HC Deb 13 November 1970 vol 806 cc747-805

Order for Second Reading read.

11.5 a.m.

The Chief Secretary to the Treasury (Mr. Maurice Macmillan)

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

This is a short but important Bill which gives effect to the proposals outlined by my right hon. Friend in his statement on 27th October reducing both the company and personal tax. It is not in the accepted or ordinary sense of the word a Finance Bill altering the pattern of tax in any way. It deals with simple changes in the rate. In Clause 2, however, there are some small changes in the arrangements for marginal relief of small incomes to prevent them being excluded from the general reductions in income tax. Nor is it any more a Finance Bill than was my right hon. Friend's statement a Budget Statement. And even if it has been called a mini-budget this autumn, it in no way prejudices whatever he may choose to do in his maxi-budget next spring. It does not involve a budget judgment and can in no way prejudice the judgment he may well make in April 1971.

We have had extensive discussions of all the measures announced on 27th October and, relative to our normal procedure, there has been extensive questioning of my right hon. Friend, plus the two-day debate. This means that the very limited provisions of this Bill have probably been more discussed proportion- ately than usual. Therefore, I do not intend to rehearse all the arguments again and weary the House with repetitions of points which have already been made with considerable force, but I feel that I should deal briefly in general with the Bill before turning to its Clauses.

A great deal has been said about the iniquity of reducing taxation in this way in the course of which arguments have been developed which tended to imply that the standard rate of tax could never be reduced, for any reduction of standard rate of tax naturally gives greater benefit to those who pay the most tax, that is to higher incomes. But the same people, even after these changes, will be paying more tax both relatively and absolutely as before.

There is one other point I should make. The marginal rate of tax, which in the United Kingdom tends to be high, is reduced at all levels including for those who are just crossing the tax threshold. To insist that tax changes must always benefit the bottom end of the income scale most of all is, in effect, to reject for ever any alteration in the standard rate. I personally would be happy indeed to see hon. and right hon. Gentlemen opposite going on record with this view, for I agree with the judgment of the right hon. Member for Coventry, East (Mr. Crossman) which I have already quoted in the House as to the effect it is likely to have. Nor do I believe that hon. and right hon. Gentlemen opposite wish to go on record as asserting that the present tax rates are not too high. It is not, after all, the view expressed by the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) who has already deplored the extent to which excessive government spending has driven up the rate of direct taxation. So that there is considerable real support, not only in the country but in this House, for measures designed to reduce Government spending, first to avoid the further increase in taxation and secondly to allow reductions.

There are rather different considerations when we turn to corporation tax element. In the Bill this is concerned not so much with direct incentives to investment as to increasing the ability of companies to invest. Both the Trades Union Congress and the Confederation of British Industry have expressed themselves as worried about both the level and the quality of companies' investment programmes. Companies themselves are under some considerable financial strain. The profit trend is agreed by all experts to be dangerously downwards, and the pressure on company liquidity very considerable.

I do not think that there is any inconsistency between this Bill and other measures which the Chancellor has announced, such as the special deposits, credit restrictions and so on, as this amelioration of corporation tax has an immediate effect on the problem of liquidity, because when companies are due to pay corporation tax on 1st January 1971 some companies which have already paid will be repaid as soon as possible.

With the other changes to improve investment and liquidity incentives, we find that in 1970–71 there is help to the extent of some £60 million, as announced in the White Paper, and in 1971–72 help to the extent of some £90 million—in effect, an improvement of 6d. in the pound in corporation tax and the equivalent of another 6d. in the pound in the withholding tax, since it will enable companies to achieve a greater distribution without greater cost or the same distribution at lower cost without impinging on profits.

Mr. Joel Barnett (Heywood and Royton)

Can the Chief Secretary tell us whether company liquidity will be affected the other way by the money squeeze?

Mr. Macmillan

The impact of the measures announced by my right hon. Friend should mean that companies which have the profits and are being successful will be able to make the necessary investments, but there will not be, and this is the intention, the borrowing capacity available for consumption.

These two, the corporation and the personal tax ameliorations, make up the Bill. One might virtually call it a two and a half Clause Bill. Clause 2 is really a consequential modification of Clause 1. It will therefore not take very long to look at the Clauses.

Clause 1 simply reduces the standard rate of income tax by 2½ percentage points from 41.25 per cent. to 38.75 per cent. or, in the more familiar pre- decimalisation terms, from 8s. 3d. to 7s. 9d. in the pound—a reduction of some 6.1 per cent. As usual, this leaves surtax levels to be settled later, because surtax in respect of 1971–72 normally becomes payable on 1st January, 1973. This is the usual practice. So much for Clause 1.

I turn now to Clause 2. My right hon. Friend intends that every tax payer in 1971–72 should benefit from a reduction in income tax, but there are some cases where the reduction in the standard rate would not lead to any reduction in the tax bill. This could happen to older taxpayers whose income is somewhat above the limits for age exemption—£475 for single persons, and £740 for married couples. In this area the aged tax payer's liability is limited to 50 per cent. of the amount by which his income exceeds the exemption limit.

So the way to benefit these so-called marginal exemption cases is to reduce the 50 per cent. figure and paragraph (b) of the Clause reduces it to 47.5 per cent. Paragraph (a) deals with the small income relief on investment income where the total income does not exceed £450. Here, too, there is a marginal relief—of a slightly different character—which at present is governed by a figure of 55 per cent. Paragraph (a) reduces the figure to 52.5 per cent. These two reductions of 2½ per cent. correspond, of course, to the cut in the standard rate.

Clause 3 gives effect to my right hon. Friend's decision to reduce corporation tax from 45 per cent. to 42.5 per cent.—a reduction, again, of 2½ percentage points, or of some 5.6 per cent. The somewhat Delphic utterance in subsection (2) has to do with close companies, though I am bound to admit that it requires greater knowledge of the Statutes than most of us possess to determine this at first sight.

A reduction in the rate of corporation tax in the case of a close company has the effect of increasing the distributable profits and, therefore, of increasing also the required level of distributions. If close companies do not distribute to this required level they are subject to a shortfall assessment. In order to prevent this happening, subsection (2) of Clause 3 provides that the 45 per cent. rate of corporation tax is retained for this shortfall. The retention of the 45 per cent. rate is for shortfall only: a close company's profits will be charged at 42.5 per cent. in the same way as are those of any other company.

Also in Clause 3 there is special provision, in subsection (3), that where it is of benefit, effect is given to the reduction in the rate of corporation tax even in those cases where the company has been completely wound up and tax paid on profits at the 45 per cent. rate.

To sum up, this Bill implements part of the policies announced by my right hon. Friend on 27th October: Clause 1—the standard rate of income tax; Clause 3—corporation tax; Clause 2—certain adjustments to avoid excluding some specific tax payers. It does not deal with surtax, following the conventional pattern, nor does it in any way prejudice the Budget in 1971 or narrow my right hon. Friend's room for manoeuvre.

It still leaves, one must admit, the man earning £5,000 a year paying more tax than his counterpart in France, Germany, Canada, America or Sweden. It still leaves the marginal rate of tax on salaries of £10,000 upwards higher than all of them—France, Germany, the United States, Canada, Australia, New Zealand, the Netherlands and Sweden. But it is the first step—or, rather, a part of the first stage—in a change of policy, a policy which, as we have repeatedly emphasised both before and after the General Election was for changes to be made over the lifetime of this Parliament. As such, I commend the Bill to the House.

11.19 a.m.

Mr. Dick Taverne (Lincoln)

We come now to the pay-off for all the cuts in public spending and the increases in charges announced in the statement made by the Chancellor of the Exchequer. Whether that statement should be called a budget or a minibudget—or, perhaps, a midi-budget—is a matter of terminology. But the whole exercise was designed to make room for these tax cuts and I must first say something about the contents of the package as a whole as it is perhaps appropriate, after two and a half weeks, to look at its effects.

When the Chancellor of the Exchequer made his statement there was a certain euphoria on the benches opposite—although, perhaps, not amongst certain perceptive Members. But that euphoria did not last. Just over two weeks later the Government have found that the measures over which they have been cogitating for many months during the summer—the dash for freedom which was to galvanise the economy—has had anything but the desired effect. The mini-budget has crumbled in their hands.

The first question we must ask is, why did the Chancellor announce the cut in income tax then, in advance of next April's Budget? We would normally expect a Chancellor to preserve all possible freedom for manoeuvre, and despite what the Chief Secretary has said there is no doubt that he has circumscribed that freedom. We do not know what the conjunctural situation will be next April. It seems somewhat rash to prejudge the situation now.

Indeed, it has been suggested that the income tax cuts announcement was decided on only at the last minute. We can only guess at the reasons. Perhaps the Chancellor felt that the package needed a sweetener and that it would otherwise be too unpalatable. He probably also felt that by announcing the tax cut now he would provide a boost and change the climate of the economy—jolly, jolly sixpence, and all that.

If the latter is the explanation, the Chancellor sadly miscalculated. First, the announcement was immediately followed by a further announcement of a squeeze, and that alone negatived the boost. That was the squeeze on the banks.

Second, it has been increasingly realised that the impact of the package, far from helping immediate problems, was only to make the inflationary situation worse. No one has denied that when the Government came to power they faced a serious problem of wages inflation. Certainly, my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) made that quite clear in his Budget Statement.

At that stage the problem was one which we had in common with other industrial nations of the Western world, but since then it has become aggravated. Our inflation has accelerated in the past few months and our position compared with the rest of Europe has become worse. From all sides there are calls for action by the Government. No doubt the I.M.F. team is pressing the Treasury to make clear what its policy is on inflation. The O.E.C.D. has made its warnings only too clear, and even The Times, which has supported the Conservative Party loyally for the past year, felt bound to denounce in its editorials the lack of any policy to deal with the present crisis.

What has happened is that the Conservative Government, after their wholesale denunciation of what the last Government did, or tried to do, have prevented themselves, or feel that they have, from adopting the kind of measures which international and domestic opinion is now asking them to adopt, and from taking up, for example, the kind of suggestion by Mr. Vic Feather to talk about a voluntary incomes policy. All that they can offer is ideology based on the supposed effects of lower direct taxes and the absence of government.

If that policy had any merit at all, it could act only in the long term, over a period of years. But it would still be a long-term policy supremely ill-fitted to meet our immediate needs. It is seen to be inappropriate. Who would have thought that less than three weeks after the announcement of a cut in corporation tax and a sixpenny cut in income tax the Stock Exchange reaction would be such as to leave the Financial Times index 30 points down?

We heard many lectures in the past six years from right hon. and hon. Gentlemen opposite that what was needed above all was confidence, and that confidence could be provided only by a Conservative Government. Who would then have imagined that a broadcast by a Conservative Prime Minister in defence of Conservative policies would be followed the day after by a run on the pound?

There is no indication of any kind of action by the Government to deal with our problems. All we hear from the Prime Minister is that wages are a matter for the employers and employees, that it is all the fault of Sir Jack Scamp, that the rôle of the Government is to keep out, that their rôle is apparently to be restricted to the adjustment of tax rates. In his desperate repetition of this theme, the Prime Minister increasingly resembles Sir Anthony Eden, as he then was, at the time of Suez.

I turn to the measures in the Bill, starting in the reverse order by taking first the cut in corporation tax. I take it first because it seems to me to be largely irrelevant to the purpose for which it is designed, which is to increase investment and produce growth. However, the main determinant of the level of investment is not the level of corporation tax. It depends on industry's confidence in the future and the prospects it sees for the economy as a whole. I found myself, perhaps rather to my surprise, in agreement with an article in the Evening Standard of 14th October by Mr. Nigel Lawson. The point he made, for which there seems to be abundant evidence, is that increased capital investment is a consequence, not a cause, of growth. He said: Manufacturers invest in new plant and equipment to the extent that they foresee a rising demand for their products, and their view of the future is largely determined by what is happening now. This is amply borne out by our own recent experience. He pointed out that in the period of the Government of the Chief Secretary's father the consumer boom of 1958–60 in itself set off the investment boom of 1959 to 1961, which then dropped back sharply as a result of the squeeze initiated by the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd). Again, the capital investment boom resumed momentum after, not before, the reflation initiated by the present Home Secretary. We can take a more recent example from the years 1968 and 1969. In 1968 there was no lack of liquidity. We have admitted that in 1968 the money supply was allowed to grow by more than was healthy for the economy, yet 1968 was not a good year for investment. In 1969 the growth of the money supply was rigidly controlled, yet because of the reasonable growth achieved in the previous year investment in 1969 was increasing at a healthy rate.

What is the outlook today? We cannot say that the investment prospects are particularly favourable, whatever happens to the rate of corporation tax. When industry can see cost inflation rampant, with all the pressures that that entails on industrial profits, the depressing effect of that prospect is likely to be a more powerful factor than the effect of marginally greater liquidity brought about by the corporation tax cut.

The answer can be seen abroad. Holland, for example, has a higher rate of corporation tax than ours even before the cut. I take Holland as an example because its corporation tax system is much the same as ours. Its rate is 46 per cent., but the healthy growth of the Dutch economy does not make a high rate of corporation tax in any way an obstacle to a higher rate of industrial investment.

Mr. John Nott (St. Ives)

The critical point is the rate of tax on distributed profits. Can the hon. and learned Gentleman assure me that the rate of tax on distributed profits in Holland is lower than it is in the United Kingdom?

Mr. Taverne

I cannot tell the hon. Gentleman the exact rate of tax on distributed profits in Holland. I specifically chose Holland because in the Dutch case the ordinary income tax applies to dividends received. This is at varying rates according to the income. In the case of Germany and France, although the corporation tax might be as high as or higher than in this country, there are differential rates on distributed profits. The Dutch example is a very fair comparison.

I turn to the cut in income tax. Here we come to the core of the ideology, the philosophy expounded by the Prime Minister, the Chancellor, and their right hon. and hon. Friends, that a low rate of taxation is essential for a higher rate of growth. It is quite clear from international comparisons that that doctrine simply will not stand up. Comparisons with European countries show that if we take the total level of taxation in this country as a proportion of gross national product we are by no means taxed above the average. Indeed, this is admitted by Conservative economists. [Interruption.] This is the total level of taxation as a proportion of the gross national product. For example, I shall quote an article which appeared last year in the National Westminster Bank Quarterly Review by Lomax and Reading. I am deliberately citing from an article by those who share the view of hon. Mem- bers opposite. The authors admitted that we were not hampered by the level of taxation. The article was concerned with saving and, after setting out the savings, it said, after quoting figures: It is also clear … that Britain's poor savings performance cannot be explained by total taxes on household incomes, since Britain collects an average amount of total taxation from incomes and taxes an average proportion of G.N.P. in this way. Indeed, the previous article to which that was a reply, published in the same Review by Mr. T. P. Hill, showed conclusively that the only league table of taxation in which we came out near the top was in indirect taxation. Here, after the position of 1968 and 1969, we are about level with France. Again, the O.E.C.D. study published in July firmly concluded that a high rate of public spending was not an obstacle to growth.

So the Conservative case cannot rest on the total level of taxation. It has to fall back on the second leg of their argument, which is concerned with marginal rates and stands or falls by the test of whether these are so disincentive in their effect on personal initiative and hard work that they prevent a faster rate of growth. This has been endlessly and passionately asserted. It is a central tenet of the Conservative creed, a self-evident truth, it seems, that requires no evidence to support it. Indeed, there is no evidence to support it.

The Brookings Institute essay on low growth rates in this country carried a careful and elaborate analysis of the causes of low growth in Britain. It pointed to a number of factors but did not mention tax or marginal rates. It pointed to the lack of opportunity today for expanding the labour force, which was expanding before 1964 and in that way contributed to the greater Conservative growth rate of those years. It pointed to the residual inefficiency factor and made other detailed points. But there was not a sentence in it which could give comfort to the philosophy so dogmatically asserted by hon. Members opposite. Specific studies of the effect of taxes and incentives in the United States and Sweden showed none of the disincentive effects which the right hon. Gentleman has claimed today. The same was found by the Royal Commission and by other studies in Britain, referred to in the P.E.P. pamphlet by Brown and Dawson on personal taxation, incentives and reform.

It is perhaps only in the surtax range where one might find some evidence, but it is extremely thin there. It is clear that people do not refuse promotion because of taxation. They accept it because of the prestige of the job, the interest of the job and, indeed, the service they can give to the company. It is clear that much of the argument about tax incentives is based on myth when the vast majority of people in this country do not know what effective rate or, indeed, what marginal rate of tax they pay. Suppose for a moment, however, that this myth is founded on fact and that high marginal rates were a major deterrent. Let us accept the argument of the Government for the sake of argument. It becomes clear that the total effect of the Conservative package of which this is only a part is to increase disincentives and it also makes it clear that this belief does not apply across the whole range of incomes.

Anyone who has studied the effects of social security benefits, which depend on means tests, has been aware for some time that there are certain ranges of income in which there is a very high marginal rate of what might be called implicit tax. This was not a problem created by the Conservative Party. We were very well aware of it and concerned with it when we were in power.

There was a very clear analysis of the problem by Professor Prest in a research monograph published by the Institute of Economic Affairs, and called "Social Security Benefits and Tax Rates". In this he showed that the withdrawal of certain social benefits when a household reached a certain level of income had a quite astonishing effect on the marginal rates. In several cases, a household would actually be worse off if it earned more. The undeniable fact is that this deeply worrying position is worsened by every extension of the means test and hon. Members opposite propose to extend means testing with a vengeance.

The application of a means test after all implies that less benefits are payable as income goes up—in other words, that for every extra pound earned one can keep less of the extra earnings. How can the Government maintain that this has any other effect than that of a high marginal rate of tax?

The position is drastically worsened by the F.I.S. scheme. Those who receive the benefits will lose 10s. of F.I.S. for every extra pound they earn. In some cases I understand that they may be paying taxes as well, in which case their marginal tax rates are 50 per cent., plus 30 per cent., a total of 80 per cent. altogether. In fact, in some cases the tax rates will be higher still. Those who lose rate rebates, rent rebates or maintenance allowances for school pupils over 15, or have to pay charges for children at day nurseries, or have to pay student grants, or lose help for clothing and school uniforms, will find that their marginal rates of implicit tax will be jacked up even further.

It is as yet impossible to work out the full sums, since not only is the F.I.S. scheme in itself somewhat complicated but we do not yet know what the rent rebates are to be. But there can be no doubt that many of those marginal means-tested benefits will be relevant. What will happen then? Because it will take infinite sophistication to understand the full effects of F.I.S. in every case, there will be families where the wife goes out to work to increase the family income and may leave the family worse off than if she had not worked at all.

One cannot escape the conclusion that there is a total contradiction between the Conservative doctrine of means tests and selectivity on the one hand and their philosophy of the disincentive effects of marginal tax rates on the other hand, and I would be grateful if the Financial Secretary would deal with this fundamental point.

If the tax cuts had been concerned to help reduce the direct tax burden in a more just way, there is no doubt as to what form they should have taken. It is true that the direct tax burden increases over the years as earnings rise. There was a very pertinent letter in The Times on Monday in which Mr. John Hughes showed that, assuming a 7 per cent. increase in income, even after the 6d. cut, a family with two children or more with an income of £1,700 or less will be paying a higher proportion of their income in tax in 1971–72 than they did in the current tax year. The extra percentage is higher in the lower range of incomes. It will be 1.7 per cent. higher as a proportion of total income—again, a married man with two children who earns £900 a year today; and it will be 0.4 per cent. higher for a man now earning £1,400 a year. All this of course excludes the effect of charges on the total disposable income of the household.

If the Chancellor had been concerned to reduce the direct tax burden then he should have acted on the allowances. The right hon. Gentleman may say that that means one can never act on the rates of income tax, but this is a question of priorities and the most urgent necessity when one is looking at it in terms of reducing direct taxation is the necessity to raise the allowances.

I believe that with the sum required to lower the rates by 6d. he could have increased the allowances by some £40 a year, which would have meant a gain of some £13 per taxpayer evenly spread. This would have been a far more defensible way of relieving direct taxation.

What it all boils down to is that the central Conservative doctrine about disincentives is not only totally untrue but highly selective. It does not apply across the whole range of incomes. It does not apparently apply to the lower paid but only applies to the higher incomes.

The fundamental basis for the Conservative philosophy is what one might call the Charles Wilson syndrome. The gentleman in question was he who thought that what was good for General Motors was good for the United States. With hon. Members opposite it takes a different form: they believe that what is good for the wealthy must be good for the country as a whole. This has been the traditional cry of the rich throughout the ages.

The Bill is not only irrelevant to our immediate problems, but it aggravates them and it is totally unjust in its impact on society.

11.41 a.m.

Mr. David Madel (Bedfordshire, South)

This is my maiden speech and I should like to ask for that indulgence which the House has a tradition of showing towards maiden speakers.

My constituency was formerly represented by Gwilym Roberts and I should like to pay tribute to the energy which he displayed as its Member. No matter raised by a constituent was too small for him to investigate and he brought a colourful style to politics which always commanded the attention of his constituents and, I know, of the House.

Most people in my constituency are employed in the motor manufacturing and allied trades. They make a direct contribution to the balance of payments in the high quality goods which they produce for exports. South Bedfordshire, thank goodness, has never known severe long-term unemployment. It is a constituency at the centre of the political spectrum and it looks to the Government to provide the conditions for growing prosperity, calmer industrial relations and an ever-increasing proportion of the national income being made available for expenditure on education.

I must tell the Chancellor of the Exchequer that it is a matter of regret, and I hope temporary regret, that he has not yet felt himself able to ease some of the heavy burdens now resting on the motor industry. Surely it is agreed that the large sought-after rise in exports cannot be achieved unless there is a much more buoyant home demand and higher home sales. In order to finance the necessary expansion of parts of our social services, the Government are rightly looking for uninterrupted and increasing output from our factories. The cut in corporation tax and income tax has been welcomed by many in industry, but especially has the cut in income tax been welcomed by many of my constituents who put in much overtime and who wish to see greater take-home pay as a result of their extra effort.

The higher real earnings and higher production which are at the heart of the Government's economic strategy cannot be brought about simply by exhortation on the one hand and adjustments in the tax system on the other. What we need to do is to study much more closely the conditions at the place of work and the satisfaction or lack of it that work gives to the worker. We have so often turned the place of work into something which gives an employee very little or no freedom to exercise talent or skill. So often people do not determine how they do their work that they have become mere components in the modern production system and they feel that their identity is lost. We are constantly calling for greater productivity and greater effort to solve our economic problems and yet I wonder whether we have done enough research into the effects of years of confinement in our factories.

The modern production methods so necessary to our prosperity need intensive investigation from the human as well as from the scientific angle. I think that we should examine shift work much more closely. We take safety, health, welfare and the employment of women and young persons very largely for granted in the relentless drive for greater efficiency and prosperity. We must also accept that, without an occupational health service which studies these facets of modern industrial life in depth, we shall not get the increased economic activity which we all seek.

Making more intelligent use of our home resources is the key to economic expansion and it is the employer and the manager who is ultimately responsible for this. A rise in productivity cannot be achieved without a great in-increase in management education. This has been going on in America for about 40 years and yet it is only in the last few years that we have got started in this country. One still hears the old argument that managers are born, not made.

So many people in industry feel that their skills and potential are being ignored. What is needed is an annual review within companies to measure people's perfomance vis-à-vis the tasks that they have undertaken in the previous 12 months. It is impossible in large companies for top management to be fully aware of all the talents existing within the company. This is clearly a task for an enlarged personnel department with something like a management development officer and a team whose special responsibility would be to see that no one on the factory floor or in the office was overlooked or forgotten. Greater emphasis on career planning as an urgent development for both big and small companies is essential, for only in this way can the country move on to greater economic prosperity by releasing the tremendous potential of our human resources.

I have devoted a good part of my speech to the human problems in modern production methods because unless these are alleviated, the Government's hopes for greater economic growth will not be realised. Of course alterations in tax rates are very welcome, but the social service charges will now lead to increased money wage demands, which, I hope, can be translated into wage settlements by factory-by-factory bargaining and bargaining at plant level. With the Government moving away from an interventionist rôle in industry, a heavier than usual responsibility now falls on management to work with organised labour for that more humane and prosperous society which we all seek.

I thank the House for its indulgence.

11.47 a.m.

Mr. John Roper (Farnworth)

The hon. Member for Bedfordshire, South (Mr. Madel) now has behind him the ordeal which I face. He had a much more distinguished career than I as a debater at university and, to judge by his speech this morning, I am sure that he will have a distinguished career here, too. I was surprised by how much of what he said found my agreement.

I speak in the House for the first time mindful of the high standard set by my predecessors. Ernest Thornton, whom I follow, represented the constituency for 18 years and he was as widely liked in the division as, I am sure, he was in the House. His lifetime of experience in the cotton industry, including many years as a trade union official, and his experience in local government were a formidable background for his Parliamentary career. His integrity and kindness ensured that he was universally respected. I, personally, am most grateful to him for all the help and guidance which he has given me in recent years. I have learned greatly from him of the responsibilities and requirements for service in the House.

The Farnworth division of Lancashire is made up of four Lancashire local authorities. Three of them, the borough of Farnworth itself and the urban districts of Kearsley and Little Lever border the River Irwell. That river had a reputation for pollution. Indeed, there was an anonymous couple: 'I' stands for Irwell, for Irk and for Ink But none of those liquids is wholesome to drink". This summed up the position at one time, but I am glad to say that the most recent report of the river authority said: the reputation of the river which was nationally, if not internationally, known for its grossly polluted condition, is now unjustified. The state of the river is still not satisfactory, but it can no longer be described as notorious. The fourth authority in the division, the Urban District of Worsley, in the eighteenth and nineteenth century was the hub of the canal network which James Brindley built for the Duke of Bridgewater. Today, the division is the hub of a motorway network which serves industrial Lancashire and links us to Yorkshire. We are proud to have one of the most complicated motorway junctions in Europe under construction which has gained locally the name "Spaghetti Junction". One loop of that spaghetti, the M.63, stretches from Worsley to the borders of Altrincham and Sale, the constituency of the Chancellor of the Exchequer. Thus it is perhaps not inappropriate that I should make my maiden speech in this debate. I do so with some trepidation, knowing the pitfalls facing Members dabbling in matters of finance.

In my constituency there will no doubt be some who will welcome the Bill, the wealthy, healthy bachelors who will gain substantial advantages from the tax reductions. There will be others who will welcome it in ignorance, ignoring the other part of the Chancellor's package which will raise the charges for school meals, evening classes, council-house rents, drugs, spectacles and dental treatment. But I am sure the majority of my constituents, while welcoming the extra 4s. or 5s. a week it may bring them, will see that it does not go very far towards dealing with the extra expenditure their families will be involved in as a result of the package announced earlier.

The Measure is openly and avowedly redistributive. The bigger the income then the fewer the responsibilities and the greater the benefits. It compares very unfavourably with the Budget brought in by the noble Lord, Lord Butler, on the last occasion the Conservative Party returned to power after a period in opposition. In the 1952 Budget, which was bitterly attacked from the Opposition benches for the cuts in food subsidies, at least when it came to income tax the then Chancellor used such relief as was available to increase personal allowances and to widen the scope of the reduced rate bands. On that occasion the Chancellor concentrated relief, as my hon. and learned Friend the Member for Lincoln (Mr. Taverne) suggested, at the bottom of the scale, and this had its effect throughout.

Apart from the social objections to the Bill, I am sceptical as to whether taxpayers will eventually benefit from it. If the economic situation deteriorates over the next four months as it has over the last five months, it will be difficult for the Chancellor to permit the inflationary injection of £300 million into the economy in the year beginning next April. I cannot see how this Measure can be compatible with any Budget strategy he may be planning. There is no evidence that the rate of increase of wage-earnings will decelerate in the next 12 months. It is now running at a rate of 14 per cent. or 15 per cent. a year and there is unfortunately very little evidence of any industrialised country which has reached this sort of level of wage inflation being able to return to more normal rates of wage inflation without a serious economic crisis. Such evidence as one can find is that prices will rise faster over the next 12 months. An estimate of 8 per cent. price inflation does not appear to be exaggerated at present. In those circumstances the additional reflationary measure which the Bill provides could only be harmful. I suggest that either this Measure will never be implemented or that the Government will have to eat their words and introduce an incomes policy. It is most likely that they will have to do both.

If the Chancellor had wanted to honour his election promise he would surely have done better to start with selective employment tax. I must declare that my association with the Co-operative Movement may colour my views in this regard, but the same sum as is being distributed through the reduction in the standard rate of tax could have been used to reduce selective employment tax by 50 per cent. I suggest this would have had a far less inflationary effect. I am certain that such a reduction would have had some effect in moderating the rise of retail prices and could have proved part of a strategy to deal with the problem of inflation.

I should apologise to the House if I have strayed from the convention of non-controversial maiden speeches in what I have said so far. The two final points I should like to make are, I hope, more in keeping with that tradition.

We have heard already a good deal about incentives and disincentives. My hon. and learned Friend the Member for Lincoln has made considerable reference to them. As he said, the evidence is by no means clear. What is clear, however, is the extent to which people overestimate the rate of tax which they are paying. The pilot study by C. V. Brown reported in the Scottish Journal of Political Economy shows that this is largely due to a misunderstanding of the earned income allowances. Hon. Members on all sides of the House will have had the experience of being assured repeatedly by constituents that they are paying 8s. 3d. in the £ out of every extra £1 they earn.

In spite of the propaganda of the Revenue, as long as people are earning less than £80 a week, the fact that they are paying 6s. 5d. in the pound at the most just has not got across. Now we have a Bill which will make the marginal rate for wage-earners 30.138 recurring new pence in the pound. It is very unfortunate that the Chancellor did not include in the Bill provision to establish an earned income rate of 30 per cent., 6s in the pound, and in place of earned income relief an unearned income surcharge of two-sevenths. I know this would have had consequential problems about allowances and the particular problem of the advantage given to those with incomes beyond the present earned income limits, but those could perhaps have been ignored up to the level of surtax and included in an adjustment to surtax rates above that level. If there is anything in the incentive arguments, such a clear statement as to the rate—6s. in the £—would surely have an effect of stimulating effort. Perhaps the Bill is not the place for such a change, but I hope that the Chancellor will bear it in mind for the future.

The other omission from the Bill is that there is no Clause modifying the claw-back provision. There would have to be such a Clause if the Government had honoured their pledge to raise family allowances. We have heard in other debates a number of reasons why such action was not taken. I believe that one reason is that claw-back is unpopular, and that it has the reputation with the Revenue and Treasury for being unpopular. This is because of the administratively clumsy way it was handled when initially introduced in 1968. People suffered increased claw-back or deductions from tax in July of 1968 in anticipation of getting increased family allowances in September 1968. They had no explanation of what was happening at the time and therefore claw-back became undeservedly unpopular. It was not properly explained to taxpayers. I hope that in any future use of family allowances and claw-back from the better-off this administrative clumsiness will not be repeated.

It is as easy to suggest modifications to income tax law and practice as it is for the Revenue to reply that they are too overworked at the moment to take them into account. I think that there is a vicious circle about tax reforms. There is never time to make a substantial reform to the system, and a succession of modifications is made which result in the situation becoming worse.

The Bill does nothing about improving the structure of the tax system, and as I have suggested, it is socially and economically mistaken. I thank the House for its indulgence.

12 noon.

Mr. Peter Hordern (Horsham)

It is my happy task to congratulate my hon. Friend the Member for Bedfordshire, South (Mr. Madel) and the hon. Member for Farnworth (Mr. Roper). Both spoke movingly about their predecessors and about their respective constituencies.

My hon. Friend brought into the debate a very human element which is often lacking in our stern appraisal of tax matters in financial debates. He spoke warmly of the human problems which confront those who work on the shop floor in dull, boring and repetitive jobs. I am sure that the House will welcome future contributions from my hon. Friend.

At the same time, I must say how impressed I was with the manner of the hon. Member for Farnworth, though not entirely with his arguments. I am sure that the House will hear a great deal more from him and that his contributions will be valued over some time to come—at least until the next election.

Listening to the hon. and learned Member for Lincoln (Mr. Taverne), one would scarcely have thought that the last six years had occurred at all. One would have thought that we had been living in a complete vacuum. It was extraordinary to hear so much criticism of this Government so early from a member of the party responsible for increasing taxation by some £3,000 million, for introducing a statutory prices and incomes policy which failed and which it was forced to drop, and which in the three months before the election pumped more money into the economy at a faster rate than at any period in our history. It is that increase in the money supply which is the root cause of the inflation from which we suffer today.

The hon. and learned Gentleman said that there was no real evidence that high taxes on income were a disincentive. I can only assume that the party opposite, if the dreadful day ever occurred that it assumed power again, would follow its previous examples and increase taxes once again. I can only imagine that it would meet with the same fate that it has always done.

Mr. Taverne

I did not say that I assumed that it had no disincentive effects. I said that there is no evidence that it has a disincentive effect. Perhaps the hon. Gentleman can explain what evidence he has found.

Mr. Hordern

There is a good deal of evidence to be found in the Jones Report on the so-called brain drain.

Mr. Barnett


Mr. Hordern

Yes. I remember reading that report with interest since its publication followed a visit that I made to the United States, in the course of which I went to a number of research laboratories. In every one I met British scientists who told me that the reason why they were working in the United States and not in Britain was their expectation in future years that they not only would earn higher salaries in the United States but would be able to retain more of what they earned. I think that that is concrete evidence. But, of course, the hon. and learned Gentleman can happily stick to his policy of increasing taxation, if that is what he wants to do. After all, it has been followed by all Labour Governments. For my part, I welcome the first reduction in income tax that we have seen for 12 years, and I congratulate my right hon. Friend on proposing it.

Comparison with other countries is a game that we play in almost every financial debate. It would be difficult to think of an hon. Member engaged in such a debate who was not able to produce a very good example to support his point of view. However, the argument which hon. Gentlemen opposite often advance is that if social security contributions are added to the tax that we pay, we do not compare so poorly with other countries. Other countries have very high social security contributions. But the point is that taxation and social security contributions have increased rapidly during the last six years, and, even more important, when one looks at the benefits which these social security contributions produce, one finds that as a proportion of the gross national product the benefits account for only 6.4 per cent. in the United Kingdom, whereas in the Netherlands it is 16.2 per cent., France 17.7 per cent. and Western Germany 19.3 per cent.

Not only is taxation very heavy as a proportion of the gross national product; in its incidence it is extremely high on direct taxation, especially at the top levels at the marginal rates. On an earned income of £7,500, the proportion taken in tax in the United Kingdom is 34.5 per cent. In the United States it is 19.9 per cent., in Western Germany it is 27.6 per cent., and in France it is 19.3 per cent.

That is not the worst of it. Taxation has been extremely high in this country not just because we have been spending far more than other countries by way of public expenditure on such desirable objectives as housing, hospitals, roads and schools, but because we have perpetuated for many years a system of subsidies created when conditions were totally different. For that reason, I welcome the economic statement and my right hon. Friend's evident determination to cut taxation and to concentrate increased resources on the sectors where they are most urgently required.

The best way to encourage savings is to reduce taxation. But, in addition to encouraging savings, in our situation we have to defer present expenditure. No hon. Member can look at the figures of consumption with anything but dismay when he sees how how they are compared with the proportions spent on consumption in other countries. My right hon. Friend will have to devise further methods to encourage savings more directly.

It might be an idea to increase the allowance at present offset against taxation on insurance premiums from two-fifths to three-fifths to achieve a deferment of expenditure and a direct encouragement to savings. I take the same point about corporation tax. Taking companies and shareholders together, as one must, they are more highly taxed here than they are in most other countries. For that reason, we welcome the reduction of 2½ per cent. in the rate of corporation tax, combined with the proposal for 60 per cent. depreciation allowances.

I wonder, though, whether it will be the most effective way of increasing manufacturing investment. The hon. and learned Gentleman knows how very poor has been our rate of manufacturing investment when compared with the records of other countries. It has been our most constant concern and should still be today. What worries me is whether the reduction in corporation tax will of itself encourage manufacturers to set aside more for plant and machinery or whether we should not change completely the method of corporation tax. It is not without significance that a country with one of the best records in manufacturing investment is West Germany. There, a company is obliged to invest in new plant and machinery. If it does not, it is taxed very heavily. There is much to be said for introducing the West German system of corporation tax here. There is a high rate of tax on retained profits against which manufacturers can offset their plant and machinery and pay a low rate of corporation tax on distributed profits. That would make manufacturers think twice before sitting on their profits, as they are still able to do today.

It is still possible in our system, even with a reduction in corporation tax, for the survival of the fattest to proceed apace. That is one change in the system which I hope that my right hon. Friend will consider carefully in the months leading up to the Budget.

Of the problems with which we shall have to deal during the coming months and years, many were caused directly by the six years of Labour Government. The particular problems now facing us—mounting inflation and a very low level of manufacturing investment—are the two which need to be tackled more directly, perhaps, than these changes in taxation are able to do.

I greatly welcome the change in emphasis, in particular the total change in direction, which these changes in taxation have brought about, and wish my right hon. and hon. Friends all good fortune in the further changes which I am sure that they will make in the next Budget and in succeeding ones.

12.10 p.m.

Mr. John Horam (Gateshead, West)

I am happy to be the first hon. Member from this side of the House to be able to congratulate the two hon. Members who have made their maiden speeches today.

The hon. Member for Bedfordshire, South (Mr. Madel) made a very warmhearted speech and one full of common sense. He spoke about individuals in factories becoming mere components in the modern production system. This is a danger of modern industrial life. We on this side welcome the hon. Gentleman's acute and sensible comments on this matter.

In one other respect I cannot welcome the hon. Gentleman's appearance in the House, because he takes the place of a Labour Member. Indeed, I also understand that he is an advertising executive. He replaces Mr. Gwilym Roberts, who had a special concern for consumers. However, I can certainly welcome the hon. Gentleman for his cogent and warmhearted contribution to the debate.

Next, I welcome my hon. Friend the Member for Farnworth (Mr. Roper) and congratulate him on his maiden speech. He began by a very deft and amusing tour of his constituency. As I remember, the Labour Hall in Farnworth is called the "James Maxton Hall", which is something which will commend itself to this side, as also did my hon. Friend's cogent and well-informed contribution to the debate.

The Government have asserted throughout all the recent debates about the measures proposed in the Bill that they are seeking to achieve a greater degree of incentive; yet throughout all the days of debate, both inside and outside the Chamber, the Government have not been able to advance any serious sociological evidence to support the contention that there is a connection between marginal changes in the rate of taxation and incentive. Indeed, all the serious research evidence has come from this side of the House and has been to the effect that there is no such connection. I made a short contribution on this point in the debate on public expenditure and taxation. My hon. and learned Friend the Member for Lincoln (Mr. Taverne) gave a far more persuasive and comprehensive account of the evidence today.

Yet we have heard nothing from the Government side on this point. One would expect the evidence on this issue to come from this side, because the sheer economic logic points to the fact that there should be no connection between marginal changes in rates of taxation and incentive. A reduction in taxation has two effects. It has a substitution effect, in that it is made more attractive to work as opposed to not to work; so there will be an incentive to that effect. Equally, there will be an income effect, which means that an individual receives more money for any amount of work he does and can therefore reduce his effort while maintaining his income. There will, therefore, be a disincentive on that side. The two pull against each other and the likely effect is therefore neutral. This is supported by the evidence about which we have heard.

Indeed, the only incentive that I can see resulting from the measures put forward by the Government is for individual workers to make higher wage claims.

In addition to this point about whether marginal changes in taxation are an incentive, we have heard considerable talk about the need to help the wealth creator. Accepting for the moment that there may be a need to help the wealth creator, there are other ways of helping him which are far more attractive than by a reduction of 6d. in income tax.

For instance, one of the things that the wealth creator is up against is the wealth conserver. There are many individuals and families with large inherited fortunes. These individuals and families control large slices of industry and agriculture. They are influential in the City, in brewing, in glass making, in shipping, and in farming. These individuals and families perpetuate their influence from generation to generation. They often employ the wealth creators, the very dynamic individuals who seek to make money for themselves in some capacity or other.

The wealth conservers generally ensure that the effective control of the organisation remains with them and does not go to new people. If that balance between the wealth conserver and the wealth creator is to be changed, much more can be done about it if there is a change from estate duty to a properly worked out gift tax rather than by small changes in income tax. If there were added to that a measure to achieve an annual tax on wealth, some contribution might be made towards the incentive for capital to be used more effectively than it is now.

Thus, if the Government are serious about helping the wealth creator, there are other ways of doing it which do not have the harmful effects of the measures they propose. It may be that it is not so much the distinction between the wealth creator and the wealth conserver that the Government are worried about. It is simply that they admire wealth for its own sake, however it may be acquired.

My final point connects with what the hon. Member for Horsham (Mr. Hordern) said about the need to tackle the problems of inflation. This Measure will have a harmful effect on any serious attempt to cope with this problem; for inflation is caused not only by economic factors, but also by social and institutional factors. It is caused, not only by companies seeking to rebuild their profit margins and, therefore, increasing prices, but by ordinary people, because they think that prices are rising too fast, trying to protect themselves against this development by putting in wage claims and influencing their trade unions to that end.

If the problem of inflation is to be properly tackled, a total strategy is needed which takes into account not only the economic factors but also the social and institutional factors.

How can any attempt be successful if the very social and institutional bodies whose agreement will have to be secured to achieve success in coping with inflation are affronted? Will a policy which makes it more difficult for a working man to earn a decent wage and which affronts the trade unions whose co-operation will be needed in combating inflation succeed?

The Government accept the diagnosis of inflation. They accept that there are social and institutional factors as well as economic ones. They are one of the prime elements in trumpeting this factor. They place too much emphasis on the argument that wage claims are an element in this. Therefore, it is illogical for the Government to argue that they can only use economic measures to combat inflation and it is only economic measures, if they had any measures at all, which they are using in the short term. It is not only illogical but disastrous, because if they ignore the social and institutional factors behind inflation they will have to pursue even harder the economic measures necessary to cope with this problem. In fact, deflation will have to be far worse than possibly since the war if it is to have any success, and that is a recipe for disaster.

12.20 p.m.

Mr. William Hamling (Woolwich. West)

One of the questions raised in this debate is the high level of taxation. That is one of the reasons given for the introduction of the Bill. It was one of the issues discussed at the last General Election. One of the points actively pursued in my campaign was the contradictory view put forward by right hon. and hon. Members opposite that we could enjoy the present standard of public and social services and improve it and, at the same time, cut taxation all round.

There is nothing wrong with high taxation if it is accompanied by fair distribution. There is nothing wrong with high taxation on the wealthy in order to improve the standards of public service and social services which are mainly enjoyed by people who are not so well off. My party has always adopted that view. The logical conclusion of the Gov- ernment's view is that we should go back to the times of the nineteenth century when there really were incentives for the wealthy who were not taxed in anything like the fashion that they are now. But would anyone say that that was a good life for most of the people?

The argument which lies behind a good deal of this debate is whether we should pursue policies designed to give incentives to wealthy industrialists, land owners and people like that at the expense of the good life of the community as a whole. The Government have set out to turn back the clock, away from the pursuit of the good life for the community as a whole in favour of giving incentives to the wealthy.

The Bill is concerned with a cut in direct taxation. This was part of the economic package recently presented to the House. It must be considered against the background of the Government's view on taxation, namely, that direct taxation is too high and that we should pursue a policy of increasing indirect taxation and reducing direct taxation. One of the purposes of the package was to increase indirect taxation. The Bill gives benefits to wealthy taxpayers, but it has been made possible only because the burdens on other taxpayers have been increased in the form of indirect taxation—taxation on consumption, increased food prices and impending import levies which are indirect taxation affecting taxpayers with lower incomes and, to a far lesser extent, the wealthy taxpayers.

The Bill is to be financed by cuts made in the social services in the sense that charges will be imposed on the social services paid for by taxpayers in the lower income group. Therefore, the Bill will be financed by a process of redistribution which runs counter to all the practice of this country over the last 70 years. Redistribution away from the lower income groups towards the high income groups: that is what the Bill is about, that is its philosophy.

I will benefit from the Bill far more than I will be penalised by other aspects of the Government's economic package. But let no one suppose that the views of right hon. and hon. Members are dictated by questions of personal advantage. I am quite prepared—and here I quote from the speech which I made in the last election—to pay high income tax in order to finance the social services and to benefit the lower paid. That is my view and the view of my party.

But there is a growing tendency towards, not only more indirect taxation, but more regressive taxation in other fields. We are not only concerned with indirect taxation. We are also concerned with the possibility of other legislation to be introduced by the Government. I have in mind particularly charges in the form of insurance contributions and health contributions. We have only to look at the record of the Conservative Party in office to know what will happen.

From 1951 to 1964 the Conservative Government, year by year, financed social security and the Health Service increasingly from contributions, which means the imposition of a poll tax on the middle income ranges. We know what the policy is—that the people who enjoy the social services should pay for them. That means a poll tax.

The Financial Secretary to the Treasury (Mr. Patrick Jenkin)

Perhaps the hon. Gentleman would permit me to intervene merely to correct a misapprehension. When the National Health Service was introduced the contribution on the stamp represented about 20 per cent. of the cost. By the time that the Conservative Government left office in 1964 it was less than half that, which does not bear out what the hon. Gentleman is saying.

Mr. Hamling

Perhaps the hon. Member will look at the speech which I made in the House two years ago in which I spelled out in detail all the increases in contributions and the total burden of insurance contributions as a percentage of the income of the Exchequer. From 1951 to 1964 it had increased. The proportion of income which the Government received from taxation in that form was far higher than it had been in 1951. I hope that the hon. Gentleman will look up the figures which I quoted on that occasion. If he does, he will find that what he has just said is not correct.

Insurance contributions are regressive and, in so far as they are increased to finance the social services and to reduce the burden on the Exchequer and on the wealthy, that is a shift of taxation on to the middle income groups and away from the wealthy. The Government say that the social services are to be paid for more and more by the people who consume them. That is their philosophy. The Bill is the other side of the coin. It has been possible to introduce the Bill only because that is the Government's policy.

Yesterday it was announced in the Press that freedom is to be given to local authorities. This is another aspect of the Bill which we should consider. One reason for high Government taxation in the last five years has been that the Labour Government increasingly made social services a charge on the national Exchequer. In my own Borough of Greenwich, two-thirds of the rate that we levy as a borough is financed by other contributions, by the rate equalisation scheme and particularly by central Government grants. If the Financial Secretary wants to look up the figures, I hope that he will look up the speech I made two years ago giving all these details.

Increasingly, we put upon the national Exchequer the burdens which have hitherto fallen on the local ratepayers. Increasingly, we were expecting the taxation to be shifted from the regressive tax of the local rates to the national Exchequer. We know what the Tory policy in this regard will be: they will give local authorities freedom and they will reduce the amount paid by the Exchequer and call upon the local ratepayers to pay more.

The Bill is an example of Tory taxation philosophy. The Tories are bent on reducing the taxation of the wealthy to allow them to opt out of social responsibility. The Bill has been financed by cuts in the social services and by future cuts in the development of those services. Have we, for example, seen the last of the charges on the Health Service? I wonder. Time will show, but some of us have grave suspicions. I do not welcome the Bill at all.

We are in conflict with the philosophy of the party opposite that the wealthy will work only when they are given these great tax reductions. What about the good life? What about social conscience? What about the obligation on the strong to help the weak? That is a conflict of philosophy between the two sides of the House, and I am sorry that one of the first acts of the Government should be to betray their real preference in taxation for putting more and more burdens on people in the middle income ranges and the poorer sections of the community so that they can relieve the taxation of the wealthy.

12.32 p.m.

Mr. Charles Curran (Uxbridge)

I listened attentively to the speech of the hon. Member for Woolwich, West (Mr. Hamling), and it seems to me that the arguments that he is using—

Mr. Speaker

Order. I am sorry to interrupt the hon. Member, but it will help the reporters if he speaks up.

Mr. Curran

I am sorry, Mr. Speaker; I am not often accused of not speaking up.

I have listened attentively to the arguments of the hon. Member. He is using arguments which are the common stock of the Labour Party, and yet it seems to me that those arguments completely ignore the realities of 1970. I do not see any ground for suggesting, as the hon. Member suggested, that we on this side are indifferent to poverty. It is not justifiable to say that we on this side are any less concerned about the victims in our society than are the Labour Party. The question of fact is how we can best help them. I invite the hon. Member to agree that we can help the weak and the victims of our society only to the extent that the country is prosperous.

The key fact about England over the last six years is that our rate of economic growth has dropped and dropped. It is now down to less than 2 per cent. a year. On a growth rate of that kind, it is simply not possible for the country to provide as much money as it should for the weak, the sick, the helpless and the other victims in our society. It is not any good expressing sympathy with them unless we are prepared to adopt a policy which will enable us to help them.

I therefore suggest that the Government are quite right in applying themselves first and foremost to the question of stimulating the growth rate. Unless we can get the growth rate up, the country will simply not be able to afford to provide the money that we ought to provide for the non-competitors in our society. The point of substance between us, on which we differ from the Labour Party, is simply how we are to stimulate a rise in the growth rate and how we are to make the country more prosperous and, therefore, better able to finance the cost of looking after the casualties in our society.

The Labour Government tried for six years to get a rise in the growth rate by means of State direction, State intervention, State supervision, and so on, and it was a failure. So far from getting a rise in the growth rate, so far from getting the rise in the growth rate which it had confidently asserted that it could achieve before coming into office, Labour presided over a steady fall in the growth rate. I suggest that this was the direct result of Labour's philosophy. Labour simply refused to recognise the legitimacy of the acquisitive appetite. It simply refused to accept that the profit motive should be stimulated. I suggest that to expect a rise in the growth rate while condemning the acquisitive appetite is like expecting a rise in the birth rate while putting a taboo on lovemaking.

If we are to get a rise in the growth rate, we must accept the facts about human beings and we must recognise that most of them are people who work because of the acquisitive appetite. That is just as much true of workers as it is of employers. Therefore, the Government's strategy, which seems to me to be completely justified, is to stimulate the acquisitive appetite—I do not see why we should run away from these words—by means of tax remissions.

When the hon. Member who preceded me talked in favour of high taxation, I wondered what constituency he represented.

Mr. Hamling

Woolwich, West.

Mr. Curran

I wondered how that argument went down there. I represent a constituency in West Middlesex which, I imagine, is not very dissimilar from the hon. Member's constituency. I have, as no doubt he has, a very large number of electors who are workers. My experience with them is that they strongly and vehemently object to high taxation upon their earnings.

Mr. Hamling

I made this an issue in the election. I spoke about it at every meeting I attended. I said that we wanted to have a high standard of public service. I said, "If we have one, you must be prepared to pay, like me, as a taxpayer"—and I was re-elected. [HON. MEMBERS: "Only just."]

Mr. Curran

I was rather more successful than the hon. Member: I was successful in defeating a Labour candidate by using very much the same argument as the hon. Member used.

I assure the hon. Member that I had this experience over and over again during the election. Worker after worker would come to me and bring me his pay slip. He would show me what his gross earnings were and what his take-home pay was, and he would tell me that the difference was too great. I am astonished that anybody with experience of the electorate can dispute that the worker strongly objects to the high proportion of his earnings which is siphoned off before he gets them. It is no use telling him, as, I imagine, the hon. Member for Woolwich, West might, that those deductions from his pay packet represent a social wage and that he gets the benefit of them through the social services. In my experience, this argument cuts no ice at all.

I have listened often enough, with a good deal of sympathy, to Labour M.P.s justifying high taxation by explaining the social wage. I have heard that kind of speech so often that I could make it myself. If Transport House cared to pay me a small fee, I should be willing to instruct Labour M.P.s how to make speeches on the social wage that would register with working-class audiences, They do not know.

I am sure that Labour Members are as aware as we are that the ordinary man considers only his take-home pay. That is what matters to him. It is no use telling him that the deductions to which he objects, the stoppages which he attacks, are to help him. He is concerned only with his take-home pay.

The Government are absolutely right to strike at direct taxation upon earnings, just as they are to strike at direct taxation on profits, because the same motives operate among workers and employers alike. They will not exert themselves unless it is worth while. If we want them to exert themselves more, we must make it worth their while to do so.

We have taken the first step. I hope that we shall take a good many more during our period of office. We are doing this not out of greedy, brutal materialism but because we are seeking to lift the growth rate to make this country more prosperous and thereby to enable it to finance on a bigger scale the whole process of helping the non-competitors in our society.

I decline to accept the assertion that this is an appeal to materialism. I repeat, we cannot hope to help adequately the casualties, the non-competitors, unless we make this country richer and thereby put ourselves in a position whereby we can finance this additional help.

I invite the Labour Party to recognise that it was not successful during six years in office in doing what I am sure it wanted to do. I invite it to agree that the Tory Party will be judged by its ability to succeed where Labour failed.

We, as the governing party, must accept the responsibility of lifting the growth rate and thus making this country more prosperous. Unless we are successful, we shall see a crisis in parliamentary Government in this country. The British people will not indefinitely tolerate perpetual inflation, a perpetual fall in the value of money, a perpetual rise in prices and a perpetual stagnation in the growth rate, which means that we must keep squeezing our welfare payments.

It is clear that Labour had no solution. Labour was in power for six years and achieved nothing. Because its failure was manifest the Labour Party is now in opposition. If we, after five years in Government, are equally unable to cope, I believe that the British people will draw a very plain conclusion. They will say: "Labour has failed to do it. If the Tories also fail, then it is clear that two-party parliamentary Government is unable to cope with the problems of the 1970s."

I do not believe that we shall fail. I do not believe that the Government will lose their nerve and permit the process of inflation and stagnation to continue indefinitely. Therefore, I applaud the steps which the Government have taken. I urge them not to yield to criticism but to go further. The first duty of the Prime Minister is to be bloody, bold and resolute. Unless he is, we shall fail, as Labour failed. I do not believe that we shall fail.

I welcome the proposals before us, not as the final instalment, but as the first step towards making this country richer, thereby enabling it to cope with inflation and Help the people to whom the hon. Member for Woolwich, West referred and for whom I feel as deeply and sincerely as he does. I want this country to be rich enough to do more than we are doing for the non-competitors in our society. We cannot do that unless we make this country richer. We cannot make this country richer unless we appeal openly to the acquisitive appetite among the producers of wealth. They are not the only people in our society. There are large numbers of people for whom the whole business of incentives is verbiage; it does not apply to them. But the comparatively small section of the community which is engaged in the production of wealth must be stimulated more than it is now, not so much in its own interests as in the interests of the rest of the country.

The policy adopted by the Government makes sense. I see no other policy before England which makes sense. For that reason, I am glad to support the first step which we have taken.

12.47 p.m.

Mr. Joel Barnett (Heywood and Royton)

I am delighted, on the first opportunity of my own maiden speech from the Front Bench, to congratulate the two maiden speakers who have taken part in the debate.

The hon. Member for Bedfordshire, South (Mr. Madel) made an excellent speech in which I am sure all hon. Members were interested. The hon. Gentleman referred to his predecessor, whom many of us knew very well. When Gwilym Roberts spoke in this House his voice alone was enough to make all love him—at least on our side. But I think that he was reasonably well liked by hon. Gentlemen opposite, too.

The hon. Gentleman made an excellent point when he talked about the need for an intelligent use of human resources, particularly in factories. This matter needs a great deal of examination. I hope that we shall be able to do much more research into it. I hope to refer later to certain aspects of workers in factories and the effect of this Bill upon them.

The other maiden speech was made by my hon. Friend the Member for Farnworth (Mr. Roper), whom I have known for a long time. We have worked together in the Fabian Society over many years. My hon. Friend spoke about his predecessor, Ernest Thornton, who again was a highly respected Member of this House for many years. Ernest Thornton did a lot of work in the Royton part of my constituency just after the war and I know how well respected he was there. It was good to hear my hon. Friend refer so kindly to him.

My hon. Friend's phrase about the wealthy, healthy bachelors liking the Bill was, I thought, very apt. I entirely agree. However, I am not sure that I agree quite so much with his argument about a 50 per cent. cut in selective employment tax—but I am not a co-operative Member, so that might have something to do with it.

I was pleased to hear my hon. Friend refer to the need for making the income tax system better understood by abolishing the earned income rate and having, say, a 30 per cent. or 6s. rate. As some hon. Members, know, for many years—I do not know whether my hon. Friend has read my speeches—Amendments to the Finance Bill have been put down by my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) and myself on precisely those lines.

I am sure that the House will look forward to hearing both my hon. Friend and the hon. Member for Bedfordshire, South on many future occasions, because they showed in the thought that they put into their contributions that they have a great deal to offer.

The Chief Secretary opened the debate by telling us that the Bill was not really a Finance Bill, a budget or a budget judgment. He did not need to tell us that. There is, clearly, no budget judgment in the Bill, in the package or in anything else which the Government have done since 18th June. As my hon. and learned Friend the Member for Lincoln (Mr. Taverne) rightly said, most of what the Government have done is irrelevant and in any case, to a large extent it does not take effect until April next year, and one assumes that the Government have decided that there is no need for decisions to be made on economic matters at this time. I find this rather strange in view of what was said before and during the General Election and is being said by commentators in all parts of the country and abroad.

There have been other interesting speeches which I hope to refer to later. The hon. Member for Uxbridge (Mr. Curran) did not deal with the speech of my hon. Friend the Member for Woolwich, West (Mr. Hamling), whose main argument concerned the re-distribution of the tax cuts. The Bill would be justified only if the reduction of 6d. in the standard rate acted to stimulate growth, and this was the burden of the hon. Gentleman's argument concerned the redistribution of illustration of how one could stimulate the acquisitive appetite by comparison with a couple in love, but, as I hope to show later, the 6d. reduction in the standard rate will have little or no effect in stimulating the rate of growth.

A stimulant to the rate of growth can come only from economic measures which improve the rate of demand and the general climate in which people are working. The Government have made it clear that the package, of which the Bill is a part, is neutral on demand. There is no economic stimulant in the Bill or anywhere else in the package, or in any Government measures since 18th June.

Mr. Curran

I am following the hon. Gentleman's argument closely. Nobody would say, certainly I would not, that the cuts in tax which we are discussing are massive, monumental and epoch-making, but would he not agree that they are a first and far from negligible step towards stimulating the growth rate? Does he not agree that if taxes upon earnings and profits are cut, to that extent output will be stimulated?

Mr. Barnett

I hope to show later that this is not necessarily so. I do not accept the hon. Gentleman's argument. He says that it is a first step, but, as my hon. Friend the Member for Farnworth said, by April there may have to be another step backwards. A budget judgment will have to be made some time, even if it is a negative one, and the Chancellor of the Exchequer may decide next April that the £315 million which he has decided to return to taxpayers will have to be balanced the other way to make up for the demand which he has created. The hon. Gentleman may be more optimistic about this being a first step than the current economic situation warrants.

We are told that the philosophy behind the package and the Bill is to enable us to get away from blanket hand-outs, so that, in the graphic phrase of the Secretary of State for Trade and Industry, we stop treating as lame ducks people who do not need help. That philosophy, if it did not collapse some time ago, certainly collapsed with the Bill, which gives the largest handout of all across the board.

The Secretary of State for Trade and Industry described what we had been doing in the past as "trying to put cream in the coffee by spraying it around in the dark". The Bill certainly hands out cream to the man earning £100,000 a year, who will get £2,500 a year in tax relief; but the man on £1,000 a year will get £3 a year. I am not sure at which end of the tax scale the "lame duck" is, but that is certainly spraying the cream around. The trouble is that the thick cream gets to one end of the income scale and the thin cream gets to the other, and it is so thin that it is more like the milk that has, unfortunately, been taken from the children to allow the cream to be so lavishly and indiscriminately handed out.

This is a very muddled philosophy. It is vague and ill thought out, particularly on incentives. My hon. and learned Friend the Member for Lincoln gave a large number of facts. Many right hon. and hon. Members on this side have given facts for many years, but they seem to fall on deaf ears. The hon. Member for Horsham (Mr. Hordern) could only reply to my hon. and learned Friend by referring him to the Jones Report, "The Brain Drain", which produced no evidence that the rate of tax had a disincentive effect and caused people to leave the country. No such recommendation was made in the Jones Report. The Government have not proved that there is such a disincentive effect, which is so frequently claimed and is now claimed by the hon. Gentleman. This was emphasised by my hon. Friend the Member for Gateshead, West (Mr. Horam).

It is often argued that the reduction of direct taxation will make people work harder. The phrase "wealth creators" was used by Ministers in the debate last week. Presumably they were referring to men aged between 25 and 45 earning from £3,000 to £10,000 a year, who will benefit from the Bill by tax reductions ranging from £42 to £195 a year. Surely it is insulting to those young executives to imagine that they will work considerably harder as a result of this tax reduction. I cannot believe that in practice they will be much affected by it.

Will the wealth producers, who get an average of 5s. a week as a result of the Bill really work harder? I doubt it very much. It may be that by reducing the marginal rate of tax from about 32 to 30 per cent. a few more will work overtime which they would not have done before. But there are people today who do not work overtime, not because they know they are paying 6s. 5d. in the pound, but because they think they are paying 10s. or even 15s. in the pound on that overtime.

Although it could be argued that by reducing the marginal rate of income tax from 32 to 30 per cent. more workers will work overtime, the House should ask itself whether this is something that we necessarily want to encourage. Is it necessarily the right way to get the growth mentioned by the hon. Member for Uxbridge? Is it the right way to get increased productivity?

Mr. Hamling

Surely the point of the Bill is that although industrial workers may have a cut in income tax, the other measures of the Government will vastly increase workers' indirect tax in the form of higher charges, increased prices, and so on, and that the industrial worker, who is supposed to be encouraged by the cut, will be taxed more by this Government.

Mr. Barnett

I agree with my hon. Friend, but at that point in my speech I was referring to the incentive and I was arguing that we should not necessarily be encouraging workers to work longer overtime. Indeed I have been looking at some of the research which has been carried out into this subject. There is an interesting reference in Research Paper No. 9 of the Donovan Commission to certain case studies: In one of these 56 workers were studied and when their average hours were reduced from 58.2 to 51.2 per week production rose by 22 per cent. The paper refers to another piece of direct research carried out by an American, David G. Brown. He reported that in 52 per cent. of the cases he examined reduction in hours did not result in a fall in output. Yet another piece of analysis by a man called Brechler concerned the relationship between output, employment and hours of work in Britain between 1950 and 1962 and suggested that the overtime hours may be relatively less efficient than normal hours.

There is surely little doubt that work done at the end of a tiring day or week is less productive than work carried out earlier in a day when people are fresh. This certainly applies to me as a Member of Parliament, and I imagine it applies equally to workers in factories and indeed also to executives. It must also be borne in mind that companies have to pay more highly for overtime work, which greatly increases unit costs.

We should be asking whether this is the right way to go about it and whether we should not be looking rather more closely at work in factories and advocating less overtime rather than more, since there is not one jot of evidence to show that overtime is beneficial to the nation or to the individual. Before further moves are made to encourage the working of additional overtime, I believe that a great deal more research needs to be carried out into the relationship between productivity and increased overtime.

I come to the other incentive that is said to be contained in the Bill, and that is the £60 million which will be received by companies in January. As I said in the debate on the package provisions on public expenditure, I believe that possibly some of this money will be spent in the right way. It is a hand-out from the blue. Companies, having already made their reserve for dividend and taxation, will suddenly find themselves with an increased amount of money.

But we have had no direct answer—although I asked for one when I intervened in the Chief Secretary's speech a little earlier—about the effect on companies of the money squeeze. To what extent will this counter whatever increased small amount of investment might arise from the £60 million? Whatever incentive effect there might be, the cream is spread quite widely when the Government distributes this £60 million. A good deal of it is bound to go to a large number of "lame duck" companies as well.

The Government seek to argue that the only criterion for a company is the making of a profit and that these are the only companies that can really be effective. This was certainly the argument used by the Conservative Party on investment grants. [Interruption.] Is the Financial Secretary disagreeing? If so, I should be delighted to hear. It is well known that in development areas new companies get no benefit from tax cuts in the first year or two of their life because frequently they have not the profits to gain from such handouts.

What evidence have the Government that a lower rate of corporation tax will induce a higher amount of industrial investment, a matter of what the Conservative Party has made so much in the last six years? They were constantly talking of the desperate need for industrial investment. But what have they done since assuming office? Even taking into account the cut in corporation tax, they have cut the amounts that companies will receive. I see that the Financial Secretary is not now disagreeing. Over the life of an asset companies will now receive less, so that even if the old system is not as good an incentive as one would have hoped, to remove it and replace it with something less is hardly likely to be a greater incentive.

The hon. Member for Horsham sought to use the West German corporation tax system as a reason for our moving to a lower rate of corporation tax, pointing out that the West Germans had a higher rate of industrial investment. This selective use of international comparisons is a little difficult to take. International statistics can be used to prove anything. The hon. Gentleman was trying to prove that because West Germany has a different corporation tax structure and a high rate of industrial investment, therefore the two things went together. But this is a false argument since there are many companies with levels of corporation tax equivalent to or higher than our own, with a substantially higher rate of investment than we have been able to achieve not over six years but over 20 years. It is foolish to take international statistics to try to prove a positive particular point on taxation.

The Government certainly cannot use international statistics or evidence of what has happened in this country in earlier years to show that cuts in corporation tax will necessarily mean an increase in industrial investment. Such increases occur largely when the demand exists and when companies feel that they need to produce more goods and therefore need extra machinery. As the Government are doing nothing to stimulate demand, there is nothing either in this Measure or in anything else they have done which will help them increase the rate of industrial investment.

So, without this evidence, this Bill is, as regards company taxation, as ill thought out as the rest of the Government measures. It depends on a mixture of faith, hope and blanket across-the-board charity to all companies, including the right hon. Gentleman's lame ducks. As to an incentive towards saving from this 6d. reduction, it has been clearly demonstrated that for those on, say, £3,000 a year and below there will be no opportunity to save, because the charges in the rest of the package will more than eat up that reduction.

What do the Government hope from those earning above £3,000 a year—those who are to gain from this Bill? Have they made an estimate of what level of saving will result from the Bill? One assumes that they must have made such an estimate; otherwise, how could the Chancellor of the Exchequer have arrived at his decision that the whole package will be neutral on demand? When my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) put it directly to the Chancellor of the Exchequer that he thought there would be some reflation as a result of these measures—and many commentators outside have said the same—the Chancellor of the Exchequer did not reply.

I hear the Financial Secretary say that they have it wrong but, if it is wrong, why do the Government not say so? If all the outside commentators are wrong and the Government have decided that the package is neutral on demand, why do not the Government give us the elements in the package affecting demand? Is it that the central capability unit has not yet worked it out, or does it not intend to look at these parts of the Treasury package? Whichever it is, the Government are under an obligation to tell the House and the country, if the package is neutral on demand, where the saving is to come from and how the whole package is balanced in terms of demand.

Mr. Gerald Kaufman (Manchester, Ardwick)

Would my hon. Friend, who is a distinguished expert in these matters, take into account one disincentive to saving, which is that by the reduction in the standard rate of income tax people going in for house purchase will now lose part of the tax relief they get? Hon. Gentlemen opposite to whom I have put the question are quite unable to quantify this, but it is a disincentive.

Mr. Barnett

I am obliged to my hon. Friend for his complimentary remarks. He makes an ingenious argument. However, as I do not speak for the Government, and have only just started to speak for the Opposition, I must leave it to the Financial Secretary to reply in rather greater detail to my hon. Friend's excellent intervention, as it will have some effect on the Government's equation, if they have made the equation, in arriving at their conclusion that the package is neutral on demand.

What does the Bill, and the package, do about the major problems facing the nation—

Mr. Eric S. Heffer (Liverpool, Walton)


Mr. Barnett

As my hon. Friend quite rightly says, nothing.

Whilst the Bill will, if anything, have a reverse effect on inflation, I do not go along with the hysteria that is at present being adopted by some right hon. Gentlemen and by other people outside the House. I listened at the weekend to speeches by my right hon. Friends the Members for Coventry, East (Mr. Crossman) and Southwark (Mr. Gunter) and by the right hon. Gentleman the Member for Wallasey (Mr. Marples). They spoke of inflation here as being, or likely to be, akin to that in Latin-American countries. I do not go along with that kind of hysteria. It is not necessary. But some action is needed, as my hon. and learned Friend the Member for Lincoln has said, and we certainly do not get any action in the Bill or in any of the rest of the package which the Government have introduced.

The Prime Minister was recently asked on television why he had not taken any action, as he had promised, to deal directly with inflation. He replied that he could not do so as the position was rather worse than he had expected on coming into office. I fancy the Financial Secretary is telling me that his right hon. Friend said nothing of the sort, but I have not seen any denial of it. The interview was reported in The Times of 10th November: Asked why the Government had not carried out its election promise of abolishing selective employment tax, Mr. Heath said 'We found that Government expenditure was rising faster than we had been led to believe and we found that the money supply had increased enormously beyond anyone's expectations.' I see that the hon. Gentleman now agrees that the Prime Minister said that he could not take this action because the position was worse than he had expected.

But the right hon. Gentleman could and did take some action to reduce taxation—but not to reduce selective employment tax. Here we have action to reduce taxation, but it is income tax that is reduced. So the right hon. Gentleman could have acted immediately, as he had promised to act, directly on costs by cutting some indirect taxes. The answer given by the Prime Minister in that television interview was quite obviously totally false.

But what does the Bill do to help to get the co-operation of the trade union movement on incomes? The claims are undoubtedly inflationary. Sir Jack Scamp, in a blinding glimpse of the obvious, stated that the claims are inflationary. This apparently shocked and disturbed the Prime Minister. But will the Bill help to abate these claims in any way, or will the rest of the package, which adds to the costs of every working family? The contrary is the case, because, again to the annoyance of the Prime Minister, workers can add up. They know when they are worse off. So this Bill does the reverse of helping to get the co-operation of the trade union movement on incomes.

Will the Bill persuade the trade unions to co-operate in the reduction of strikes, of which the Government have made so much? Again, the workers are not so blind as to fail to see its re-distributive effect. It seems to me that while the Government are taking time off from providing the vital measures that affect the country in order to give blanket handouts to their friends, they should not be surprised if others are not prepared to co-operate.

If the Government are seriously concerned about the problem of inflation and want to give themselves a chance of dealing successfully with it, their best opportunity of doing so will be to scrap these measures altogether, along with the Industrial Relations Bill, and then seek the co-operation of the trade union movement because without that they cannot begin to get to grips with the major problems facing the nation.

The Bill achieves one useful purpose in tying tax reductions to cuts in public expenditure. By doing this the Government have brought home to the country something which thousands of speeches would not have done, and that is the need for a fundamental re-examination of the sort of society we want to build and how it should be financed. Until now, we have all worked on the simple calculation that there are 25 million income tax payers and that, therefore, a reduction in income tax is popular.

The hon. Member for Uxbridge is right—of course it is popular to reduce income tax. But because of the way in which this present package has been tied to the income tax reduction I am not so sure that it will be quite so popular in the future. There are 25 million income tax payers but there are 55 million users of public expenditure, and increased charges to pay for this income tax cut is not what income tax payers had in mind when they were impelled to vote Conservative on 18th June. They thought that there were to be geniune cuts, not transfers resulting in their paying indirectly instead of through income tax.

They are now told by the Prime Minister that they are worse off unless they change their pattern of expenditure. What does that mean exactly? An article in the Sunday Express on 8th November put it more clearly. It was as usual by the right hon. Member for Wolverhampton, South-West (Mr. Powell), who said: Only if charges result in the corresponding public service itself being reduced has State expenditure been cut. This might perhaps happen as a result of full price for school meals; but probably the only true cuts in the whole of health and education are the abolition of school milk and welfare milk. Thus, the Prime Minister and the Government are saying, "You can be better off from the Bill if you give your children fewer school meals and no milk", and they should add that this is so if they are not ill and do not need extra prescription charges, if they do not use commuter trains—

Mr. Patrick Jenkin

There are no prescription charges for children.

Mr. Barnett

I was not saying that, but was talking about the parents paying them. The hon. Gentleman should listen. I was arguing that the parents will have more to pay if they are ill, more to pay if they use commuter trains, more to pay on their rates, and more to pay on their rents, both council and private. If they do not pay for any of those things they will be better off—and they will be even better off if they do not buy any food. But that is not what the 25 million income tax payers had visualised.

Mr. Idris Owen (Stockport, North)

Does not the hon. Gentleman agree that a vast number of the working people whom he claims to represent have had considerable wage increases to cushion the increased charges to which he refers?

Mr. Barnett

The hon. Gentleman is making a very interesting case, that the justification for the Government's measures is the level of wage increases. I am not sure that he will carry his Front Bench with him on that argument. I do not think that its logic will have escaped the Government, that the only way to make their measures fair will presumably be to allow all the claims in the pipeline. If that is the sort of spiral or vicious circle the hon. Gentleman wants to encourage in order to justify unfair measures, I do not think it is quite what his right hon. Friends have in mind.

I feel that the Bill will have the useful effect of making people realise that what they are getting from the income tax cuts is not precisely what they envisaged.

If we are to build a decent, civilised society, vast areas of that society will have to be financed by public expenditure. I do not think that the Government, for all their words, would want to deny that vast areas must be financed from public expenditure: police, defence, roads, education, the health and social services, pollution—all areas with which private enterprise certainly cannot deal.

I should like to see those things financed from a much higher rate of economic growth than we have been able to achieve. But meanwhile, if we want a fair society as well as a decent, civilised society, I believe that the Bill and the measures that go with it have hammered home that we cannot have those things by a massive switch from direct taxes to direct charges.

1.24 p.m.

The Financial Secretary to the Treasury (Mr. Patrick Jenkin)

The hon. Member for Heywood and Royton (Mr. Barnett) has made what he described as his maiden speech from the Dispatch Box. I offer him my warm felicitations on his appearance there and on his speech. He and I have debated for many years matters germane to this debate, and I look forward to crossing swords with him again.

At one point in his speech the hon. Gentleman demonstrated very clearly what he described as the philosophy to which his side of the House adheres, and where it is so distinguishable from our philosophy. That was when he referred to the Bill, which reduces taxation, as making the largest handout of all. I see that he does not dissent from that phrase. Does he really not recognise that what a tax reduction does is to allow people to keep a bit more of their own income? The hon. Gentleman laughs, but the fact is that that is how most people look at it.

Mr. Barnett

Surely the Financial Secretary accepts that there is not much opportunity for people to keep much of the money the Government are giving back to them when they must spend it by the method the Government have adopted of making them pay by charges?

Mr. Jenkin

The hon. Gentleman has very swiftly and wisely shifted his ground. A tax reduction is not to be regarded as a handout, but, among other things, as a measure of increasing consumer choice and allowing people to keep a bit more of what they earn.

I should also like to congratulate the genuine maiden speakers, if I may so describe them, my hon. Friend the Member for Bedfordshire, South (Mr. Madel) and the hon. Member for Farnworth (Mr. Roper). Like other hon. Members who have followed them, I greatly enjoyed their speeches. I was very impressed by what my hon. Friend the Member for Bedfordshire, South said about human relations and human problems in industry. We know that he speaks of these matters from a great deal of personal experience.

We very much look forward to the support of the hon. Member for Farnworth when eventually we abolish the selective employment tax, as we are pledged to do. I shall refer later to one or two of the other things he said.

This is not the time to go over again the whole philosophy underlying the statement of my right hon. Friend the Chancellor and the measures he announced on 27th October. I say simply that the Government were elected on 18th June among other things to end the process whereby Government expenditure rose year by year faster than the growth of the economy, resulting inevitably and inexorably year by year in an increased burden of taxation on the backs of the British people. This process was not only a major contributory cause of slow growth but was undoubtedly part of the cause of inflation.

My right hon. Friend's measures represent the beginning of the reversal of that process. The Bill is an essential element in that. I welcome the support my hon. Friend the Member for Uxbridge (Mr. Curran) gave when he recognised that basic purpose.

I should like to answer a number of specific issues raised, coming first to the point about incentives, which the hon. and learned Member for Lincoln (Mr. Taverne) and some of his hon. Friends discussed at some length. I do not agree with the hon. Member for Heywood and Royton that the inducement to people to work a few more hours of overtime is necessarily the only effect of increased incentives. That is to look at it far too narrowly. I agree with him that as a matter of organisation of work it is undesirable that people should be encouraaged to work long hours of overtime. It one good thing has come out of the years of the Prices and Incomes Board it is that it has brought home to many managements the desirability of altering payment methods to eliminate overtime.

The incentive case goes very much deeper than that. As the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) frankly admitted in an interview in The Sunday Times earlier this year, year, speaking of high rates of taxation, It has perhaps a slightly deadening effect on their attitude to work and life and initiative. That is true. It is not merely a question of looking at the extra hour's work, the extra output, if one is on piece rates, or the extra effort that the individual will put into the particular job. High tax rates and the consequent loss of incentive without any shadow of doubt have, as the right hon. Gentleman said, a deadening effect on the whole of life and work. The hon. Member for Heywood and Royton has persistently said that there is no evidence for this. It is a matter of simple human experience shared by millions of our country folk throughout the country, and they recognise it.

I come now to the point about the means test. I recognise clearly the dilemma posed by the hon. and learned Member for Lincoln. He was frank enough to acknowledge that, when he occupied my position, the then Government faced exactly the same problems. Of course, if one is going to attempt to concentrate help among the poorest and those most deserving of help, if one is going to make one's assistance in the Welfare State as selective as possible in order to give the maximum benefit possible to those who need it most, then inevitably one will come up against the problem of implicit tax rates.

But one is talking now about a minority, and indeed a relatively small minority of the whole population. The shape of our society now is not a pyramid but a diamond, with the mass of our people at about and above average wage levels in the country representing the centre, the widest spread, with the peak consisting of people with income at the top, and with a diminishing number of people, the very poor, at the bottom.

The argument which the hon. and learned Gentleman used about the means test and taxation is right when it refers to people at the lower part of the diamond. But if one is to give the selective help one wants to give one has to accept a high implicit tax rate and the loss of incentive which comes from them. What the evidence seems to show, however, is that, for the great majority even of those people, the loss of incentive does not have the effect of deadening the desire to work. I have thought over and over again how astonishing and commendable it is in the character of so many of our countrymen that, although the effect of a high implicit tax rate and the loss of selective benefits is to reduce incentive, nevertheless they will continue and want to continue to be, so far as they can, self-supporting and to work.

Mr. Taverne

Cannot the hon. Gentleman see plainly that what he is saying is that there are disincentives which apply to the rich but that those same disincentives do not apply to the poor?

Mr. Jenkin

I am not saying that at all. What I am saying that if one wishes to give the selective help one wishes to give one has to accept disincentive. That seems to me to be a complete non sequitur if one extends it, as the hon. and learned Gentleman did, to say that therefore incentives do not matter right across the whole board. That is manifestly untrue and I am sure that the great majority of people recognise it.

The hon. Member for Farnworth raised an interesting point. He asked why we did not deal with tax cuts by increasing the allowances. My right hon. Friend's purpose was to reduce taxation in such a way as to cut the marginal rate of income tax right across the board, and the only way of doing so was to reduce the standard rate. He also asked why we did not increase the family allowances with the clawback. As my right hon. Friend the Secretary of State for Social Services said in our debate recently, the fact is that the effect of the changes brought in by the right hon. Member for Stechford last April is that such a new change increasing family allowances with the claw-back would have given less to different families than the F.I.S. will give. Ours is a better scheme in present circumstances.

The hon. and learned Gentleman asked why we are introducing the cut in next year's income tax now. As my right hon. Friend the Chancellor said, it was in order to make sure that the benefit of the cut goes to P.AY.E. taxpayers from the beginning of the financial year. If we had waited until the Budget to make the cut, there would have been a three-month delay before they could get the benefit.

Like the hon. and learned Gentleman, I want to deal with corporation tax and then come in detail to income tax. It is a strange coincidence that, six months ago to the day, on 13th May, we debated an Amendment to the then Finance Bill to cut the corporation tax rate from 45 per cent. to 42½ per cent. I moved the Amendment myself and the House will be relieved to know that I shall resist the temptation to quote at length from my speech. But having re-read it, with all the advantages of the expert advice of the Treasury and the Inland Revenue, I do not detract from one single word of what I said.

I argued that taxation on company profits had increased under the Labour Government, and had increased sharply; that this was in marked distinction from the previous Tory Government, under which taxation on company profits had been reduced; and that this made non-sense of the statement by Jack Diamond—now Lord Diamond—that the companies were paying no greater proportion of their income in tax than they had 10 years ago. He conceded my point and said that the profile was "saucer-shaped".

In mentioning the noble Lord, Lord Diamond, I would like to add how much we shall miss him from these debates. However, I am sure that his particular talents will be of particular benefit to the debates in another place.

I argued also on that occasion that the climate of rising taxation on company profits was hostile to investment and that one way of encouraging more investment would be to reduce that taxation. Six months later, it gives me great personal satisfaction to be supporting a Bill which does just that.

The hon. and learned Gentleman said that the rate of corporation tax was largely irrelevant to the rate of investment. I can only imagine that he has never sat in on a meeting which has had to decide about an investment or capital for a new project, that he has never had to study a submission put forward on the basis of the return or pay-back which will be achieved as a result of the investment, because what he said is simply untrue.

It is quite untrue to argue that the burden of the tax on profits of the investment is largely irrelevant in deciding whether the investment should take place. I entirely agree with him that what is important—indeed, of over-riding importance—is that the board should consider the prospects of profitable operation, but if he thinks that the rate or corporate taxation has nothing to do with that then he is deluding himself.

Mr. Taverne

Could the hon. Gentleman repeat the lecture he has just graciously given me to those directors shown in one of the articles of the Institute of Directors not to take rates of corporation tax into account in making investment decisions?

Mr. Jenkin

I agree that it is a pity that there are still some companies which have not yet adopted the discounted cash flow techniques and others, which make sure that their company taxation is reflected in the decisions that they take.

Mr. Barnett

As the hon. Gentleman is now talking about the very efficient companies which use discounted cash flow, would he not accept that the answers to the questions put by my hon. Friend the Member for Ashton under Lyne (Mr. Sheldon) clearly show that under the Conservative Government's policies companies using the discounted cash flow would be able to see that over the life of the asset the net return would be considerably reduced?

Mr. Jenkin

It depends on the assets, what mix of assets one is taking, and what assumptions one makes and so on. Anybody can select individual cases which show that the change has the effect to which the hon. Gentleman refers, but these cases may be unrepresentative.

Because, therefore, the rate of corporation tax has an effect on investment, we have taken immediate action to reverse the trend of rising company taxes and we have reduced corporation tax by 2½ per cent. Looked at in isolation, the effect of this on companies' cash flow will be to make companies £90 million more liquid in the financial year 1971 and £100 million more liquid in 1972, but, of course, the change is not to be looked at in isolation. As my hon. Friend the Chief Secretary to the Treasury said, it is part of the total package of changes concerned with investment. The figures are set out in the investment White Paper—a £60 million improvement in company liquidity in 1970–71 and £90 million in 1971–72.

This is very important. There is no doubt that company liquidity has declined disturbingly in recent years and particularly in recent months. An indication of this is given by industrial and commercial companies' holdings of financial assets. Net acquisitions of financial assets made in 1967 and 1968 reduced in 1969, and there has been a further substantial fall in 1970. There is usually a fall in the first quarter of the calendar year when tax payments have to be made and there is usually a recovery in the second quarter. This year, the holdings of financial assets have continued to fall in the second quarter, and profits have fallen in real terms as well as as a percentage of factor incomes.

This is putting a strain on company liquidity. It therefore seemed to the Government that a boost to company liquidity was essential if investment programmes were to be maintained and, indeed, increased. This cut in corporation tax provides a welcome and immediate addition to cash flow and will without doubt encourage firms to maintain their investment programmes.

The hon. and learned Member for Lincoln made one international comparison in company taxes and fell into exactly the error which his hon. Friend the Member for Heywood and Royton so roundly condemned, that of taking one specific case. He mentioned company taxes in the Netherlands. My researches have shown that of all the countries in the Six and the United States the Netherlands is the only country which pays a heavier burden of company taxation than we do. My hon. Friend the Member for Horsham (Mr. Hordern) referred to the German system of the split rate and to other systems of corporation tax. I assure him that these are matters which we have under intensive study.

I turn to income tax. International comparisons have been mentioned by a number of hon. Members. I think it right that one should get a few facts on the record, because there seems to be a great deal of misunderstanding. I have made a study of this in the last few days and, as a case has been argued, it is right that I should answer it.

At once I state the proposition, firmly and unequivocally, that on any basis of comparison the rates of personal income tax in the United Kingdom are the highest in the majority of major countries. Furthermore, this will remain true even after the reduction of 6d. in the standard rates of tax takes effect.

I will substantiate this statement by making a series of precise propositions which can be proven from figures which I am ready to make available to any hon. or right hon. Gentleman who wishes to see them. First, of all the 14 major O.E.C.D. countries, tax on household income in Britain represents a higher percentage of g.n.p. bar three—Sweden, Denmark and Norway, all of whom levy local as well as national income taxes. I should add that the United Kingdom figures do not include rates, which are classified in this country as indirect taxation.

Mr. Taverne

Do they include social security contributions?

Mr. Jenkin


The second proposition is that in the same group of countries personal income tax, including social security contributions—and I hope that the hon. and learned Gentleman will listen to this—represents a higher proportion of total taxes than all bar five, and again local income taxes account for most of the difference in those cases. For the sake of the record I should say that these comparisons, which are the latest available, relate to 1968.

Thirdly, marginal rates of income tax in this country are among the highest in the ten major countries of the developed world at almost every level of earned income. No other such country has an initial marginal rate as high as 32.1 per cent. Apart from Sweden, every other country has a marginal rate at the equivalent of £900 a year less than half the United Kingdom marginal rate of 32.1 per cent. at that level. In Sweden it is 30 per cent. These are figures for a married man who has two children who are under eleven.

At £1,200 a year we are still higher than any other country bar Sweden and Italy at 20 per cent. At £2,000 a year we have the highest marginal rate bar two; at £5,000 a year the position is a little better, but we are still no more than half way down the table, while at £10,000 a year we are right at the top with a marginal rate ten percentage points higher than our nearest rival. At £20,000 a year the gap has widened to 20 percentage points. Compared with our 91¼ per cent. at that level, no other country comes closer than 20 percentage points as a marginal rate. On investment income the marginal rates are still further out of line.

My fourth proposition may be stated briefly. The tax threshold is lower in Britain than in most other countries.

Fifthly, the rate of tax at the threshold is higher in Britain than in any other comparable country and far higher on investment income. We had a starting rate under the Labour Administration of 41¼ per cent.

Sixthly, turning from marginal to effective rates of tax, that is to say, the proportion of total income taken in taxes; at most levels of income the burden of taxation is higher in Britain than in other Western countries. Even at the lowest levels of income, the United Kingdom taxpayer pays more taxes than the taxpayer in most other countries. At £2,000 a year, only Sweden has a higher effective rate and at £18,000 a year the British taxpayer pays far more than anyone else. The hon. and learned Gentleman says that this is absolutely false, but I shall be pleased to send him the figures.

Mr. Taverne

The comparisons are invalid because the hon. Gentleman keeps leaving out social security contributions. Secondly, if he compares the top 10 per cent. of earners in the United States, for example, with the top 10 per cent. of earners in this country, he will find that the rates in the United States are higher. Thirdly, if he takes the Unilever figures for comparative salaries which are paid at similar stages of executive career in Britain and in other countries, he will find that the difference is greater before tax than it is after tax. These comparisons are quite "phoney".

Mr. Jenkin

They are not phoney. They are absolutely genuine and they are based on figures which I will send to the hon. and learned Gentleman.

However, I will concede that the figures have been based on official exchange rates and there is some argument, which is perfectly valid, for saying that to some extent that can misrepresent the position, because it does not reflect relative costs of living and standards of living and therefore the real burden of taxes operating in different countries. But, as I am sure the hon. and learned Gentleman recognises, it is very difficult to devise methods to overcome those drawbacks.

Mr. T. L. Iremonger (Ilford, North)

Has my hon. Friend finished his propositions?

Mr. Jenkin

I should like to make one more.

Mr. Iremonger

I will wait until my hon. Friend has finished.

Mr. Jenkin

I am grateful to my hon. Friend, because this last of the international propositions is being made on a somewhat more sophisticated basis.

Last week, the hon. Member for Heywood and Royton referred, as did the hon. and learned Gentleman today, to the study by Professor Brown and Miss Dawson which was published earlier this year. This purported to show that at corresponding points on the income distribution scale United States tax rates were higher than ours. I have examined this article and looked into the methodology and, with the greatest respect to the learned authors, I do not think their methodology stands up to scrutiny. The main point is that the income data on which they based their studies—obviously, the comparison of the income data in America and Britain was taken on a different basis—does not make allowance for the same deductions and charges. The effect was to understate the United Kingdom income in the comparisons, and therefore to understate the United Kingdom effective tax burden. If comparable data is taken—again I give hon. Members information on this—it shows that as regards the family income, taking the family income in the United States and the figures derived from the United Kingdom Family Expenditure Survey, the contrary conclusion emerges. The burden of tax is higher in the United Kingdom than in the United States, not lower.

In conclusion, all the evidence is overwhelming and conclusive. Personal taxes in Britain are higher at almost every level than in comparable developed countries.

Mr. Iremonger

I am grateful to my hon. Friend for giving way. He will recognise that the implication of the proposition is that we on this side think it is bad, and, perfectly validly and reasonably, those on the other side think it is good. Would he arrange for one of those very useful publications, something like "Broadsheet on Britain", to present those propositions in visual graphic form?

Mr. Jenkin

I should be pleased to consider this as a possibility. My hon. Friend knows that the Treasury publication "Progress Report" did give some facts and figures about this quite recently. I will consider what my hon. Friend has suggested.

The House knows, and the country knows, that income tax has risen too high and presses too hard upon the backs of the people. My hon. Friend the Member for Uxbridge (Mr. Curran) made the point that of course it was not only Tory voters who said this. Honourable and right hon. Gentlemen opposite will have had it said to them by their own supporters time and time again. Time and again they were told that taxation was too high. Why do they complain when we cut taxes? Their arguments have been twofold. I shall try to state them fairly and answer them. They say the cut helps the big taxpayers more than the small ones. Secondly, they argue that it is mean to cut taxes when charges are to be increased. I will deal with these two arguments in turn.

A cut in the standard rate of tax means that the higher a man's income, and therefore the higher his tax bill the bigger will be the absolute reduction of tax in that bill. Evidently that is quite unacceptable to most Members of the Opposition. But I can say not to all Members of the Opposition. The right hon. Gentleman the Member for Manchester, Cheetham (Mr. Harold Lever) made a speech some two years ago in Manchester which was reported in the Sunday Times, where he said: One of the issues that needed examination was to find what adjustments were possible in the taxation burden of the well-to-do which would have the effect of promoting incentives and initiative and discouraging inactivity … We know we have his support, and I am prepared to wager that we have the support of a number of right hon. and hon. Members opposite.

Even if their argument is right, even if they are justified in saying it is wrong to give a greater absolute reduction at the top of the scale, as my hon. Friend the Chief Secretary said, if we are never to be allowed to make tax cuts which make reductions proportionate to incomes, then follows inexorably and conclusively that the standard rate of tax can never be cut at all. Is that really what hon. Members opposite are asking, that the standard rate is to stick at 8s. 3d. for all time? If that is the view of hon. Members of the Opposition, the sooner the people of the country know of it the better.

We know that view is nonsense, and that when tax rates go up better-off people suffer bigger increases than the less well off. When tax rates come down the converse is both inevitable and entirely right.

The Opposition go on to argue, "What about the charges?" We know the Opposition's view about the charges. We know that no senior Opposition spokesman has committed himself to the proposition that they will reverse our proposals. When my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) challenged the Opposition in the debate last week, the answer was crystal clear in the silent, wooden faces of the Opposition Front Bench. They will not restore the charges that we have cut. What does the argument finally boil down to? They cannot—or will not—say that it is never right to cut the standard rate of tax. They will not pledge themselves to restore the subsidies. All they are left with is that somehow it was wrong to do both at the same time. Well, they are entitled to their view. But I do not think the country will be very much impressed.

We believe that taxes have been too high for too long. The Government, by cutting out subsidies, by eliminating activities and by reducing expenditure, has made room for the first cut in the standard rate of income tax and the first cut in the rate of taxation of corporate profits for 11 years. For the people of Britain, this means at last a glimpse of light at the end of what has been a long, dark tunnel. I hope that the House will give the Bill a Second Reading.

Question put and agreed to.

Bill accordingly read a Second time.

Bill committed to a Committee of the whole House.—(Mr. Hawkins.)

Committee upon Monday next.