabarro

Thank you very much, dear boy.

Mr. Sheldon

The hon. Gentleman made one point which I want to take up, and that related to the tobacco duty and, in particular, Clause 4 of the Bill. I agree that there will be considerable repercussions as a result of experiments being conducted into the production of a synthetic tobacco. I was connected with this some time last year when I made representations to the Financial Secretary asking him to introduce a differential tax between cigarette tobacco and other tobacco. I was turned down by my right hon. Friend, although I would point out that there is nothing inherently administratively difficult in differentiating between these different tobaccos.

At this stage it is important to give massive encouragement to synthetic tobacco if it is found to be less injurious to health than the natural variety. We know that the investigations will need to be complex and long, and it is not for any of us to say with certainty, although indications are promising, that the health hazards of tobacco are at an end. Assuming that it satisfies the requirements of health, it will be the duty of the Chancellor progressively to forgo the large revenue which he obtains from the tobacco duties.

This is not a matter peculiarly affecting tobacco. We are seeing it in other kinds of raw materials. We have seen it in synthetic textiles, to which we gave great encouragement by way of the application, at a high level, of import duty. We saw it again in connection with the growth and development of synthetic rubber, and it is obviously a pattern that will be repeated to our immense benefit. It may be that our historic role as a massive importer of many of these raw materials will be modified.

If my right hon. Friend the Chancellor of the Exchequer is unable to accept a differential tax between ordinary tobacco and synthetic tobacco, which is accepted to be perfectly feasible, he must provide financial encouragement so that the work on tobacco substitutes for cigarettes, pipe tobacco and other kinds of tobacco can go ahead for the benefit of the health of the people and also of our balance of payments.

I refer briefly to the Budget judgment of my right hon. Friend the Chancellor of the Exchequer. He called it a cautious Budget. He said: I have deliberately proceeded with caution."—[OFFICIAL REPORT, 14th April 1970: Vol. 799, c. 1253.] It is not a misquotation or a misattribution to say that this is the cautious Budget that many of us have thought it to be.

The Chancellor of the Exchequer stated the three essential requirements that he foresees for the economy over the next year, two of which I am concerned with. One was the growth of total demand within the productive potential, and the other was the improved and sustained growth of industrial investment. This is what the Budget strategy largely consisted of. The total demand is to be kept within the rate of expansion of the productive potential. That means capital investment. The second demand was for improved industrial investment. There are no new proposals for industrial investment, and industrial investment has been much below what we wish to see. So the growth of productive potential will be limited, and, therefore, the growth of total demand will be limited.

The Chancellor of the Exchequer also said that he wished to guide the economy into steadily increasing growth."—[OFFICIAL REPORT, 14th April, 1970; Vol. 799, c. 1213.] He stated subsequently that to get the growth we must increase the productive potential, and to do that we must increase industrial investment, about which there were no fresh proposals. The commitment to steadily increasing growth, therefore, had no foundation, either in the Budget or in the Finance Bill. To get this steadily increasing growth when there are no new proposals to this end, we must assume that the strategy is to avoid massive "stops" and "goes", and to keep the economy on an even keel in the hope that it is so poised that it will of itself generate the steadily increasing growth to which my right hon. Friend referred.

I can see nothing else that will give us increasing growth over the next year, or even the year after. This is the opposite of the planning that I wish to see. It is a reversion to the policy of holding the ring while the economic forces within the community work themselves through.

We are now in a position to go further than that. With the balance of payments surplus, and the inventiveness and capacity of our people, who are inferior to none, we can assume that our economy is, at least, as good as that prevailing in other parts of Europe.

The weakness of all this discussion is that we can never make the alternative decisions on which the House should decide. We have in this House a peculiar situation, in which we divorce taxation and expenditure. Thus, while the hon. Member for Worcestershire, South wants to reduce taxation, many other hon. Members want to increase expenditure. We shall never get a proper assessment until these two items are discussed together, until we discuss increases in expenditure and accept the consequences in increased taxation.

So far are we from that fairly elementary principle that we are not even given the choice between different kinds of taxation. If the language of priorities is what this House is all about, we do not even have the presentation of choice, because that demands the adequate examination of alternatives. This House is no assembly in which to discuss the adequate examination of alternatives. They are not even put before us so that we can discuss whether one way of raising money is better than another. The House can never make this examination, which is absolutely essential to the Finance Bill and taxation. The powers of debate are valuable but limited ends in the modern world. What we need is the power of preparation and examination of alternatives.

If that were all it would be bad enough, but it is even worse. The Treasury nowadays does not even need to defend its proposals adequately. We never have a real debate with the Treasury. We have not had the real debate about why the income tax system has been allowed to remain unreformed, and with no precision within the different income levels. So the increasingly powerful Treasury is not forced to defend its arguments save in debate, and this is no defence.

But it is even worse than that. With the changes in Government Departments, we had the theory of "creative tension". Whatever criticism could be made of this —I was a critic also—it meant that at the higher levels of debate the Treasury was open to question within the Cabinet. There were other Ministries with equal economic interest which could challenge it. There was the Board of Trade, which, with a powerful economic interest, could defend arguments it thought important and suggest other methods by which the Treasury might move. But, with the elimination of the Department of Economic Affairs and the diminution of the Board of Trade's importance, even that restraint has gone.

So the Treasury has no need today to argue its case before any powerful body in the land. This is a most serious consequence. What we should do is set up a Select Committee on economic affairs. This House was devised to do this, but changes in operation have meant that it cannot. The House must devise a new kind of instrument, so that the Treasury can be faced with an argument and can even have a dialogue with somebody. It can have no dialogue at all at the moment. It is useless to think that this kind of discussion can go on inside the Treasury alone. We all know of the kind of self-criticism which is being experimented with in the Soviet Union and the failure of that kind of system to provide the adequate debate which, by their very nature, democratic countries are able to have.

Today our chief economic Department, the Treasury, is not required to defend itself, is not required to have a debate, and is not even required to have a dialogue with any body of importance. It is this which needs to be changed and to be challenged. If we wish to ask the Treasury why it is that we have the Budget judgment, the Budget strategy and a lack of change in our income tax system after all these years, we cannot put the questions and receive answers in the way that a Select Committee could, with advantage not only to itself but to the Treasury.

I have felt unhappy about these changes in the income tax structure. We have been tinkering with it over the past year or two, but, far from improving it, we have been making it worse each time. My right hon. Friend is quite right to try to help those at the bottom of the scale. With our present structure, the difficulty is that we have to operate in such a way that when a person comes into the taxed category he immediately starts at the rate of 32 per cent. There was no other alternative available to my right hon. Friend in order to achieve what he wanted.

There are other methods of creating tax structures which are not of enormous complexity. One could even provide simplification. One could have a tax as a varying percentage of income, for example. But we do not even know whether these kinds of proposal have been examined by the Treasury. We want someone who can appear before a Select Committee and be asked what investigations have been carried out and what conclusions have been reached as to the practicability of other methods. At the moment there is no way for us to find the answers.

There are other methods. If we were to change the structure, not only could we get the shape of the curve any way that we liked. We would also get a result which would be of enormous advantage to Chancellors of the Exchequer in that the structure could be modified in any way required to take account of the changing circumstances of people and the differences in the amounts of money that the Chancellor wanted to raise, while also taking into account questions of fairness, lack of complexity, and so on. There are these methods. Some are simple, some are more complicated. Some are difficult to understand, some are easier to understand.

Those of us who have given some thought to these matters felt that we have a contribution to make, but we may be wrong. These are vast problems. The difficulty is that the Treasury has not been obliged to face the kind of forum where it could be questioned sufficiently about its efforts in this direction as well as in others.

The hon. Member for Worthing (Mr. Higgins) repeated a number of comments made by others about the level of inflation. What we must all get clear in our minds is that the rate of inflation in this country is matched in other countries. We must understand the reasons for it: I notice that the hon. Gentleman appears not to agree, so perhaps I might refer to one or two figures.

I usually regard as comparable countries those which are in direct competition with us. Mine is not a list which has been specially selected for this purpose. Other hon. Members might make different lists, but I suggest that the countries involved would probably be much the same. They are the United States, Germany, Japan, Italy and France, and Canada is probably marginal for inclusion.

In these countries the levels of inflation have risen from 3 per cent. in 1966 to 5 per cent. in 1969. If one takes the level of wage increases this year as being between 8 and 9 per cent. and the increases in productivity at about 3 per cent., we are left with much the same figure, 5 per cent. or 6 per cent., perhaps a shade more. We are thus not much out of line with what is going on in the rest of the world. The situation is international because all these countries face the same kind of problems.

In the post-war years a generation has come into the factories and offices who have never known the fear of unemployment of the pre-war years. They thus behave in a way rather different from that of their fathers. They regard it as the responsibility of the State to provide them with continuous full employment. Because they do so, and because they are prepared to cast their votes for those parties which accept that responsibility,ipso factoit does become a responsibility of the State. A democratic State is responsive in this way. So wage increases, at least in part, become in general the responsibility of Governments to a greater extent than before. Whereas employers might have stood firm, as Governments become more and more involved in economic operations they tend to give way to wage demands a little more readily than some of the employers of the past.

This in itself is a built-in inflation factor. It is therefore not surprising that the countries with which we can make direct comparisons are inflating at roughly the same kind of level as ourselves. There are, of course, variations, but over all, year by year, this kind of inflation is common to all these countries.

What we are seeing is not even steady inflation but something a little worse than that. We are seeing an acceleration of the rate of inflation, and it is happening in all these countries because, as workers and trade unions get more sophisticated, they begin to anticipate inflation. When they make their demands, they do so on the basis of a built-in feeling about the rate of inflation likely to occur in the year following. What could be yet another twist in the spiral is that they may come to anticipate an increasing inflation, expecting that next year's will be greater than this year's and so on. Fortunately, that situation has not arrived in this country yet but it would be a great optimist who believed that it could never happen.

Faced with such a situation, in which we may be only at the beginning of a spiral which I hope we shall not see, it becomes even more important to plan our defences. The only possible answer is some kind of prices and incomes policy. I have been against a rigid prices and incomes policy, and I laid my views on the line in 1966. I believed that the kind of slow start which my right hon. Friend the Member for Beim (Mr. George Brown) made—building on experience year by year so that we could get this kind of sharing—was the right way. Progress in this sort of thing can be measured only in decades and not years. Given such a start, then we might well have been somewhere along the road by now.

These are matters on which we have to proceed very slowly indeed. It is a pity that we have wasted a number of years but, looking at it in the time-scale of this method of control, it is not too late even now to make this modest, cautious beginning.

The Budget was too cautious for the present time. As my right hon. Friend the Chancellor of the Exchequer knows, many of us have been prodding him to remind him of his expansionist past. I hope that at some time we shall remind him successfully.

9.45 p.m.

Mr. Richard Wainwright (Colne Valley)

I was particularly glad to hear the earlier part of the speech of the hon. Member for Ashton-under-Lyne (Mr. Sheldon). His constituents share with mine an important weekly newspaper, and I am glad to think that both sets of readers will read his eloquent regret at the absence of any reform of the tax structure and, equally, his regret at the absence of dialogue between the House and the Treasury.

Earlier, the hon. Member for Heywood and Royton (Mr. Barnett), whose constituents share another weekly newspaper with mine, did such a magnificent demolition job on the opening and extraordinarily bland speech of the Chief Secretary that there is only one corner of the right hon. Gentleman's remaining structure which I should like to demolish so that everything is razed to the ground, to the level established by the hon. Member for Heywood and Royton.

The Chief Secretary, whom I sought to interrupt, but who hoped that I would be able to make my point later in the debate, was so complacent as to declare at the Dispatch Box that the Inland Revenue is working efficiently and that the chances of maladministration are only about one in a million. This is to imply that maladministration works only one way, and that the Revenue is efficient if only a relatively small number of taxpayers discover serious maladministration in their own tax affairs.

While admitting that, taking instance by instance, the direct suffering of a taxpayer through being charged too much is the worst of all possible offences, I cannot admit the implication of the right hon. Gentleman's speech that it is all right if the Revenue lets a great many taxpayers get by with less than this House has decided they ought to pay, not because I rejoice in the Government raking in the shekels, but for the obvious fact that now that so many taxpayers are allowed to get off with less than their proper obligations others have to pay more in the following year, because if the revenue is less than it should have been there is an inevitable tendency to put up rates in the following year.

If the Chief Secretary had allowed me to interrupt him he could not have denied that he has seen, and not, apparently, taken any great exception to, the Fifth Report of the Estimates Committee in the Session 1968–69, which said, in paragraph 24: In recent years, especially since 1965, the volume and complexity of the work done by fully trained inspectors have greatly increased. At the same time there has been a failure to produce, either by direct recruitment of graduates or promotion within the branch, enough such inspectors to keep up their numbers … The result has been that they are no longer able to do all the work that ought to be done at their level. In the words of the Chief Inspector of Taxes, they ' have to make a much more highly selective choice of the issues to pursue and fight than (he) would wish them to '. How in the light of an impartial, independent statement like that, the Chief Secretary is able to stand at the Dispatch Box and try to tell the country, through the House, that the whole system is working efficiently, I should not be able to understand had I not on many previous occasions listened to the complacencies of the right hon. Gentleman.

It is necessary that something should be said to correct the impression which is still given to the country, through numerous newspaper reports, that the Finance Bill is the main vehicle for giving effect to the Chancellor's Budget proposals.

That has been less and less the case in recent years and, certainly, the Bill we have before us carries out only a minor part of the Chancellor's proposals. In particular—and I have no complaint about this for I do not see how it could be otherwise—the Finance Bill contains no reference to the central part of the Budget strategy, namely, strict control of the money supply on the basis that the Chancellor himself spelt out in his speech. Nor does the Bill make any provision whereby the country or this House or, indeed, anybody outside the Treasury, can know whether that strict control is being applied.

It is because of the fog of ignorance as to whether the Chancellor is diligently pursuing his avowed intentions that there is so much doubt, criticism and in some unfortunate cases excessive alarm being voiced in the country today. To take, if I may, the case of one outstanding example of excessive alarm, I had the misfortune, as one of the deputy chairmen of the Wider Share Ownership Council, a position I share with the right hon. Gentleman the Member for Sowerby (Mr. Houghton), to sift through what theEconomistthis weekend has called the over-alarmist views of Lord Shawcross. His speech contradicted itself so many times that there is no need for anybody to issue any contradictions from outside.

I say simply to the right hon. Gentleman the Member for Sowerby that I have made known to my colleagues in the Wider Share Ownership movement how much I deplore that particular outburst and hope that steps are being taken to see that that kind of thing does not occur again at that particular type of meeting. But unless, before this debate closes tonight, the House can be reassured by the Minister of State that the Bank of England is selling enough Government stock to maintain the intentions of the Chancellor of the Exchequer of strict control over the money supply, and unless that is spelled out, doubts and queries will continue to resound and obviously will get louder, because this is the central weapon which the Chancellor chose—and not many people quarrelled with him—to deal at any rate with the most excessive part of the present and expected wage claims during the rest of the year.

To Liberals, the most deplorable feature of the Bill is the utter lack of any attempt to reform the tax structure. In so far as there are any simplifications at all, they are merely to the clerical side of the most elementary parts of tax calculation. If Conservative Governments had started the computerisation of the revenue at the time it should have been started, even those minor clerical refinements would not have been necessary. This Government will leave the taxpayer even less able to understand why he is being charged his particular tax bill than he was five years ago when the Government came to power.

It does not seem to occur to Ministers on the Treasury Bench that the very same features of our complex tax system which deter people from entering the service of the Inland Revenue, equally appal the ordinary taxpayer who is the victim of the process, and particularly the elderly taxpayer who very often is subject, if he has a pension and is doing a couple of part-time jobs, to the most fiendish series of calculations and demands, many of which show that the issuing tax office itself does not understand the taxpayer's circumstances.

I concluded my remarks in the Budget debate by describing it as a "watch and pray" Budget and I said that we would have to pray very hard before the summer was out. The difficulties I had in mind have come upon us even earlier than I supposed possible, and unless the Minister of State is able to give some reassurance about the operation of money supply control many people will say that the Government are past praying for.

9.56 p.m.

Mr. A. H. Macdonald (Chislehurst)

The hon. Member for Worthing (Mr. Higgins) used the phrase "open-minded sincerity", implying, I thought, that that was a bad thing. I cannot think why. It is obvious that any Government will advance their proposals tolerably confident that they are right. At any rate, it would be odd for a Government to put forward proposals which they thought were wrong. I therefore cannot imagine why the hon. Gentleman used that phrase in a critical spirit.

However, the hon. Gentleman was correct later when he referred to the great gulf which exists between the two sides. I do not hesitate to support the Chief Secretary and the Chancellor in thinking it right that we should take sums by way of taxation and use them for expenditure on public services.

Several hon. Members, notably the right hon. Member for Taunton (Mr. du Cann) and my hon. Friend the Member for Heywood and Royton (Mr. Barnett), in disagreeing with many aspects of the Measure, combined in regretting that so little was being done in the Bill. They both described it as a Bill of wasted opportunities.

It is, in a sense, for this reason that I am inclined to welcome the Bill—precisely because it does very little. In previous Finance Bill debates I have advanced the theme that we should be extremely cautious before making tax alterations. Indeed, I have made this point in every such debate since I had the honour of being elected. Now the Chancellor is doing what I told him to do. I do not suppose that he is doing it because he paid note to what I said; but that does not stop me from claiming credit for what he has done.

We should be cautious before rushing too readily into tax alterations. The Chief Secretary said that it is common ground that we should do all we can to smooth the path of industry. I have felt for some time that what is a hindrance to industry and commerce is not exactly a high level of taxation so much as a fluctuating and uncertain level.

In a competitive commercial atmosphere, long-term planning is more than ever essential, but it is difficult because there are a number of variables—interest rates, wage rates and, obviously, sales —which must be prophesised as best they can be. I have, therefore, always felt it undesirable that we should wilfully add to those variables by making alterations in the tax structure, particularly since I suspect that in many ways such tax alterations have little more than a marginal effect.

I am thinking not only of substantial tax alterations but of what I regard as tinkering alterations. Some have come forward this year, and I regret them. They are often introduced because a loophole or anomaly has been noted, and they are introduced, with perfect justification, to modify faults that have been discovered. I am reminded of the knights of old who for excellent reasons put one piece of armour on after another and so added to the total burden which they had to carry that it was so cumbersome that if they were poked off their horses they had to stay lying on the ground.

It being Ten o'clock, the debate stood adjourned.



That the Proceedings on Consideration of the Lords Amendments to the General Rate Bill and to the Roads (Scotland) Bill may be entered upon and proceeded with at this day's Sitting at any hour, though opposed.—[Mr. Dobson.]

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