FINANCE BILL

HC Deb 17 December 1974 vol 883 cc1369-489

Order for Second Reading read.

Mr. Speaker

I have selected the amendment in the name of the right hon. Gentleman the Leader of the Opposition and his right hon. and hon. Friends.

4.12 p.m.

The Chief Secretary to the Treasury (Mr. Joel Barnett)

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

The spring Finance Bill, in May of this year, made a start on the construction of a fair and just tax system. I have never been more convinced that without such a system we cannot hope to achieve the unity so desperately needed at this time of great crisis. I am therefore pleased to be introducing this Finance Bill, which continues in the tradition of the previous one.

In the March Budget the main emphasis was on pensions, food subsidies and a more progressive income tax. Action was also taken to deal with profits from speculation in land. In July, the standard rate of value added tax was cut to 8 per cent.

In the latest Budget there were three main areas where action was needed and was taken. First, there was the threat of unemployment. Action was needed urgently to protect employment in the months ahead, and this was the main purpose of the measures we took on company taxation. Secondly, there was the need to continue to make progress with our social programme. Hence the further pension increases, the increase in family allowances, the new tax allowance for the elderly, and the capital transfer tax proposals.

This brief summary confirms that fairness has been a consistent theme of the Government's policies. We have sought to give a fair deal to pensioners and to families with children. We have taken the first steps towards a fairer distribution of income and wealth. We are providing for the nation as a whole to receive a fair share of profits from the North Sea. And we are doing our utmost, along with the TUC, to avert the greatest unfairness of all—mass unemployment.

The Finance Bill is a substantial one—much longer than any other autumn Finance Bill in recent memory. I do not apologise for that, because the main reason for its length is the inclusion of a major, and long overdue, tax reform— the capital transfer tax.

I should like to go through the Bill as briefly as possible. I know there are many hon. Members who wish to speak in this debate. I will therefore keep my remarks to the minimum and leave some of the clauses to be dealt with by my hon. Friend, the Financial Secretary.

Clauses 5 to 16 of the Bill deal with income and corporation tax changes. Clause 5 brings down the starting point for the investment income surcharge to the level proposed in the spring Budget. We have made no secret of our belief that my right hon. Friend's predecessor, the former Member for Altrincham and Sale, fixed the threshold for the surcharge at an unacceptable level.

That is why we proposed this year to bring down the threshold from £2,000 to £1,000, except for elderly people for whom we proposed that the threshold should be £1,500. Hon. Members opposite voted against this, but we made it clear all along that we should reintroduce the proposals, to be effective for the current year, in our second Finance Bill.

I am not suggesting—I never have-that those with investment income at those levels can be described as wealthy. But it is worth recalling that before the £2,000 relief, all investment income was taxed at a higher rate than earned income. Some small amount of relief from the surcharge is reasonable, and £1,000 of interest or dividend is not unfair. But in considering any reliefs in present circumstances we must give priority to those with the lowest income and capital.

I should perhaps remind the House of the concession which the Government made earlier this year to exempt from the surcharge the first £1,000 of any maintenance payments received by a divorced or separated wife. This exemption will, of course, stand under the revived proposal, and the threshold in these cases will thus be £2,000.

Clauses 12 and 13 incorporate the two changes in initial allowances against corporation tax announced in the Budget Speech. Clause 12 increases the initial allowance on industrial buildings from 40 per cent. to 50 per cent. for expenditure incurred after 12th November 1974, while Clause 13 provides at 100 per cent. first-year allowance for expenditure incurred after 12th November 1974 on adding insulation against loss of heat to an existing industrial building. I hope this relief will be of some help in our objective of conserving energy wherever possible.

Clause 14 restores the trade union provident benefit income exemption for the period from 6th April 1972 to 15th September 1974 to trade unions which de-registered under the Industrial Relations Act 1971 and to new unions formed after 30th September 1971 which did not register under that Act. As we made clear in previous debates, this relief was never intended to be withdrawn and should not have been withdrawn. The clause remedies a gross injustice.

Clause 16 and Schedule 3 embody proposals for corporation tax relief in respect of increases in stock valuation in 1973. I will not spend time on the details of these provisions. But, to avoid misunderstanding, I wish to emphasise certain points.

The first is that this is a provisional relief, framed in a manner to meet an immediate need. My right hon. Friend has given an assurance that relief will be made available next year for all companies and unincorporated businesses broadly to take account of the rise in prices of stock during this year and next. I cannot give any indication at this stage of the form that that relief will take. Much depends on the progress of the Sandilands Committee on Accounting for Inflation, whose recommendations will clearly be of the first importance.

Mr. David Mitchell (Basingstoke)

Will the hon. Gentleman be kind enough to indicate some of the reasoning for the cut-off at £25,000 in that connection? I understand that it is something to do with administration, but we have some difficulty in discovering the reasoning behind that explanation, since most of the work is done by company auditors and not by the Inland Revenue.

Mr. Barnett

I shall come to that.

However, whatever form that further relief will take, the relief given to com- panies this autumn will count as an instalment towards the total relief due for the two years, and any adjustments that may be needed, either because the relief now due is insufficient, or because it is excessive, will be made in the later year.

Next year also, those businesses that do not qualify for relief this year will come within its scope, and, as my right hon. Friend said in his Budget speech, in framing the relief, account will be taken of the fact that those concerned have had to wait for it. Let me say at once that I fully accept that these smaller businesses have as much claim in equity to immediate relief as the larger ones, but we have to operate on bills which in the main fall due on 1st January, and there just is not time for the revenue to process more than a certain number of claims. The formula chosen as the way of limiting the numbers is rough and ready and no doubt has its anomalies, but it can be made to work quickly, and that must be the decisive factor.

One reason why we have been able to adopt a comparatively simple approach this year is that all the events relate to the past, and there can have been no attempt to exploit the relief. The clause needs no anti-avoidance legislation.

Obviously, there is now opportunity for companies and groups of companies to arrange their affairs to try to get more than their fair share of relief. I will just utter a warning. We shall not hesitate to propose any counter-action that seems necessary. The essential purpose of this clause must be preserved, namely, to protect jobs.

I come to the provisions for the new capital transfer tax. The purpose is to remedy the deficiencies of the present estate duty by ensuring that there is an effective tax on all wealth. I doubt whether anyone can dispute that estate duty has been too easily avoided in the past, for two main reasons. The first is that duty has been avoided altogether on assets given away more than seven years before the donor's death. The second is that the wealthy and well-advised have been able to put their wealth beyond the reach of the duty for generations up to 80 years or more—by putting it in discretionary trusts. Surely no fair-minded person would say that it is fair that such a situation should persist.

Estate duty has all too often fallen most heavily on those with modest capital who could not afford to give it away before they died, and on those who have not been in a position to indulge in avoidance devices to minimise the incidence of the duty. By comparison, the tax has fallen only lightly on those rich enough to give their property away during their lifetime and to set up elaborate schemes to minimise the tax burden. In short, estate duty is unfair, and by its inadequacy it has contributed to the other and wider inequity of failing to ensure that the most wealthy have made a proper contribution to the nation's revenue.

In a programme designed to achieve a major distribution of wealth, a system must be found which reverses these major defects. The new tax will apply, subject to certain exemptions, to all transfers of wealth, whether made by way of gift during a person's lifetime or on death. As regards settled property, the broad principle to be applied is that in general the charge to tax should be of the same order as would have been the case if the property had not been put into trust.

Because the new tax will be a comprehensive one, without the defects of the estate duty, we have felt it right to introduce it at rates significantly lower at all points of the scale than the old estate duty rates. The rates are in clause 33.

The new tax will follow the estate duty in applying to all transfers by persons domiciled within the United Kingdom, and to all assets situated here, irrespective of the domicile of the donor or testator.

The meaning of domicile will be extended to cover those who have been resident in the United Kingdom for 17 out of the last 20 years, though they were not technically domiciled here, those who left the United Kingdom in the previous three years after being domiciled in it, and those who after 12th November 1974 have become domiciled in the Channel Islands or the Isle of Man immediately after being domiciled in the United Kingdom.

The legislation will provide for the abolition of estate duty after the passing of the Bill. The transitional arrangements provided in the legislation have the effect that property passing on a death after 25th March and before the passing of the Bill will be liable to the existing estate duty and not capital transfer tax.

Property passing on a death after 12th November and before the passing of the Bill will be liable to the existing estate duty, but the new scale of rates will apply to property passing on death in this period, as will the new exemption for transfers between husband and wife.

Mr. Ian Gow (Eastbourne)

Does the proposed change in the law of domicile relate only to the purposes of this Bill, or does the hon. Gentleman purport to change the law of domicile for other matters?

Mr. Barnett

I am talking about the capital transfer tax and the references I have made are related directly only to that tax.

I was saying that property passing on a death after 12th November and before the passing of the Bill will be liable to the existing estate duty but that the new scale of rates will apply to property passing on death in this period, as will the new exemption for transfers between husband and wife. The previous reliefs for agricultural land, certain business assets, and woodlands will be withdrawn, and the new relief for agricultural land will come into effect from the same date.

Mr. Jasper More (Ludlow)

Has the Forestry Commission been consulted about whether what the Government propose is to the advantage of the forestry industry?

Mr. Barnett

The Forestry Commission has been consulted, and I have no doubt that we shall take its views into consideration in deciding how the Bill will eventually emerge on the statute book. We take into consideration everyone's views, including those of hon. Members opposite. We do not always take notice of the latter, but we take them into account, and whatever decision we come to, one way or the other, will be reached after we have decided to ignore those views or to take them into account.

There are a number of exemptions and reliefs from the charge set out in Schedules 6 and 7 to the Bill. I hope that the scope of these reliefs will demonstrate that the Government are prepared to be flexible in applying the broad principles of the tax and to ensure that it will not bear too onerously on large sections of the community.

The most important relief is the exemption of gifts between husband and wife. This will especially benefit those who, as I have indicated, have been unable or unwilling to avoid estate duty. It will be particularly helpful to those with comparatively small estates who until now have paid a disproportionate share of estate duty.

A husband and wife will be chargeable to tax as separate individuals, but gifts between them while they are both alive and property left by one to the other on death will be exempted, except where the recipient is not domiciled in the United Kingdom at the time of the gift or death. This reverses the general position under estate duty up to 12th November 1974 where there was an exemption on the death of a surviving spouse of property left in trust to him or her. This latter exemption will be withdrawn for property to which the new relief applies on the occasion of the first death.

The Government also propose to continue into the capital transfer tax a broad equivalent of the present estate duty reliefs for small gifts. The first £1,000 gift made by one donor in a year will be exempt. In addition, there will be exemption for gifts made out of income which form part of the donor's normal expenditure and leave sufficient income to maintain his usual standard of living.

Mr. William Clark (Croydon, South)

Who decides what shall be "out of income"?

Mr. Barnett

That has been done before. There is nothing unusual about it.

Gifts in consideration of marriage will be exempt up to £2,500–£5,000 if the marriage occurs before the passing of the Act—if the donor is a party to the marriage or is his or her lineal ancestor. For any other donor the limit will be £1,000. The £1,000 exemption and the exemptions for gifts out of income and wedding gifts will not apply to property passing on death or as settled property.

Mr. Toby Jessel (Twickenham)

Is not a gift made in respect of a marriage already exempt as being between husband and wife? Why should there be a £2,500 limit?

Mr. Barnett

I was not referring to gifts between husband and wife because, as the hon. Gentleman rightly said, they are wholly exempt. I was referring to a gift which a father or mother gives to a daughter or son on marriage.

The broad effect of the treatment proposed for gifts to charities and national heritage bodies at death is to give relief on the same scale as at present applies under estate duty.

Mr. Patrick Cormack (Staffordshire, South-West)

The Chief Secretary will be aware that all those who are concerned with the national heritage do not believe that Schedule 6 goes far enough. I hope that the hon. Gentleman will listen carefully to representations made by the Society for the Protection of Ancient Buildings, the Georgian Group, and others. If not, there will be a flood of buildings on the market, the National Trust will not be able to take them on and the country will be the poorer.

Mr. Barnett

I take the hon. Gentleman's point. We shall be prepared to listen to all the arguments during the passage of the Bill.

Dr. Jeremy Bray (Motherwell and Wishaw)

Does the exemption apply also to gifts to parents on marriage?

Mr. Barnett

That is an interesting comment. Knowing the complexity of detailed Revenue points, I will leave that to my hon. Friend the Financial Secretary to deal with when he winds up the debate.

Generally speaking, transfers to charities are to be exempt up to a cumulative sum of £50,000 for any one person whether in life or on death. Where this sum is exceeded, tax will be charged on the transfer or transfers in the normal way on death; but if the transfer is a lifetime transfer and is made at least a year before the donor's death, tax will be charged at half the normal rate.

The existing estate duty exemption for property going to certain bodies concerned with the preservation of the national heritage will continue for capital transfer tax and will apply to transfers both in life and on death. There will also be complete exemption for transfers to local authorities, to Government Departments and to universities in the United Kingdom.

The question of how works of art remaining in private hands should be treated under capital transfer tax is one which the Government will wish to consider in the light of the decision we take about wealth tax on works of art when we have the benefit of the Select Committee's advice. Meanwhile, we have decided to continue the existing estate duty exemption for works of art and other objects of a qualifying standard which remain in private hands, but so as to apply only to transfers of qualifying objects on death. The exemption will be conditional, as under estate duty, on the giving of certain undertakings—for example, not to send the object out of the country- and will be lost on a sale or a breach of the undertaking.

Mr. William Clark

Have the Government given consideration to capital gifts to political parties?

Mr. Barnett

We have given consideration to it but, as the hon. Gentleman will have noticed, the only exemptions in the Bill are those to which I have referred. That is to say, £1,000 of capital per year per person will be allowed.

We have decided to ease the burden which would fall on transfers of agricultural land owned and farmed by full-time working farmers. Relief is given under Schedule 8 where the transferor qualifies as a person wholly or mainly engaged in agriculture as a farmer or farm worker, or as a student, in five of the seven preceding years If more than three-quarters of the earned income in those years is obtained from farming the qualification is automatic.

The relief will apply in respect of land including farm houses and buildings occupied for farming by the transferor for at least two years before the transfer. The relief given will take the form of a reduction of the agricultural market value of the property to 20 times its gross rental value, subject to a special arrangement for land in Northern Ireland. But any element of development value in the land will be taxable in full. The relief will be subject to overriding limits—which apply to each transferor on a cumulative basis—of £250,000 by value or 1,000 acres whichever provides the larger relief.

Mr. Peter Rees (Dover and Deal)

It may be within the knowledge of the House that during the summer a penalty inflicted on a major union by the National Industrial Relations Court was discharged by an apparently unknown benefactor. Should it turn out on investigation by the Commissioners of Inland Revenue that that unknown benefactor was an individual, will he or the union be subject to capital transfer tax?

Mr. Barnett

I am sure that the hon. and learned Gentleman knows that it is not possible for me to discuss individual cases.

Mr. Rees

It is the principle.

Mr. Barnett

It is simply not possible to say without knowing much more about the details of the case.

I turn now to business men's estates. As a whole, like those of everybody else, they will get the benefit of the lower rates of duty introduced by the Bill. Nevertheless, as my right hon. Friend the Chancellor of the Exchequer announced, a special relief is being provided in respect of the tax on transfers of business assets. This takes the form of relief from interest on the instalments of tax payable on business assets and certain holdings of shares.

This new relief is more significant than may appear at first sight because, without it, interest is payable on the whole of the outstanding duty at each instalment date, at 6 per cent. for transfers on death and 9 per cent. for lifetime gifts. The discounted value of the interest otherwise payable, taken as at the date of the first payment, will, with a discount rate of 10 per cent., represent 16 per cent. of the total tax on death and an even higher proportion of the tax on lifetime gifts.

I turn now to settled property. The use of settlements to void the effects of estate duty was one of the main reasons why that duty was ineffective. We intend to ensure that the same route for avoidance is not open under capital transfer tax, particularly as regards discretionary trusts. The aim is not to penalise the holding of property in settlement but simply to ensure that property held in this way pays its fair share.

The principle is that there should be a charge to tax when property is settled as on any other gift, when the enjoyment of an interest in possession comes to an end and when capital is paid out. When an interest in possession comes to an end —for example, on the death of a life tenant—tax will be calculated as if the life tenant had transferred the settled property but will primarily be the liability of the trustees. Distributions out of the capital of discretionary trusts will be charged to a rate of tax derived from the settlor's circumstances when he made the settlement, although there will be a somewhat more lenient rule for settlements made before 26th March 1974.

For discretionary and accumulative trusts, there will also be a periodic charge at ten-yearly intervals which is designed to produce broadly the same result as the charge on property owned by individuals, where it can be expected that the whole property will on average be subjected to a tax charge once a generation. The periodic charge will be 30 per cent. of the tax which would have been payable had the whole capital of the trust been distributed.

Mr. Peter Rees

I recall that under a previous Labour administration there was a 15-year charge to capital gains tax on discretionary settlements. Why has the present administration chosen to reduce the period from 15 to 10 years?

Mr. Barnett

We are dealing with a wholly different tax. For that reason I have tried to make the position clear—namely, that we have fixed the figure at 10 years and 30 per cent. It seems reasonable to us, and no doubt we shall have ample opportunity to discuss this matter at some length in Committee.

There will be no charge to tax when a life tenant becomes absolutely entitled to the settled property in which his interest subsisted, or when it reverts to the settlor. There will be relief from normal charges on property held on discretionary trust where the settlement is an accumulation and maintenance settlement restricted to the benefit of individuals up to the age of 25. Exemption will also be provided for wholly charitable trusts and relief, on the same basis as estate duty for superannuation schemes.

Preparation of the capital transfer tax legislation has been a mammoth task involving the framing of a complete new code covering both lifetime transfers and transfers on death to replace the 80-year-old estate duty. I wish to pay tribute to the work of all those who have been involved in the Inland Revenue.

Mr. Dafydd Wigley (Caernarvon)

Will the hon. Gentleman give some idea of the cost to the taxpayer of administering the tax?

Mr. Barnett

I shall be coming to the additional staff required to deal with that tax and other matters. As a result of the difficulties we have had in framing the tax, there are certain matters with which there was insufficient time to deal in the Bill as published. We intend to table suitable amendments in Committee. I shall mention some which are likely to be of particular interest.

It is intended to introduce provisions to prevent avoidance by making gifts through the medium of close companies, including transactions involving alterations in the rights attaching to different classes of shares. It is intended to provide relief from the charges on settled property for: trusts set up for the benefit of employees, for example, benevolent funds held under discretionary trusts and trusts intended to give effect to profit-sharing schemes; and funds held on discretionary trusts by a number of professional bodies, and a few quasi-professional ones, which are designed to indemnify customers and clients against losses due to default by their members, for example, Lloyd's Central Fund and the Law Society Compensation Fund.

There is one final point. A recent letter to The Times pointed out that our proposals to treat people in certain circumstances as domiciled in the United Kingdom could involve the taxation of gifts of overseas property made between 26th March and the publication of the Bill by people whose legal domicile is abroad. This would be contrary to the undertaking which I gave in the spring Budget debate about gifts made before a date to be fixed in this Bill. I undertook that a gift made in that period would be exempt from the new tax if it would not be chargeable to estate duty if the donor died on the day after making the gift. We intend to honour that undertaking, and we shall table an amendment to Clause 400 to ensure that the new rules on domicile do not apply to gifts made before 10th December 1974, when the Bill was published.

Mr. Cormack

If the overriding aim of the Government in its financial measures is fairness and the capital transfer tax seeks to ensure that wealth is caught wherever it may be, what is the need for the wealth tax?

Mr. Barnett

There are two different aspects: one is to replace estate duty, and the other is an annual tax on wealth. We shall be dealing with the wealth tax shortly. The hon. Gentleman should not be too impatient because we shall have an opportunity to discuss that tax in the very near future.

I have tried to deal as briefly as possible with the more important aspects of this crucial new tax. I understand that the tax is likely to be opposed by Conservatives. I do not complain about that for I know that my hon. Friends will appreciate that it introduces a new and, for us, a fundamental change for the good in our capital taxes.

Mr. Nigel Lawson (Blaby)

Will capital gains tax and capital transfer tax be cumulative, or will one tax be offsettable against the other?

Mr. Barnett

They are two entirely different taxes. If I may give an example, if a man or woman leaves £100,000 worth of shares and there is, say, £20,000 capital gains tax on it, and he or she pays the capital gains tax and transfers £80,000, then the capital transfer tax will be on £80,000. If, on the other hand, he or she transfers the £100,000 worth of shares and the donor himself proceeds to pay the capital gains tax, the donee has received a gift and there has been a gift of £100,000. Therefore, the capital transfer tax will be on that £100,000. I hope that is clear to the House.

Mr. Cormack

That is double taxation.

Mr. Barnett

I disagree with the hon. Gentleman, but we shall have ample opportunity to discuss these matters in the not-too-distant future.

I was saying that as far as my hon. Friends are concerned, I am sure that they at least will appreciate that this new tax introduces a fundamental change for the good in our capital taxes.

It is customary on Second Reading of the Finance Bill to say a few words about the staffing implications, and this answers a point raised by the hon. Member for Caernarvon (Mr. Wigley). Extra staff will be needed to deal with the work on the capital transfer tax, with the lowering of the threshold for the investment income surcharge, and, on a smaller scale, with the provisions relating to life assurance relief and the relief for increase in stock values. It is estimated that the Inland Revenue will need 150 additional staff for these purposes in the current year and a further 160 in 1975–76. The Customs and Excise will not need any extra staff to administer the proposals in the Bill.

Finally, I wish to say a few words about the Opposition amendment. It would appear that the Conservative Party, which always tells us that it seeks to reduce the borrowing requirement, finds the Bill inadequate. I have never heard the Opposition Front Bench suggest increases in taxes, but we know that there are many areas where they want relief. Therefore, we can only assume that they seek to borrow more. On the other hand, I know that the usual Opposition case is to offset any further cuts in taxation by massive general cuts in public expenditure. That case is not exactly helped by their regular demands for increases in public expenditure in almost every area, not least in their desire to spend thousands of millions of pounds more on defence expenditure.

Mr. Peter Tapseil (Horncastle)

Is there not another possibility—that if wage awards were kept under sensible control, our exports might be more competitive and we would achieve our ends without borrowing so much?

Mr. Barnett

That is an interesting point, but it is more appropriate for the debate tomorrow. I am sure that we shall hear from the Opposition Front Bench precisely how they would control incomes. No doubt it will be the way that they managed to do it so well between 1970 and 1974.

The Opposition's amendment would apparently refuse to give back relief which was unfairly withdrawn from de-dependants of trade unionists, including widows, orphans, the disabled, the sick and the infirm, at a time when it was never more crucial for a Government to seek the co-operation of responsible trade unionists.

The amendment emphasises the good fortune of the nation that it is not governed by right hon. and hon. Gentlemen opposite. It is a mixture of unfairness and confusion. That is not perhaps too surprising when we look at the top and bottom signatories to the amendment. We see that it is headed by the present Leader of the Opposition and ends with the hon. Member for Cirencester and Tewkesbury (Mr. Ridley). Any amendment that can combine those two right hon. and hon. Gentlemen is inevitably bound to be somewhat confused.

For my part, I am happy to return to the point that I emphasised at the outset. The Government are determined to proceed with the task of building a fairer society. Unless we do this, we cannot expect the people of this country to unite to deal with our economic problems. The need for fairness is central to all our policies and, in particular, to the Bill that we are considering today. I am happy to commend the Bill to the House.

4.52 p.m.

Mrs. Margaret Thatcher (Finchley)

I beg to move, to leave out from "That" to the end of the Question and to add instead thereof: this House declines to give a Second Reading to a Bill whose provisions, in the present critical state of the economy, are inadequate and in some respects damaging and which also provides, without good reason, for the retrospective repayment of tax to one section of taxpayers. Inevitably, the Second Reading of the Finance Bill has turned out to be rather technical. We are grateful to the Chief Secretary for giving way to explain just how heavy these taxes will be so that we may know the full extent of their impost.

We are also grateful to the hon. Gentleman for peppering the beginning of his speech with a few provocative remarks. Indeed, he started by claiming that his administration's policy was fair and just. It depends what one calls fair and just. At the moment it is everything that the hon. Gentleman calls fair and nothing that most other people call fair.

It was rather ironic that the first proposal in the Bill to which the hon. Gentle- man turned was the one that many people would consider most unfair—the surcharge on savings income. People who have been affected worst by inflation would hardly call this administration's policy either fair or just, because inflation, which is the most devastating tax of the lot, is imposed without the permission of this House.

The hon. Gentleman then dealt with food subsidies and indicated that they relieved inflation. I was rather interested that he should do that, because the Labour Economic Finance and Taxation Association published its views in a booklet by John Mills headed Redistribution, A Review of Progress". The Prime Minister is president of LEFTA, and the Chancellor of the Exchequer, the Foreign Secretary, the Home Secretary and Professor Kaldor are vice-presidents. The seventh conclusion was: The main danger from inflation is not to the pre-tax distribution of income; it is that the Government may use the limited taxable capacity of the country to fight inflation with general subsidies. This policy will do nothing to mitigate inflation and is highly likely to be financed by marginal taxation on those whose incomes are already well below the national average thus leading to regression. It would seem that the Labour Economic Finance and Taxation Association does not agree with the Chief Secretary about the use of subsidies to fight inflation in any way.

The hon. Gentleman said that his administration had introduced measures to ensure that the country got a fair share of profits in the North Sea. Some of us would not describe them in that way. They are measures more likely to ensure that the oil stays under the North Sea rather longer than it would have done, because the Government are undoubtedly delaying the garnering of that tremendous harvest which could be of such benefit to this country in a few years.

The hon. Gentleman then turned to an effective tax on wealth. In this respect, he seemed to indicate that every person in this country had a bounden duty so to order his or her affairs as to pay the maximum amount of tax on the most unfavourable construction of the statutes. The Chancellor thinks that people should do it that way. What he will get, if he considers that people should do it that way, is mass avoidance of the easiest kind—spend the lot and save nothing. That is the kind of society that we shall have.

The Chancellor of the Exchequer (Mr. Denis Healey)

Hoard the lot.

Mrs. Thatcher

I am not as successful as the Chancellor at hoarding houses. I cannot afford to hoard houses, as do the Chancellor and the Prime Minister. If I could, I would.

The way in which the Chancellor is going about it, by putting extra penalties on saving, is to aim at a spendthrift society. The right hon. Gentleman favours the spender but penalises the saver.

The Chief Secretary made some comments about domicile. There is a devastating clause on domicile as it affects the new capital transfer tax. I hope that the hon. Gentleman will draw to the notice of some of those foreign gentlemen upon whose support he relies to finance his borrowing requirement. If they buy assests here—some of them are already buying assets here—they should know the kind of gifts tax to which they will be liable if they transfer them to someone else. I understand that the capital transfer tax applies to properties situated here.

Mr. Joel Barnett

So did estate duty.

Mrs. Thatcher

Yes, but it is wrong to compare a gifts tax with estate duty. I gather that the Chief Secretary indicates assent. Then what possible relevance has the hon. Gentleman's statement? These people could have passed on assets to their sons or daughters or anyone else without encountering tax. They will not now be able to do so, due to the proposals in the Bill.

It is also wrong to compare estate duty tax on charities with the capital transfer tax. In most cases, donations and benefactions to charities escaped all tax because they were made well in advance of death and never came into estate duty charge. The Bill will have a devastating effect on many charities if the charitable provisions remain as they are now.

I am rather alarmed at the suggestion that we are to have a lot of amendments in Committee. If the hon. Gentleman is not careful, we shall not get the Bill out of Committee in time to comply with the Provisional Collection of Taxes Acts, because there is already a great deal to do. Ten sittings upstairs seem comparatively few to deal with the long list of amendments that we shall undoubtedly have. Let me warn the Chief Secretary that I am a very good night worker.

A year ago today the present Chancellor cross-examined the then Chancellor, Anthony Barber, on a statement that he had just made. A year ago today the present Chancellor said: Figures published on Friday show that in the first year of the Government's humorously entitled counter-inflation policy, inflation was running at more than 10 per cent."—[OFFICIAL REPORT, 17th December 1973; Vol. 866, c. 967.] May we now say to the Chancellor that figures published on Friday show that inflation under him is now running at the rate of about 18.3 per cent. per annum? That is the deterioration during the course of one year.

In the last economic debate before the February election, the right hon. Gentleman's last debate as Shadow Chancellor, on 6th February, he said: The Chairman of the Stock Exchange told us last autumn that the stock market was a barometer which indicated confidence in the Government's will to govern and the Government's ability to govern. We can look at the barometer. Yesterday, the share index fell below 300, and it is still bobbing round the 300 mark. It is a very accurate barometer."— [OFFICIAL REPORT, 6th February 1974; Vol. 868, c. 1253.] Yesterday, the index closed at 156.2. The Chancellor stands condemned by the very test that he chose for my right hon. Friend the then Member for Altrincham and Sale.

The Finance Bill must be judged on how it provides for the problems of today. Most of the broad economic matters will be dealt with in the debate tomorrow. Today we consider in particular the disruptive force of inflation as it affects companies—and, therefore, those who work in them and invest in them and those who retire from them—and as it affects savings in their several forms and their transfer from one person to another.

Before coming to the detailed effects, I should like to make a few observations about the general effects of inflation if it continues at its present rate. First, the rate of inflation is not static. It is accelerating. The annual rate of increase last December was 10.6 per cent. Last March it was 13.5 per cent. This December the annual rate of increase is 18.3 per cent., and next year rates of about 25 per cent. are forecast.

I do not believe that everyone has grasped fully what these rates will mean to our society or our institutions if they persist. Two or three weeks ago in an economic debate in the other place, the noble Lord, Lord Stokes, gave some figures for wages if the annual rate of inflation were to continue and stay at 20 per cent. per annum. I hasten to assure the Chief Secretary that the figures were not a matter of opinion but are obtainable by using the compound tables for calculating inflation. To retain the same purchasing power, a person who at the age of 18 was paid £1,800 a year would, if the rate of inflation persisted at 20 per cent. per annum, be receiving at the age of 30 £16,000 a year. At the age of 40 he would be receiving £100,000, and at the age of 50 he would be receiving half a million pounds a year—to retain the value of the original £1,800.

This obviously could not go on. If it cannot go on, it has got to stop. But I wish that the signs were better that the Government really intend to deal with inflation. Even the other day at Question Time the Chief Secretary was acting as if there were a kind of trade-off between inflation and unemployment. That seems to some of us very old-fashioned economics. The danger of inflation at this rate is that it will lead to massive unemployment of a kind which we have not seen in this country for some time and which most of us never wish to see again.

But even looking back at past rates of inflation, I doubt whether some 30 or 40 years ago we would have believed the forecasts of events which have actually happened? At the beginning of the big Economist diary there is a whole series of tables which is well worth studying.

Mr. James Dempsey (Coatbridge and Airdrie)

Only a short time ago I spoke to a manufacturer of confectionery goods in my constituency. He advised me that sugar from Munich was being unloaded at a cost of over £200 per ton, as against our £83 per ton. He also advised me that he is unable to estimate manufacturing costs over the next week because he has been warned that this price will rise to £300 per ton. Is the right hon. Lady willing to say from the Dispatch Box that the Chancellor of the Exchequer is responsible for that situation?

Mrs. Thatcher

I think that the hon. Gentleman would have made a very good speech on our side during the February election campaign, when we had to deal with very considerable rises in commodity prices, affecting many commodities other than sugar. Undoubtedly that was a factor in pushing up prices. I do not wish to pause in my speech to give the hon. Gentleman a discourse on the difference between rising prices and inflation. There is a very good one in a chapter of Mr. William Rees-Mogg's book called "The Reigning Error". In the early chapters the hon. Gentleman will find a very good explanation, and a superlative cross-examination of an economist by a judge on what inflation is.

I was about to refer to the table in the Economist diary, which gives United Kingdom incomes from 1938 to 1974. This shows what past inflation has meant. We would not have believed it if we had been told at the time. A £1,000 income in 1938 would need today, to have the equivalent purchasing power net of tax, for a family man with two children, to be £7,669. A £2,000 income in 1938 would need to be £20,000 today for the equivalent purchasing power. A £4,000 income in 1938 would need to be £66,000. That is the effect of inflation. It also indicates the effect of inflation on taxation thresholds when they are not indexed. But that is a past rate of inflation, and most of us would consider that it had been at rates which were tolerable.

Mr. John Tomlinson (Meriden)

On that specific point, does not the right hon. Lady agree that as the figures she has quoted are net of taxation they contain a far greater reflection of taxation changes than of inflation?

Mrs. Thatcher

But the hon. Gentleman will remember that at the beginning of my speech I said that inflation was one of the biggest single taxes, and that unless one indexes thresholds one reaches this point. If the hon. Gentleman looks at the figures, he will find that even with average earnings, taxation takes an increasing proportion of gross earnings and leaves a smaller proportion as net taxed income. This is one of the effects of inflation. It is one of the effects which we are experiencing at present.

The other effect of inflation, which is quite devastating, is the effect on pension funds. They are already finding it difficult to provide adequate pensions for their beneficiaries in the light of present-day inflation. Company after company is having to top up pension funds from profits because the funds cannot meet their actuarial assessments owing to market collapse and inflation. BP has provided £38 million for its pension fund, and some of the banks and ICI have also had to provide large sums. Perhaps it is as well for the pensioner that this year the profits were there to do it. Next year they may not be.

Again, however, this emphasises that we cannot sit complacently and watch this accelerating rate of inflation. It should be the prime objective of the Chancellor of the Exchequer to deal with it. Even the Bank of England Quarterly Review, commenting on the position of pension funds, has said: The erosion of equity earnings also poses a problem for companies in the management of their pension funds. The need, with inflation, to finance rapidly growing pension liabilities, in face of a reduction in the real income from their accumulated equity funds will become a further drain on their resources. Let us make it quite clear that prosperous companies and good dividends are vital to the 11 million members of private pension funds.

I turn to the three aspects of the Bill with which I particularly want to deal— the effect on companies' savings, and the capital transfer tax. First I turn to the the effect of the Bill on companies. We know that the long-term problem is that companies cannot make enough profit to provide for investment or attract new capital. The medium-term problem, and it is pretty immediate, is to agree a new accounting system which will show what the true profit is and therefore establish a proper basis for assessing future needs and actions.

The immediate problem is that some companies are short of cash to meet their commitments and are therefore having to lay off workers although the position of profits on paper still looks reasonable. For the Chancellor to have done nothing in these circumstances would have meant a large-scale loss of jobs and it was that rather than conversion to the private enterprise system which led him to take the action he took.

The situation is an example of how inflation can create unemployment. The Chancellor has decided to relieve the cash position by reducing corporation tax payable on the value of the increased stock and limiting the increase to 10 per cent. of the trading profit for taxation purposes. I gather that trading profit means after interest has been allowed but before depreciation. Most of us doubt whether the Chancellor has done enough. We are aware that this action is accompanied by price increases. We are also aware that the problem of tax on stock appreciation has occurred in other countries, too, but I note the comment in the Bank of England Quarterly Review It is not entirely clear why industry's difficulties should have become so much more acute here than elsewhere … exact international comparisons are not available … it is possible that the return on capital in this country has fallen to a lower level than in other industrial countries. It may also be the case that the recent rapid rise in costs in at least some other countries has been passed on more quickly than here in higher prices … Taken together, the tax reliefs and the relief through the price code may not provide companies in the next 12 months with much more than a third of the prospective increase in the cost of their stocks in this period. Clearly, therefore, there is considerable doubt even in that quarter about the adequacy of the Chancellor's remedies in the present serious situation which faces companies.

Another point has also been raised by one of my hon. Friends. We believe that the relief this year should be extended to small businesses. I remain unconvinced by administrative arguments to the contrary. There appears to be no logic about the sum of £25,000 closing stock. We do not know how many companies that affects or how many it would affect if the figure were lowered to £20,000 or £15,000, and I doubt whether even the Inland Revenue knows. What we do know is that the accountants seem more able to make changes more quickly than the Inland Revenue. The speed with which they have been operating far exceeds the speed at which the Inland Revenue can operate.

May I say about this "bankable assurance" that an assurance just plain is not bankable. Only a legal entitlement is bankable. The expression "bankable assurance" is a contradiction in terms. An assurance does not pay the interest on the money a company has to borrow because it does not have the cash that it should be getting back, so this assurance just is not good enough.

The third point is that the relief is haphazard. I learned from an article in the December issue of Accountancy that Marks and Spencer gains nothing because its stocks increased by only £1.9 million whereas 10 per cent. of its trading profit is £8.2 million. Tesco, however, would gain £7.3 million because its stock rose by £16.9 million, which is far more than 10 per cent. of its trading profit. I need hardly say that companies like Leyland which paid little or no tax did not gain. The effect of the relief, therefore, is very haphazard.

It is also possible to contend that the Chancellor could have chosen a much simpler system, namely, that urged upon him by CBI, and then he could have found that it was possible to extend the relief to small businesses immediately.

By his action the Chancellor has enabled a number of companies to survive when they might otherwise have become insolvent, but he has not restored their capacity to invest. How quickly they resume expansion of fixed investment will not depend only on financial considerations, important though they are. It will depend also on industrial confidence, and there seems little hope of restoring that so long as it remains the policy of the Government to take a larger part of the running of companies. It is clear that some parts of the Labour Party believe in a mixed economy. The question is how large a part is it and is it the predominant part? Or are those whose avowed intention is to end the system in the ascendancy, either by their own actions, or through the acquiescence of their rivals.

On savings, it is important that we should invest more, that we should save more, and that the Chancellor does every- thing in his power to encourage savings on a considerable scale. The massive re-equipment of industry is not likely to be obtained unless those who choose to put their money in it see that that money first retains its value, secondly, earns a reasonable return by way of interest or dividends, and, thirdly, that they are able to keep enough after tax to make saving preferable to spending.

These conditions are not being met at the moment. Savings are not retaining their value. The pound in the bank, the Post Office, gilt-edged stock, War Loan, Daltons, building societies and equities is being devalued even taking into account the high interest rate such as 17 per cent. gross which is obtainable on some long-dated gilts. Sooner or later the Chancellor will have to deal with this very difficult problem.

I admit that the Bill contains two small improvements for savers. Building society investment for pension funds has been improved in that the funds can reclaim the tax paid on interest. This is largely due to the strenuous efforts of my hon. Friend the Member for Croydon, South (Mr. Clark) during the last Finance Bill. Many people who will be purchasing houses through building societies can thank my hon. Friend for that. The second improvement is the small indexed savings scheme of up to £500 for retirement pensioners. I understand that it operates only over a period of five years and there is a technical provision in the Bill connected with that.

The main provision in the Bill on savings income is a new impost on this year's savings which will operate now and for so long as a Socialist Government remain in office. To levy a higher rate of tax on savings income when it exceeds £1,000 per annum is thoroughly vindictive and it is a measure which will create real difficulty for many retired people who have no pension provision but who had to provide for their own future by building up assets and then living off the income. I am aware that the figure can be increased to £1,500 for those over 65, but if £1,000 and £1,500 were the right figures, even accepting the Labour Government's arguments, in March, they are the wrong figures now. The tax on that sum would be even more severe than it was when the Labour Government proposed the system.

This is what makes me say that the Chancellor will have to give more serious consideration to adjusting some of these figures rather more rapidly than in the past in a way that is beneficial to the taxpayer. The limited age allowance next year will cope with only part of the problem. The disabled who have been victims of road accidents and other disasters and who have received heavy damages will be particularly badly affected. We shall fight this clause at every stage and hope that in future the Chancellor will take a more advantageous view towards savings. He did not do so on the last Finance Bill. I am still getting correspondence about one or two petty points which were put to his Department which he was told would adversely affect thrift and self-reliance, and he did nothing about them.

One case which I remember particularly, because I have come across three similar examples of it, was when he introduced a limit on mortgage relief. The examples I have in mind affected vicars. A number of them who purchased houses for retirement found to their great shock that they could not get mortgage relief on the house they were purchasing. They were living in the vicarage and were told "You are living in a tied house. The house you are purchasing for your retirement is a second house. Therefore, you cannot have relief for mortagage interest on it."

The cases were put to the Exchequer, who said that those concerned must let the houses at a commercial rent—as if there is such a thing. Anybody who has been in the Department of the Environment knows that there is no such thing as a commercial rent at present. There are frozen rent and a fair rent, and in some areas a decontrolled rent. That is typical of how mean the Government can be towards those who save and try to look after themselves—mean, because the Government are much more concerned to pursue something doctrinaire than to give reliefs where they are due.

I come to the capital transfer tax. The Chancellor's reasons for introducing it seem to be threefold. The first is that great concentrations of wealth still escape largely untouched; the second is that the tax redistributes wealth; and the third is that other countries have similar taxes.

The first point just is not true. The yield from estate duty last year was £405 million and the yield from capital gains tax was £320 million. With inflation as it is, that is largely a wealth tax on inflation and not a tax on capital gains. The yield from another capital tax, stamp duties, was £190 million.

Estate duty was introduced in 1894 at a maximum rate of 8 per cent. on estates over £1 million, which would be worth £10 million today. A substantial extra charge has already been levied, because the rate now varies from 25 per cent. to 75 per cent., the latter figure in respect of estates of over £500,000. Therefore, there have already been substantial increased taxes on capital.

Secondly, a capital transfer tax does not redistribute wealth, nor does a wealth tax. They concentrate wealth in the hands of the Government, which is the very opposite of distribution. They strengthen the economic power of the State against the individual. It is interesting that, as this week's Economist pointed out, the day before the Bill was published the LEFTA Group published a pamphlet by John Mills entitled "Redistribution, A Review of Progress". I have already quoted its seventh conclusion. On page 1 we read: it is impossible to increase working-class incomes to any substantial extent by milking the rich still further if the main objective is more equality for anyone". If one wants to distribute wealth and not concentrate it, a form of inheritance tax on the donee is better, not a tax on the accumulated gifts of the donor. Such a tax was proposed by Anthony Barber in the Green Paper in 1972.

The Chancellor's third reason—that other countries have a capital tax, and therefore it is all right that we should have one—must be considered in the light of the weight of all taxes both here and overseas. A comparison was given in the 1972 Green Paper. An extra tax cannot be considered in isolation from the effect of all other taxes. A table in the Green Paper showed that in the relevant year, 1969, the yield from death duties alone in this country, both as a percentage of total central and local taxes and as a percentage of GNP, was already higher than the yields in Western Europe from the total of death duties and gift duties combined. The countries compared with us were Belgium, Germany, France, Italy, the Netherlands, Denmark and Luxembourg. The percentage capital tax here was also higher than in the United States and in New Zealand. We are not low but very high in the league of capital taxes. We do not need extra taxes.

I turn to consider some of the specific features of the proposals on capital transfer tax in the Bill. The Chief Secretary spoke of the benefit to the surviving spouse. If the total estate is left to the widow or widower, there is a benefit strictly to the surviving spouse—but at what penalty to the children! The amount payable on the second death is much greater under the new rules than under the old estate duty rules with the surviving spouse exemption. [HON. MEMBERS: "No."] I am surprised that the Chief Secretary, being an accountant, does not know this point. The only exception is for estates over £1 million. For estates under £1 million the amount of duty under the new tax after the second death is greater than the amount of estate duty under the old tax with surviving spouse exemption. The suffererers are the children. It is a depressing thought if both parents happen to die in a tragedy and leave infant children. I wonder how many couples will leave their estates wholly to the surviving spouse, when the full consequences for the next generation are realised.

Secondly, one of the peculiarly Socialist features of the tax is that children are treated no better than strangers, with the one exception of gifts within the marriage consideration to which the right hon. Gentleman referred—that is, gifts upon marriage, the £2,500. Apart from that, children are treated the same as strangers. In many other countries where there is a gift tax, a lower rate is charged on gifts to the families than to strangers, but the Government do not appear to have considered that. They do not want children to benefit from the efforts of their parents.

Thirdly, although we have rampant inflation, there is no provision for indexation. If inflation continues at present rates, the £1,000 per annum exemption will soon be worth very little, and in effect the tax will become a prevention of gifts tax. Money, land and companies will remain in the hands of the older generation. They will not make the gifts, because of the tax. Some companies and farms will remain far too long in the hands of senior members of the family, when it would be better to pass them over to the younger generation from the point of view of management.

Fourthly, there is no quick succession relief, except in the case of some settlements.

Fifthly, the value of the gift is not the value that passes to the receiver but the loss to the donor. If the gift is part of a whole—for example, shares in a company with which control passes—the amount liable to tax will be greater than the amount given. Although the test is what is lost to the donor, and although the gift will rank as a realisation for capital gains tax purposes, no allowance is made to the donor for capital gains tax. It is a cost, a loss, to him, but he will have to pay it in addition to the capital transfer tax. That unfair extra impost does not apply to estate duty. We removed it.

The two taxes together—capital gains and capital transfer—will lead in many cases to a higher rate than that formerly payable under estate duty and to much higher rates than have yet been published for the capital transfer tax.

Sixthly, the effect of the Bill on agriculture will be devastating. The only asset of many farmers is their land. Many farmers, even with reliefs, would have to sell part of their land to pass some of the rest to the family. We should witness fragmentation and destruction of family farming if the Bill went ahead unamended. The proposed reliefs in some cases are not reliefs at all, and in other cases they are wholly inadequate. In particular, the figure of 20 years' purchase of the rental is much too high. The fact is that the previous estate duty provisions were much better for the health of farming and therefore better for food production.

Seventh, if the effect on fanning is devastating, it is difficult to find words strong enough to describe the effect of the tax on those who invest in woodlands. That point has been raised and we shall return to it again.

Eighth, when we consider the effect of the taxes at present proposed on small businesses, the only rational conclusion is that the Chancellor and his hon. Friends are out to destroy them. The provisions would mean that to pay the tax the owner would have to sell the whole or part of the undertaking. Who would purchase that, other than the State? The nation would be living on its seed-corn, which is a sure recipe for calamity. In a letter to the Chancellor the Small Businesses Association wrote: We are sure that it is no exaggeration to say that the combined effect of the proposed wealth tax and capital transfer tax would be to destroy all privately owned businesses within a generation. The Opposition will fight for small businesses, believing that they are a valuable part of our national life.

Ninth, the provisions in respect of charities are extraordinarily mean, will put some charities in difficulties, and will severely affect the setting-up of new charitable foundations and trusts.

Mr. Robert Adley (Christchurch and Lymington)

Is my right hon. Friend aware that the Secretary of State for Industry has said that he is interested only in taking over big businesses and not small businesses? How does my right hon. Friend expect people to have any incentive to build up their small businesses when faced with a threat like that from the Secretary of State for Industry?

Mrs. Thatcher

If the Government continue, small businesses will not be built up and we shall lose an important source of wealth-creating activity.

Tenth, although there are many provisions about which I have made no comment, I must refer hon. Members to the provision contained in Schedule 7. It has always been a feature of estate duty that it did not apply in respect of property passing on the death of members of the Armed Forces on active service or other service of a warlike nature. That exception is to be abolished by the Government in respect of tax on capital transfers on such deaths. In what year is the abolition to occur? In 1984. Perhaps the Government will argue that by that year, at the present rate, there will be no Armed Forces. However, so long as our people are called upon to undertake such service for the country, and its way of life, so long should the exemption remain.

Most hon. Members would accept that in principle a capital transfer tax could substitute for estate duty. It could be a legitimate source of taxation provided its effect was considered in relation to other factors and it could be more beneficial than some of the older taxes. However, some of the provisions of the Bill will have to be altered radically, otherwise they will damage the wealth and food-producing capacity of our nation to the disadvantage of us all.

The last part of the amendment refers to Clause 14, which is the trade union clause. Yesterday in a Written Answer the Secretary of State for Education and Science announced, as part of his public expenditure economies, an increase of 3p in the price of the school dinner. Yesterday the Government were taking money in from school meals. Today, under the Bill, the Government will give back £10 million to the trade unions—a fitting commentary on the priorities of Socialism.

The Chancellor of the Exchequer could have produced a recipe for recovery. The potential, the savings and the ability are there, but there is a doubt whether the Government want a flourishing, independent, private enterprise sector in industry. It is not enough to say that he does want such a sector—his actions must prove that he does. Until that time, confidence will not be restored and the right hon. Gentleman can offer only a recipe for decline.

5.35 p.m.

Miss Margaret Jackson (Lincoln)

I listened with the utmost interest to the speech of the right hon. Lady the Member for Finchley (Mrs. Margaret Thatcher). I have never heard the right hon. Lady speak before and was much impressed by her fluency and by the logic of many of the arguments she put forward, although I was not convinced of their end result. However, one point did strike me with considerable force. No one listening to the right hon. Lady would imagine that the Conservative Party had been in power less than a year ago, or that the inflation to which she referred, and which we recognise as presenting a major problem requiring a long time to ensure a solution, had any connection with events while the Conservative Party was in power. Indeed, no one listening to the right hon. Lady would have imagined that it was the failure of the Conservative Government to deal with that problem which has led to their being on the Opposition Benches today.

I should like to turn to my own view of the Finance Bill and of the Budget. I expressed some reservations concerning the emphasis on certain proposals and the timing of some of them. Nevertheless, I broadly welcomed both the Budget and the Finance Bill, since their purpose is to increase the fairness of our taxation system and to bring about a greater measure of redistribution of wealth.

I believe that the Budget, broadly speaking, has steered the right course, given the disastrous economic situation inherited by the Government, including problems concerning the balance of payments, the level of inflation, and the other indicators, to which there will no doubt be constant references during the debate. The Chancellor was faced with an inordinately difficult task. I believe that he made as good a job of it as anyone could have done, and certainly a better job than we could have expected on his record, from the previous Conservative Chancellor of the Exchequer.

The right hon. Lady referred to business confidence and to the problems from which we have suffered for many years, under successive Governments, which have been put down to lack of business confidence. I believe there can be few men in whom business men have had less confidence than the former Conservative Chancellor of the Exchequer, namely, Mr. Anthony Barber. I cannot but feel that business confidence today, whether or not business men like many of the measures put forward, must be greatly enhanced by the presence in office of my right hon. Friend the Chancellor.

I should particularly like to welcome two measures contained in the Finance Bill. The first is Clause 14, which removes the penalty suffered by the trade union provident funds because of the operation of the Industrial Relations Act. I believe the right hon. Lady said that this penalty was being removed without good reason. It seems to me that there is very good reason for removing the penalty. It was, after all, the right hon. Member for Carshalton (Mr. Carr) who told us that that penalty was never intended to be imposed, that it was a mistake, and that something would be done to set the matter right. Nothing was ever done.

It seems to me that those are eminently good reasons why the penalty should now be removed and why the trade union movement should not suffer from the mistakes made by the right hon. Gentleman. I welcome the removal of that penalty, since the provident funds are involved and therefore the widows of the trade unionists, the pensioners receiving pensions from the trade union funds, have been affected by it.

Perhaps even more I welcome Clause 17, which will introduce a capital transfer tax and which will clearly be the subject of much contentious discussion. I listened with great interest to the comments of the right hon. Lady concerning that tax and also to her reasoning concerning the lack of any necessity for the tax-the fact that previous taxes affecting the wealthy had been severe. The right hon. Lady described in the most moving terms the enormous yield that estate duty had brought to the Revenue over the years.

But I feel that her argument would have been more convincing if at the same time she had been able to quote figures showing how severely the distribution of wealth had been affected by these measures. After all, it is not merely the sums raised year by year for the Revenue with which we are concerned. We are also concerned with the end effect on the distribution of wealth and the amount of wealth controlled by a certain percentage of people. If the right hon. Lady had been able to show with equal conviction that the number of wealthy people was diminishing with great speed, I should have listened to her with more sympathy.

As my right hon. Friend said, the proposal is a long-overdue reform. It has always seemed to me both ridiculous and indefensible that those who earned substantial sums by their exertions should in many cases suffer more because they earned them than those who inherited wealth. That is a system which cannot be defended, and when the right hon. Lady spoke of the penalties which would be imposed on the children of the wealthy, it seemd to me that this was absolutely right. It is right, proper and fair that people should get a reasonable return from the work which they themselves do, but I have never seen any reason why there should be a few—and it is a comparative few in our community —who are sheltered against the difficulties which beset the rest of us by the vast inheritances that they have. I have heard the right hon. Lady defend the system, but very few people could defend it with much conviction.

This tax will give us an improvement —especially if it is to be more effective than estate duty—in the equality of wealth and its distribution.

I listened to what the right hon. Lady said about tax avoidance. Again it seems to me extraordinary that there is such a contrast, both in this House and outside it, between people's attitudes to tax avoidance and their attitudes to the false claiming of social security benefits. It appears that, the larger the crime, the more society is prepared to forgive. To me, tax avoidance is a crime, and it is a crime which we should take steps to prevent if we possibly can.

I welcome the tax also because, ever since I became interested in or aware of politics, in common with most other hon. Members I have been engaged in discussing the many reforms which we would all like to see in taxes, in the social services and in health. These reforms have only one common factor. It is that they will all cost far more. Vast sums of money are needed for reforms which all of us would like to see.

I have become interested in the industrial and economic side of policies only through failing to discern from where the resources for such changes were to come. It is because I believe strongly in the need for these additional resources to be available and because I have strong views about how they should be spent and the extent to which they should be spent, that I welcome the introduction of a tax which will bear on the wealthy, who at present in my view are not carrying anything like a fair share of the tax burden.

It is only through the right industrial and economic policies that we shall ever get the money to pay for these social reforms. This Government have made a start along the right road in that respect, as in many others. It is in that light that I welcome these proposals.

5.45 p.m.

Mr. William Clark (Croydon, South)

I am sure that we all listened with great interest to the hon. Member for Lincoln (Miss Jackson). However, I hope that she will not think me rude if I say that if she believes that business men today look upon the present Chancellor of the Exchequer with some sort of satisfaction, she will believe anything. Being in business myself, I can assure the hon. Lady that what she says is so much claptrap. Business men today are petrified at the thought of what the Chancellor of the Exchequer may do.

Miss Jackson

Were not they petrified by the former Chancellor of the Exchequer?

Mr. Clark

I should not have thought so. In any event, I was about to remind the House that the hon. Lady went on to reiterate what the Chief Secretary said about this Budget being a fair one. I think that it was a Budget of envy, and I shall try to point out how this antagonism towards capital in all its facets is the main factor responsible for the low ebb at which our economy is at the moment.

There is one feature in the Budget which I welcomed, and I say this at the outset of my speech because I am afraid that during the remainder of it I shall not be able to make many other kind remarks. I am delighted that the Government have honoured the undertaking given in the last Finance Bill about pension funds and building societies. This will give another channel of investment for building societies. The only long-term investors are the pension funds, and the building societies are long-term lenders. I am delighted that the Government have acted on the advice that they were given to marry the long-term investor with the long-term lender.

In my view, the right approach to this Bill is to ask whether it helps the economy. The Chancellor of the Exchequer made much of the stock provision. But, as my right hon. Friend the Member for Finchley (Mrs. Thatcher) pointed out so lucidly, it does nothing to help the credit-worthiness of any company. It is merely a deferment of taxation. We have a bankable assurance for two years, but it is only a deferment of taxation. It may help the initial cash flow of a business but not its credit-worthiness, and it cannot possibly be the basis for a company getting any support on the money market or the Stock Exchange.

The Government are being a little short sighted in that they have taken only the retail trades—that is, businesses which hold stocks. However, there are many large amounts carried forward each year in the invisible markets. I refer to consulting engineers, accountants, solicitors and so on. They do not have work in progress as the term is understood in the building industry, but they have work in progress in a professional capacity. There are many professional men earning foreign currency who will have work in progress at the beginning of the year, but they have been excluded.

The Government have taken this arbitrary figure of £25,000. It is not beyond the wit of the Inland Revenue to work that figure on £10,000. The accountancy profession could do the work for the Inland Revenue, subject to the Inland Revenue's checking. I remind hon. Members that we are promised this inflation relief on stock for only two years.

The Government say—and I suppose that they mean it—that they want a mixed economy. Why then do they penalise the small business man? It would be out of order for me to go into a long argument about the self-employed. But the small business man invariably is self-employed for national insurance contribution purposes, and in recent legislation he has been clobbered.

As my right hon. Friend the Member for Finchley says, a capital transfer tax —may be; but it should be taken in the context of all the capital taxes that we suffer, whether it be estate duty, capital gains tax, capital transfer tax, or whatever. But, in addition to that, we are threatened with a wealth tax. Where will it end? All these taxes impinge on the wealth of the individual, which means the wealth of the nation. As my right hon. Friend mentioned, there is also to be tax on North Sea oil. The Government cannot have it both ways. Extrac- tion of oil from the North Sea is being delayed simply because of the legislation of this Government.

Let us consider businesses again, and the surcharge on the advance corporation tax. The Government accept that companies have cash flow problems, and I cannot therefore see why companies should be forced to give interest-free loans to the Government in the form of 50 per cent. of their advance corporation tax. It is no good the Chancellor saying, as he said in the Budget debate, that people who can afford to pay dividends must have huge profits. He overlooks the fact that much of the financing of companies in this country is carried out by the issue of preference shares on which dividends must be paid. If they are cumulative preference shares, the interest is a loan charge. In small businesses much of the capital raised to run companies is raised through preference share issues.

Here the Chancellor is saying glibly that companies have to pay advance corporation tax only because they pay ordinary dividends and have made profits. It is very serious when the Chancellor says something like that with conviction and, I have no doubt, with sincerity. This frightens me. It also frightens business men that this Chancellor does not understand how business is financed and does not understand the money market.

My right hon. Friend also spoke about the saver being penalised. In my view Clause 5 represents the meanest trick any Government in this country have ever perpetrated on the taxpayer. Before the hon. Member for Luton, West (Mr. Sedge-more) laughs, let me give an example. I am sure that with his great industrial experience he will be aware that there are some unfortunate individuals who suffer industrial injuries involving, perhaps, machines. Some of them unfortunately fall into machines. I am sure that the hon. Gentleman who is laughing away about my saying that the Government are mean, will accept that the trade unions do a good job of work for the unfortunate people in ensuring that they get compensation. An individual's earning capacity may be diminished, or may disappear, because of a loss of an arm or a leg.

In many cases the individual has been earning £40 or £50 a week but because of the loss of a limb can now earn only £20 a week. The court awards him a capital sum to provide £30 a week, and so he is left in the position of earning, say, £20 a week, and having unearned income of £30 a week, and he will be penalised to the extent of 48 per cent. on any amount over £20 a week. Does not the hon. Gentleman think that that is mean? Does he regard it as being fair? Does it not show where the Labour Party has its priorities?

No doubt there are some people who may have more wordly goods than others, but is it right to clobber everybody in order to get at one or two? The Chancellor should take this point to heart. The Government are being heartless in saying that an individual will be allowed only £20 a week unearned income and that above that he must pay an extra 15 per cent. The Government should think twice about this.

As my right hon. Friend pointed out, many people in this country have not had the advantage of belonging to superannuation schemes. Successive Governments have permitted contributions to superannuation schemes to be allowed against personal tax liability. On retirement a person who has been in a superannuation scheme gets a pension that is allowable for tax purposes because it is considered to be earned income.

But consider the man who has not belonged to a superannuation scheme. He may have earned a larger salary during his working life, but he has not received any allowances for contributions to superannuation. He has had to save his own money and when he retires he receives investment income. If that is more than £20 a week he will have to pay a surcharge. [HON. MEMBERS: "No."] It is no good hon. Gentlemen denying this. What I have said is accurate.

It seems that the retirement age is gradually being lowered, and at present in most cases women retire at 60. But it is ludicrous to take an arbitrary age of 60 or 65 for the purposes of what we are discussing. The whole concept of penalising small savers in this way is wrong. It is heartless that people should be penalised in this way upon retirement.

The price controls announced at the same time as the Budget have helped to a certain extent, but I regret that the whole of the wage cost is not also allowed under the price control mechanism. I do not think that you would wish me to talk in detail about price control, Mr. Deputy Speaker, but I think I should be in order to talk about company dividends and liability to advance corporation tax. Although the Chancellor has elevated the dividend limitation slightly, companies are being hit by the 52 per cent. corporation tax because they cannot take advantage of what is known as the imputation system.

What we need in the country at large, and in business in particular, is confidence, and we can get confidence only if it is seen that the Government are trying to help business, not hit it. The last FT index I saw was at about 154 or 155. It might have gone up a point or two today, but the Stock Exchange is certainly depressed, and that is serious. We must remember that people on the Stock Exchange are not all speculators who are in one day and out the next. Pension funds contribute roughly half of all shares in this country. These are the funds on which workers' pensions are based.

Share values are being depressed and we must give an incentive to the Stock Exchange. I assure the House that I am not pleading the case of the speculator on the Stock Exchange. But there are warning signs, with Krugerrands being bought more or less ad lib, and with new and old sovereigns being bought. This is a flight from money. There is no intrinsic value in Krugerrands, and there is no intrinsic value in sovereigns, except in the gold content. The buying of Krugerrands and sovereigns provides a danger signal. We must get more and more people into equities, but how can this be done?

I have impressed upon successive Governments, including my own Government, that it is high time that we phased out capital gains tax. My right hon. Friend rightly said that many of the taxes introduced by the present Government are taxes on inflation. A glaring example of this is the imposition of the capital gains tax. It should be phased out, perhaps over five or seven years.

There is no point in thinking that we can run the economy efficiently when a person who invests £1,000 today and sells that investment in five years' time for £2,000 is told that he has made £1,000, when in the meantime the purchasing value of the original amount has probably gone down by half, and on top of that there is capital gains tax.

The Government should do more to help private enterprise. In the present political atmosphere I have some sympathy with the Chancellor. He is doing a tight-rope act. He has to satisfy his Left wing, but he also has to satisfy the Bank of England. He will shortly have to satisfy more and more of the people who are putting money into this country. He has to try to maintain a balance between the Left wing of the Labour Party and the so-called moderates. This is difficult, and in fact he will never satisfy the Left wing, the Marxists and the rest. The longer that the Chancellor tries to satisfy that element in our society the more and more will our economy go downhill—[Laughter.] The hon. Member for Luton, West may laugh—

Mr. Brian Sedgemore (Luton, West)

What does the hon. Member mean by "Left wing"?

Mr. Clark

I do not have to define terms such as "Marxist" or "Left wing militant".

Mr. Sedgemoor

I hope that the hon. Gentleman does not have me in mind.

Mr. Clark

I am not suggesting that the hon. Member is one. I mean that there are many people in our society who are not interested in our way of life. One of their objects is to overthrow the capitalist system, and my fear is that the Chancellor's tightrope act between those two factions in his own party is damaging the economy.

This Budget does nothing to help business. There are a few sops here and there, such as the concession on stock, which can easily be demolished, but behind it is the iron fist against capitalism and the small business man. What we need is confidence not con-trickery. That is why I hope that the Bill will be rejected.

6.2 p.m.

Mr. J. Enoch Powell (Down, South)

It is five weeks exactly since the Budget was introduced. It has been five weeks in which the anxieties which were then felt have become much stronger and the alarm as to the economic future of this country which pervades all sections of the public has become more insistent. Whether we like it or not, a debate about this Budget is a debate about those fears, what are the grounds for them and how, so far as they are real, they ought to be met.

Many who are rightly fearful know not what it is that they fear. There are catchwords which seem to explain to many who use them what is wrong. There is the talk about this country paying itself more than what it does is worth, which I always find a nonsensical expression. There is the allegation that we are attempting to live at the expense of the rest of the world, on the kind charity of our neighbours, a statement which only has any relation to reality at the extreme outside margin. There is the notion that somehow there has been a mysterious degeneration, a progressive degeneration, in our society, in our work force and in our very fibre.

I would say that these explanations are far from the mark, although the fears themselves are just. I would say that we are indeed in a parlous condition and that the nature of that condition is our instability. We are uneasily poised in circumstances where the slightest change in any of the factors could bring about, literally, disaster.

That uneasy equilibrium, constantly under threat, is the vicious triangle which links the deficit on our balance of trade with our huge overseas borrowing and that in turn with the enormous net borrowing requirement of the Government. These three are so linked and hinged together that a failure at the point of any one of the joints would bring about the collapse of the whole structure. Certainly we cannot be at all sure of the stability of that triangle.

The Chancellor has been on his travels in recent days. If report tells true, he has been attempting to ensure that the inflow of short-term loan capital—if possible, medium-term loan capital—from overseas is maintained. I do not happen to like the habit of senior Ministers of the Crown going round the world, either on sales trips or, even worse, on borrowing trips; but this trip was the evidence of the Chancellor's knowledge of how much depended at this moment upon his continuing ability to borrow from abroad huge sums of money in order to keep the structure of his triangle in some sort of stability.

So those are right who suspect that we are in danger, almost from week to week, of a collapse brought about by the action of people over whom we have no direct control. But suppose that this liberal readiness in those quarters to lend to meet the necessities of the British Treasury continues. Let us make the most hopeful assumption, if such it be, that we can continue to suck in these massive sums for the sustenance of the Government's net borrowing requirement. That is not a process which can be continued for very long. Even if it can be continued at our option, still it is a process which by its very nature is self-defeating.

Here too it is the healthy general instinct of the people that a structure which is dependent to this extent upon the massive infusion of sums from overseas cannot be safe or reliable. What is urgently necessary is that this country should regain control of its own economic and monetary future, that we should regain what, even in the presence of at any rate one or two occupants of the Opposition Front Bench, I would coin a phrase to describe as the ability to "stand on our own feet".

The present financial year is far gone. The net borrowing requirement which caused such a sharp intake of breath when mentioned by the Chancellor in his Budget speech—the infamous £6,300 million—is more historic now than prospective. It is more a retrospective calculation than a reality towards which we are moving in the future. It is to the finances of the coming year that all the attention and all the duty of the Government and the Chancellor must be directed.

We are moving into that crucial quarter of the year for the Treasury, the quarter which the poet Milton, who found it the only quarter in which he could compose, described as "between the winter solstice and the vernal equinox"—the first three months of the calendar year. They are the months in which the Government's policy on spending is determined. It is a blessing that this year the Public Expenditure White Paper is delayed, because that White Paper is a critical document and none of us should begrudge the Chancellor or the Government time to come to mature conclusions about what is to go into it. It is also the quarter of the year in which the critical balance has to be struck between those decisions on expenditure and the anticipated revenue.

No one who does not have access to the inner calculations of the Treasury can simply project the net borrowing requirement of the current year and form any notion of what is portended for the next financial year, all things being equal. For those outside to attempt to play that game is worse than a waste of time. I will therefore venture upon a crude assertion about what is required in the financial year to come, about the aim which the right hon. Gentleman and the Government must be setting themselves if they are to give back to this country some sense of economic stability, some sense of national independence and the right to look the world in the face.

I would say as the very minimum that in the next financial year we cannot do with a net borrowing requirement greater than one-third of that which we are experiencing in 1974–75; and perhaps to assume that in the circumstances of 1975–76 so large a figure as even £2,000 million could be secured without the risk of inflation is to be over-generous and over-optimistic. In any case, there is no symmetry between a deficit and a surplus on the Budget; so that while the risk lies all in one direction, there is no counter-balancing risk if it turns out, after all, that the net borrowing requirement could have been bigger than it was, without incurring inflationary consequences. That is the task which lies before the right hon. Gentleman.

In appraising the present situation, and in appraising this Budget within that situation, the House is called upon to give its own judgment as to what is required for the future; and, in giving its own judgment, to commit itself to the support of whatever policies comply with that judgment. For the right hon. Gentlemen on the Treasury Bench are not sitting there in the isolation of personal responsibility, with all the rest of us destitute of responsibility. We share, in one way or another, the responsibility for what they do in the next three months.

If anything like the objective that 1 have ventured to grasp at is to be achieved, there are three separate areas in which the Chancellor and the Government must be prepared to face unpopularity.

The least of those three is the maintenance of a level of revenue not less than the real level of revenue in the present financial year. No one, not even, I suspect, a Socialist Chancellor of the Exchequer, enjoys increasing the real level of taxation; and of course it is the business of all in Opposition to examine the individual components of a total tax yield. But that we ought not to look for any remission in the real level of taxation in 1975–76 I would regard as axiomatic. If that is the judgment of the Chancellor of the Exchequer as the months go on, then in that he deserves support.

The next area is a much more difficult one. That is the area of public expenditure, and in this respect the first quarter of the year is the quarter that is commonly fatal to Chancellors of the Exchequer. Their fates may be expressed in different forms. They may be visible: there was a case of that at Epiphany 1958. But there can be the worse fate of being humiliated into agreeing to do what one knows is wrong and to attempt to defend it. I will put no names to that less eligible alternative.

On expenditure, the Chancellor of the Exchequer in his Budget speech gave simply a four-year average figure, 2¾ per cent. per annum in real terms over four years. Well, there is a lot of play in an average of 2¾ per cent. over four years. The Chancellor of the Exchequer has to narrow his attention within that range upon the immediately coming financial year; for that is where the crux will arise. It may be that in 1975-76, if he is to achieve the objective I have put forward, he cannot have a 2¾ per cent. real terms increase in public "expenditure overall. It may be that he cannot have any increase in public expenditure overall. It may be that he has to have a real reduction in public expenditure overall. None of us here can know that at this moment. Perhaps even in the Treasury itself they do not yet know. But if that is necessary in order to achieve the general balance, to regain control of our own economy so as to stand on our own feet, the Chancellor ought to do it, and he ought to receive the general support of this House in doing it.

There is, however, the third and most perilous area of all where the pressure upon the Chancellor and his colleagues will be at a maximum. There has been reference in this debate already to the consequences of inflation itself in terms of unemployment. I dare say it is true that when inflation rises to such a point that the ordinary processes of distribution, production and the rest are interrupted, unemployment literally and directly flows from inflation. But I feel that for the purposes of the Chancellor of the Exchequer it is not that link which he has to fear. It is the fact that where inflation is running at 18 per cent., or whatever it may be at the moment, in any economy whatsoever, success—and we must have the success, we all agree on that—in reducing the rate of inflation, however it is done, must of necessity result in the emergence of a substantial level of unemployment. That is in the nature of things, for the simple reason that the decisions which, if the rate falls from 18 to 8 per cent., will have that consequence have already been taken. It is the existing world. We cannot undo, at the moment when we reduce inflation, all those decisions of the past to invest, to employ, to make contracts and so on, from which the consequences of dislocation and unemployment must follow.

So the Government and the Chancellor of the Exchequer, in doing what we nearly all know is their duty, have the right to ask, and have the right to receive, the support of this House, and through this House of the country, when the inevitable side-effects of success in dominating inflation emerge. Too often in the past when that moment came, when success was available to us, when we could have regained our self-respect, time and again when the spectre appeared people have not been prepared—and I believe it was there the fault lay—for facing it.

From this debate and that which follows it tomorrow the Chancellor ought to be given not merely advice and exhortation but the promise of support if he does what is necessary. This debate on the Second Reading of the Finance Bill has been turned into the first of two days of debate on the state of the economy by the amendment tabled by the Opposition. I listened to the speech of the right hon. Member for Finchley (Mrs. Thatcher) with great attention. I do not think I have ever heard inflation denounced more convincingly. Satan never rebuked sin with such eloquence as she denounced inflation. There was nothing missing. Inflation finished a prostrate opponent.

Then one waited; for surely something ought to have followed. [Interruption.] Perhaps it is to follow tomorrow. If so, I think that our patience is perhaps being unduly strained, and perhaps it was unfair to the right hon. Lady to insist that the key point of her own argument should be compulsorily kept out of her own speech for the convenience of the pattern of the debate.

Be that as it may, it was necessary that something should follow, above all from the spokesman of the Opposition in this House—namely, the statement of what ought to be done about it. Yet between the end of her denunciation of inflation and her commencement of an examination of the individual clauses of the Bill, there was not a gap large enough to insert the point of a pin in the right hon. Lady's speech.

That is not the position of my right hon. and hon. Friends and myself who are in this House to represent the greater part of Northern Ireland. I will only recall briefly what I said in the debate on the Budget Statement. I there said: I do not know whether the official Opposition intend to record a genera] repudiation of the Budget. I gather that they now do. If the amendment on the Order Paper does not mean that, and if the mutterings and threatenings about tomorrow's debate do not mean that, I do not know what they do mean. If they do, that is certainly not something in which we should be justified in joining while free to criticise and oppose individual them. Indeed, we should regard ourselves, while free to criticise and oppose individual elements in the Budget"— I reaffirm that of the Finance Bill— as duty bound by the terms on which we were returned here to support the Chancellor of the Exchequer in anything that will contribute to controlling the rise in public expenditure and fighting inflationary financing." —[OFFICIAL REPORT, 14th November 1974; Vol. 881, c. 674.] If that was our duty when we said that to our electors in October, if that was our duty and, I believe, not only the duty of this handful but the duty of all Members of this House as a whole at the time of the Budget in November, it is more abundantly so today. I hope that it will not be only on the benches behind the Chancellor of the Exchequer that encouragement and support for what nearly all of us know needs to be done, has to be done, and sooner better than later, will be forthcoming.

6.23 p.m.

Mr. Brian Sedgemore (Luton, West)

I have often wondered whether the right hon. Member for Down, South (Mr. Powell) was a deified demagogue or a demoniacal demi-gorgon. I have not yet made up my mind, and I hope that the House will forgive me if I do not follow his forbidding metaphysical innuendoes and his cruel and simplistic solution.

I was interested in the right hon. Gentleman's references to the speech by the right hon. Lady for Finchley (Mrs. Thatcher). When she spoke about inflation, I understood that she had actually met a man called Mr. Tony Barber but had never understood the effects of his measures. Indeed, inflation was something that she had discovered some time after February, late in the night when she was taking time off from her normal bedtime proclivities. But I admired the right hon. Lady's speech. It was a fighting leadership speech, and I wish her luck in the leadership stakes.

I hope that the hon. Member for Croydon, South (Mr. Clark) has brought with him today his tears for humanity. Before I go on to speak about unemployment, however, I want to say that we have a good Treasury team. It is a pity that it always takes the advice of the Treasury. We have a tough and acute Chancellor of the Exchequer, who at his worst is brilliant compared with his predecessor at his best, and there are some good measures in the Bill. I am sure that the capital transfer tax, for example, will go down as one of the-more important taxes of this century. I shall not be quite as complimentary in some of the remarks I intend to make about the subject of unemployment.

I understand that the December unemployment figures were due out this Thursday and in the normal way we would by now have had leaks through the usual channels. But I am told that they will not be available on Thursday and may not arrive until January. In November, however, 653,000 people or 2.8 per cent. of the working population were out of work in the United Kingdom, and the number was rising. More than 50 per cent. of those people had been out of work for eight weeks or more, and vacancies totalled fewer than 300,000 and were falling. No matter what criterion is used —international, historical or the current definition of full employment given by the Department of Employment—we have moved away from conditions of full employment and we are moving further away from them.

In his Budget Statement my right hon. Friend the Chancellor of the Exchequer said that he hoped the increase in unemployment would be modest. The Treasury, less sensitive about these things, has advised him that he might get through the winter with fewer than 750,000 unemployed, and that he should get through next winter with fewer than 1 million. That seems to accord with the recent survey by the National Institute for Economic and Social Research, which said that while unemployment should rise strongly next year it could be less than 900,000.

The day after the Budget Statement, Mr. Peter Jay, economics editor of The Times, spoke of my right hon. Friend as a Chancellor courageous enough to qualify the post-war commitment to full employment. That seemed to me a little unkind. Surely, Chancellors of the Exchequer in successive Governments over the last decade have qualified that commitment, if not in philosophy. But the Labour movement would expect the present Chancellor to hold to the commitment to full employment if only be-because the Labour manifesto in October committed us to restore and sustain full employment.

Of course, it was my right hon. Friend who told the Labour Party conference in November that the transfer of income from working people to companies in the Budget was necessary for the safeguarding of jobs. Just how will the public regard that stirring call as they see unemployment rise during this winter and as they see it rise throughout next year? After a Budget which made peculiar play of the word "waste", some may wonder what could be more wasteful than leaving scarce human resources to do nothing.

Clearly it is time that the Labour movement paused and asked itself what the commitment to full employment means. What did the manifesto pledge mean? Was that pledge really attainable, given the rate of inflation, the balance of payments difficulties and the downturn in world trade? What should be the policy now? On 22nd November I asked what the amount of unemployment would be if there were full employment, and I was told by the junior Minister that full employment did not admit of a precise definition in quantitative terms. On 2nd December, however, another junior Minister said that the current level of unemployment was unacceptable.

The concept of full employment as an objective was formulated by Keynes but did not gain political respectability until the wartime Beveridge Report. I think that the Beveridge definition of full employment is as good as any. Lord Beveridge said: It means always having more vacant jobs than unemployed men. It means that the jobs are at fair wages, of such a kind and so located that the unemployed men can reasonably be expected to take them; it means, by consequence, that the normal lag between losing one job and finding another will be very short. In the light of pre-war experience and in the expectation of post-war dislocation, Beveridge put the level of full employment at 3 per cent. But the war has been over for a long time, and one would have thought that had he been alive today he would have put the figure lower.

Between 1944 and 1966 the highest annual rate of unemployment was 2.4 per cent., in 1963, and in only four other years in that whole period did unemployment exceed 2 per cent. It was at its lowest in 1955, at 1.1 per cent. Suddenly the position changed in the mid-1960s, when a Labour Government were in office. Unemployment increased in relation to job vacancies, which seemed to be used as a measure of excess demand. It was thought then, without much evidence, that this could be related to the introduction of redundancy payments and earnings-related benefits.

It was, in fact, partly the result of deflations by successive Labour Chancellors at a time when balance of payments problems faced us and at a time when first devaluation and then floating exchange rates were considered to be dirty words. The increase in unemployment from 1.5 per cent. in 1965 to 27 per cent. in 1970 must have contributed to the defeat of the Labour Government in that year.

Then followed the Conservative Government between 1970 and 1974, when there were still higher levels of unemployment. In the early months of 1972 unemployment exceeded 1 million, or 4.4 per cent., and nobody at that time could have been more unhappy than the then Prime Minister, the right hon. Member for Sidcup (Mr. Heath), who during the debate on the Budget in 1969 gave his views on what constituted an acceptable level of unemployment. At that time the right hon. Gentleman said that 1968 was without any doubt … the worst year … in our history. Unemployment higher for longer than at any time since 1940 —over half a million now for 20 continuous months."—[OFFICIAL REPORT, 15th April 1969; Vol. 871. c. 1045.] I am told that the right hon. Gentleman is a man of truth. How did the man of truth stand up in this House and complain bitterly about 20 months of unemployment of over half a million and then lead a Government that kept unemployment at well over half a million for nigh on four years? For maintaining a higher and unacceptable level of unemployment, the Tory Government suddenly found that they lost office.

The conventional Treasury view about that unemployment in 1972 was that the public took it remarkably quietly, but it was partly that unemployment that gave rise to the hostile trade union reaction to the subsequent statutory control of wages and to the Industrial Relations Act that had just been put on the statute book. It was the hostile trade union reaction to the Tory Government that may have led to their downfall, because it could not have been expressed better than by the fact that the Stock Exchange index topped 500 in a week when unemployment topped 1 million.

When Labour took office in March, unemployment was 618,000 or 2.7 per cent., a figure that was almost identical to what it was when Labour left office in 1970, but there was a difference. When Labour left office in 1970 the economic waters were relatively calm. When Labour took over in 1974 the economic waters could not have been more stormy.

We heard the Chancellor's March Budget, and certain Tribune Members stood up in the House and said that as a result of the Budget unemployment would rise. The Chancellor told us that he thought the Treasury was right, but the Treasury was wrong and it thereby maintained its fantastic reputation for false forecasts in these matters.

Now we have had two other Budgets, and the Chancellor has defended his last Budget on the basis that, whatever unemployment may result from the demand management policy of his three Budgets, he has staved off unemployment that might result from the alleged liquidity and profits crisis in British industry.

Even assuming that the Chancellor is right over that—it may be that he is privy to evidence denied to the rest of the nation and not the victim of a propaganda war that has little to do with the real problems facing this country—it does not explain why he could tell the House a few months ago that he would reflate the economy and thereby reflect the Tribune amendment to his Budget, but he has ended up deflating the economy. Just how much he is deflating the economy we do not know, because he has not told us the scale of increases in nationalised industry prices.

Like some virgin in a brothel who is slightly ashamed of taking off her undies, the Chancellor seems remarkably loth to reveal these vital facts about the scale of price rises in the nationalised industries. I believe that we have come to a situation in which we have to ask our Treasury Front Bench certain questions.

Does the Chancellor now believe that running the economy below full capacity helps to stem inflation, or is this being done to tackle balance of payments problems? Just when can we expect to get back to conditions of full employment? Will it be 1976, or 1977? Will it be later still? Or is the answer "Not in the foreseeable future"?

These are not unimportant questions, because economists of all political hues are now saying that it is "inevitable" that the British economy should be run with a higher level of unemployment than hitherto. What we want to know is what level of unemployment the Government think is inevitable, and just how long are we prepared to let the system proceed along its "inevitable" road before we decide that the price is too high.

There is a certain amount of confusion about what is going on. The economics editor of The Times, to whom I have referred and who, according to a maverick computer, will be one of the world's wisest men by the year 2000, said that we should have unemployment in the low millions throughout the 1980s. His less important Conservative editor has said that he would like unemployment varying between 1 million and 2 million on a permanent level, as well as a return to the gold standard. Others are saying that we must expect a level of 1 million on a permanent basis.

The truth is that most of this debate comes from our political opponents. There is a real danger that Members of the Labour Party, not wishing to embarrass our Front Bench, will not join in this debate, and we shall find ourselves sliding into the position of accepting dangerous practices if not dangerous philosophies.

There are many rumblings in high places. Since the October Budget the Prime Minister, the Chancellor of the Exchequer and the Secretary of State for Prices and Consumer Protection have all warned that if the wage restraint of the social contract does not materialise the Government might be forced to take steps that would result in massive unemployment. In other words, under the social contract the blame for unemployment lies not with the Government but with workers. Some people will view that somewhat wryly, because it is the Government who create Budget surpluses and Budget deficits and it is the Government who control the money supply. I can think of many nineteenth- and twentieth-century Governments who bungled the handling of the economy and who would have liked that excuse to explain away their levels of unemployment.

International comparisons of unemployment are difficult and have to be treated with caution, but it seems that some countries, including Germany and Sweden, have managed rather better than Britain over the last decade. Taking the years from 1964 to 1973, unemployment in the United Kingdom varied from 1.8 per cent. to 3.8 per cent. In Germany the figures were 0.7 per cent. to 1.2 per cent., while in Sweden the figures were 1.1 per cent. to 2 per cent.

But suddenly the international situation has changed. Unemployment in Germany today is higher than it is in the United Kingdom, while unemployment is rising rapidly in the United States. I am bound to say that those facts lead me to believe that the estimate given by the Treasury for next winter may be wrong and that the levels of unemployment may be higher than those it forecast. It is clear that the world is poised between recession and depression, and we have to ask whether there are any policy conclusions we can draw from this dangerous situation.

I hope that we shall have a clear statement from the Financial Secretary that he will reject the call for a shake-out in industry which was made by the right hon. Member for Leeds, North-East (Sir K. Joseph) at the weekend. The theory that shake-outs release manpower for more productive enterprise and exporting industries rests on several false assumptions about the mobility of labour. All the available evidence contradicts that theory. The theory is not new. It was presented by the Prime Minister in 1966 when he said: What is needed is a shake-out which will release the nation's manpower, skilled and unskilled, and lead to a more purposive use of labour for the sake of increasing exports and giving effect to other national priorities." —[OFFICIAL REPORT, 20th July 1966; Vol. 732, c. 628.] Apparently, after unemployment would come export-led growth, and after that renewed investment.

Some of my right hon. Friend the Chancellor of the Exchequer's Cambridge economic advisers hold to variations of the same theme. The only trouble is that there is little evidence that people thrown out of work by shake-outs are re-employed in export industries or in more purposive or productive enterprises. A survey carried out in the West Midlands of those shaken out in the unemployment between 1966 and 1970 showed that one-third went back to the same industry after a period of unemployment and that a substantial proportion of the others moved into service industries or were not doing such skilled jobs when they were eventually re-employed. Although exports increased during that period, there is practically no evidence to show that people moved into export industries. There certainly was not an export-led boom and there was no increased investment after that period of unemployment.

The basic premise of mobility of labour outlined by the right hon. Member for Leeds, North-East is wrong. No one who reads his speech would believe, as is the fact, that between 7 million and 8 million people change their jobs every year—that is 36 per cent. of the total work force. That is an enormously high figure. Of those, 4 million pass through the unemployment register each year, the vast majority only fleetingly, and the other 4 million move voluntarily.

For years we have misunderstood the unemployment figures. They do not tell us much about unemployment. They take a snapshot of unemployment at a given time, but behind that lies an enormous movement of workers who register at employment offices.

I have taken it a bit further. I have asked a few Questions of the Secretary of State for Employment and I have discovered that between June 1970 and June 1972—the period of the last Tory shake-out—between 14 million and 16 million people changed their jobs and 8,134,000 unemployed people registered at employment offices. Yet in June 1972 the increase in the pool of unemployment was only 300,000 higher than it was in June 1970. As the pool of unemployment was only a small fraction of the total number who became unemployed, and an even smaller fraction of the total number who changed jobs, it is hardly logical to argue tha the creation of redundancies during that period was central to the necessary movement of labour. With this massive movement of labour it is ridiculous for the right hon. Member for Leeds, North-East to say that firms should give people time off to go to labour exchanges during the afternoons and evenings.

We must remember too that between 1970 and 1974—I do not quote statistics because the two tables I have been given have different bases—the proportion of workers in manufacturing industry fell and the proportion in service industries rose. It seems likely that skilled labour is dissipated by these economic shake-outs, and it must be obvious that economic shake-outs limit the voluntary movement of labour.

In those circumstances the Chancellor should do nothing to satisfy the cravings of a man who, to tackle inflation, wants to increase unemployment and is trying to find excuses but will not stand up and say that that is what he wants to do. We should reject the poisonous fruit of the wayward mind of the right hon. Member for Leeds, North-East.

Trade unions, shortly to be aided by the Employment Protection Bill, might intervene to prevent redundancies at least until conditions improve and Government-inspired investment growth begins. Each worker in British Leyland produces six cars a year, compared with 26 Toyotas a year per worker in Japan, not because of overmanning but because of differences in investment.

If the trade unions adopt a non-redundancy policy, it is inevitable that the Government will have to help. The Government might consider providing subsidies at least equivalent to the unemployment and social security benefits that would have been paid if redundancies had occurred. Such subsidies should be used for firms which are clearly likely to survive the recession or depression and which need to keep their skilled labour forces intact.

The trade union movement might call for some form of selective import control. The fear of retaliation, which is trotted out almost without thinking by the Treasury, might not be so great if the controls were confined to areas where Britain has trading deficits and where there are suspicions of dumping, as with Japanese cars. Japanese companies are getting little if any return on capital whereas British dealers are getting huge mark-ups. The controls should also be confined to countries which use hidden import controls through alleged quality and standard control. In the end it is investment that counts, and it is Government-inspired investment-led growth that counts.

The experience of the last three decades of the performance of private industry has made clear that investment-led growth cannot be achieved by conventional Key-nesian demand management and fiscal concession policies. Investment-led growth will come about only if the Government intervene and if they mean it when they talk about planning agreements and the National Enterprise Board. Without these, however competitive are our exports and however much slack we create through unemployment, it will be home demand that will take up surplus labour, not necessarily in productive areas. Without these tools there will be "phoney" sprints for growth and recurrent balance of payment difficulties, and unemployment will be sought as the cure.

Only if the Prime Minister means it when he says that the National Enterprise Board is to become the fulcrum of the economic system, directing investment into key industries and the regions, can we break out of the stop-go and spiralling inflation and unemployment cycles. For every 100 jobs created by the NEB in the regions in manufacturing industry there should be 80 additional local service jobs created during the following three to five years. If we stand not by the old and barren Treasury orthodoxy but by the Labour Party manifesto, we cannot go too far wrong.

6.48 p.m.

Mr. Geoffrey Dodsworth (Hertfordshire, South-West)

I share the sentiments expressed by my hon. Friend the Member for Croydon, South (Mr. Clark) and by the right hon. Member for Down, South (Mr. Powell) that the public at large are anxious and concerned about the outcome of our economic debate and the effects of the Bill. If one considers the evidence by which the public have to judge the conclusion we reach, it is equally uneasy.

I hope in the next few minutes to suggest at least one practical course of action which is open to the House and the Treasury Bench to take in the cause of seeking to stem inflation. The evidence which people face is that taxation is turning hard-earned savings into Govern- ment spending money. The practical effect of the Bill is that it is turning capital into Revenue spending. That cannot be for the benefit of the nation as a whole. If we want more investment in industry, more investment per person employed, that capital must not be eaten up by day-to-day Government spending. Increases in VAT can only accelerate the costs of everyday life.

We discover that the investment income surcharge is to be at a level of over £1,000 of investment income. This is happening at a time when inflation in the next year or so is likely to be running at 25 per cent. The Government are doing nothing to encourage earned investment on which we need to rely. We are writing into the corporation tax system a stock-in-trade adjustment which will perpetuate the inflationary problem that we are seeking to solve. So far as I see the situation, adjustment of tax reductions or deferment will make for smart bookeeping which will do little to help the long-term problems of the nation.

Lastly, in Clause 49—and this I find more sinister—we see provisions to increase the authorised lending powers for the Public Works Loan Board. This offers an illustration of the practical results of Government policy. Two years ago, in 1972, £4,000 million was approved in tranches of £1,000 million. Now we are being asked to approve a further £8,000 million tranches of £2,000 million —double the slice in two years. The level of local government expenditure might not be enough unless action is taken. The present level of local authority debt is running at £20,000 million, at an annual rate of £4,500 million. Of that £4,500 million, £2,000 million is in the form of loans and £2,500 million—in respect of the refinancing of existing debt. "Recycling" and "rescheduling" are the modern terms, but what they amount to is our paying back on the never-never.

We now have an opportunity to put a stop to this process. At least let us keep the borrowing or lending power for the Public Works Loan Board at the same level. Let us not increase it. We know that Government policy will increase the requirement in terms of the new house-building programme and the purchase of private-sector houses. Incidentally, I should like to say how much I enjoyed the analysis of the situation put forward by the right hon. Member for Down, South. I have often shared the enjoyment of his analyses but I have rarely shared enjoyment at his conclusions. At any rate, on this occasion the right hon. Gentleman came to no conclusion. He marched us up the hill and then he marched us down again. There was no link between analysis and conclusion because there was no conclusion in which to insert a link.

I suggest that there is a conclusion we can offer. We should undertake a thoroughgoing review of national and local government expenditure. We must see that there are priorities for all investments in an effort to promote exports and to save imports. This is the kind of determination which the British people seek. They want to know that we are in control of our affairs. They want to know that we have command of the situation so that they can have confidence.

If we can have an order of priorities, we can seek the form of capital expenditure which is productive and in which employment has a place. I wish to see the creation of income to provide employment, but there must be goods and production to pay for it. In the meantime, in regard to the Public Works Loan Board we should cut back on the level of funds which are being made available. In that way we hope that the situation will stabilise and that as a result we shall have more confidence and control over our own affairs. If we can show that we are determined in our efforts, we shall achieve our aim.

I am often asked "Where will they obtain the money to do all this?" What lies behind this question is the feeling that it may be difficult to obtain much more money. That is the sense of the nation and I think that the nation is right. It is time we did something practical about the problem. I recommend my hon. Friends to look at the control of the level of Government expenditure. If we seek to do that, we must control the level of borrowing. I believe that that is a practical and realistic proposal. It may be small and measured, but I am sure that it is worth while.

6.56 p.m.

Mr. John Pardoe (Cornwall, North)

The right hon. Member for Finchley (Mrs Thatcher) did a splendid demolition job. However, like the right hon. Mem- ber for Down, South (Mr. Powell), I listened in vain to hear any constructive proposals from the right hon. Lady. Perhaps they may come tomorrow.

The Chief Secretary to the Treasury introduced the Finance Bill in terms of fairness. He said that all the measures introduced by the Government in their first Finance Bill and in their second Finance Bill were aimed at social and economic fairness. That is a splendid criterion and I shall be happy to judge the Government on that basis—but not on that basis alone, because fairness will not defeat inflation, it will not pay for our imports, it will not encourage investment or maintain the value of the pound, and it will not create the employment about which the hon. Member for Luton, West (Mr. Sedgemore) spoke.

In the Finance Bill, fairness or otherwise is largely irrelevant to the major economic problems which we now face. I say "now face" advisedly since events are carrying us on apace. It is not the first economic measure of the last few months which has been largely outdated by events before it even had time to have any effect at all. The March Budget was based on the forecast, and indeed the aim, that the borrowing requirement would be brought down from £3.4 billion to £2.7 billion. We now know from the Chancellor that the figure will be over £6 billion—and by the end of the year the figure may be higher than that.

The Government pinned their hopes on the social contract with the idea that we could maintain living standards. But we cannot maintain living standards. Those standards are bound to fall in the next year. This year the gross national product—not a very good measure of economic effectiveness of the nation but the best we have at the moment—will fall for the first time since the 1930s. There is no way in which we can pursue the social contract, which is based on the idea that we must maintain everybody's living standards, because to do so is to live in a fool's paradise. The Finance Bill is based on a premise which has proved to be entirely wrong—namely, the idea of a 2 per cent. growth. There will be no such growth, so the Finance Bill is already out of date.

We cannot debate the Bill without considering the economic climate, although I appreciate that it is intended that that subject should be dealt with in tomorrow's debate. We are debating the second Finance Bill of 1974 surrounded by the signs and portents of economic catastrophe the like of which this nation has not witnessed certainly for 40 years and perhaps even longer.

There will be those who deny the seriousness of the situation, though I doubt whether many on the Government benches now do so. I think that among most men and women of good sense and reason today only two views are possible. The argument is between those who believe that economic collapse is about to come and those who believe that we are already in the midst of and experiencing it, even if we have not fully realised that fact yet.

In saying that kind of thing, one runs the risk of being thought to cry wolf. Certainly I and other hon. Members—no one political party has a monopoly in this matter—have warned this House and the country often enough of the dangers inherent in our economic situation and the progress or lack of it that we have shown in the last few years.

I recognise that members of the Government never want to be told the truth —I say this of any Government—and that when told the truth they certainly do not want to believe it. Ministers, whichever party is in power, are congenitally inclined to believe the best of the nation's prospects and to read the statistics that way. But I do not think that the Government and the whole House dare now escape the reality of the economic situation in which the Bill is being introduced.

In some respects our situation is not unlike that of November 1936. For years the Government had believed the best of the security situation in Europe. For years the House had been fed on a diet of half-truths and distortions about our national security. On 12th November 1936 the then Prime Minister, Stanley Baldwin, was forced to admit to the House that he had concealed the truth. He came down and apologised and said: Supposing I had gone to the country and said that Germany was rearming and that we must rearm, does anybody think that this pacific democracy would have rallied to that cry at that moment? I cannot think of anything that would have made the loss of the election from my point of view more certain." —[OFFICIAL REPORT, 12th November 1936; Vol. 317, c. 1144.] Churchill's comment on that in his memoirs was that it did "less than justice to the spirit of the British people".

I must ask the Chancellor of the Exchequer and the Financial Secretary, who is to reply on his behalf today—but the Chancellor will have an opportunity to speak for himself tomorrow—what justice he thought it did to the spirit of the British people when, on 23rd September this year, the right hon. Gentleman told them that those who said that the underlying level of inflation had reached 20 per cent. were liars.

We all know how the right hon. Gentleman arrived at that figure. We all know that, as a result of the July Budget, he managed to fiddle the retail price index down to an annual rate of growth of 1 per cent. between August and September. But between September and October the annual rate was 15 per cent., between October and November it was 26 per cent. and in the last month it is certainly over 20 per cent. Therefore, the average of the last three months as an annual rate, which is comparable with the 8.4 per cent. that the right hon. Gentleman gave in the election campaign, is well over 20 per cent. Who is right, the Chancellor forecasting 8.4 per cent. or those who at the time said that the underlying level was certainly over 20 per cent.?

I believe that it is better to deal with the details of the Bill in Committee—I understand that we shall have three days on the Floor of the House to debate the main issues of principle before the Bill goes upstairs—but there are one or two aspects to which I should like briefly to refer.

The capital transfer tax is at least a move in the right direction. It is a move in the direction of ensuring that wealth is taxed in a proper manner.

The Government have set up a Select Committee on the wealth tax. I am in favour of taxing wealth and of redistributing it. We shall not be the only so-called capitalist country to tax wealth when we have such a tax. However, it seems crazy to set up a Select Committee to investigate the possibilities of a wealth tax when we add yet another bit and piece to the whole panoply of taxation of wealth which we already have.

If we are to have some form of capital transfer tax, I should prefer it to be an accessions tax. It is far better to tax the donee or the transferee than the donor or the transferor. The Government must make it clear whether they are in favour of distribution or confiscation, because there are aspects of the tax which seem to make generosity a sin.

The investment income surcharge was changed in Committee on the last Finance Bill on the basis of an amendment which I moved and which was supported by the Opposition. We were therefore able to carry it in the mathematics of the House at that time. The Government's return to their previous levels is a mean-minded action.

If we are to have a wealth tax, let us have an efficient revenue-raising wealth tax encompassing the whole taxation of wealth. In that sense the taxation of income from wealth ought also to be encompassed within it. If the wealth tax is to be efficient, it must take account of our present system of taxation of investment income, or savings income as some hon. Members prefer to call it.

Generally, on the tax level there is no doubt that we must cut consumption, and clearly we must cut public expenditure. As the right hon. Member for Down, South said, it will be no use right hon. and hon. Members then complaining that we must also raise the level of taxation, because any Government, if they are to bring down the borrowing requirement, will have to raise the level of taxation.

I should like to put forward one suggestion which is not entirely original but has not been advocated of late. I suggest that we might have another look at the Keynesian device of post-war credits, which because of the long delay in repayment were discredited somewhat in the public's mind but which could be of value again. I am suggesting a post-crisis credit—I should hope indexed— which would be paid as a surcharge on income tax but would be repayable at some time when the crisis was over. When will the crisis be over? It certainly will not be over until we are self-sufficient in oil, and it may not be over then. There- fore, the Government would have to put a date on such a scheme.

The Government are entitled to hear from right hon. and hon. Members in today's and tomorrow's debates not simply an "I told you so" reiteration, which I fear we shall get from the Opposition Front Bench tomorrow afternoon, but a strategy for survival. I hope that my right hon. Friend the Member for Devon, North (Mr. Thorpe) will fill in some of the details of such a strategy tomorrow.

I should like to make some suggestions as to what I believe should now be done. On the balance of payments, there is frankly no easy alternative to taking the strain on the pound and allowing it to float downwards. It is not just a question whether we should devalue and have a new fix. No one knows to what level we should devalue or what level the world would accept. Even if the world accepted it tomorrow, it might not accept it the day after that. We should be honest about the float, clean it up and allow the pound to find its own level. There is no sense in the Bank of England borrowing vast sums of money to try to prop up the pound. All that has happened is that we have got import-led collapse instead of export-led recovery.

The Morgan Guaranty Trust of New York recently estimated, in comparisons with the rest of the world, that the wholesale prices of United Kingdom manufactures rose between January and October by about 6 per cent. faster than those of our major competitors. That shows what has happened to our competitive position. We cannot shirk that point.

We could make all sorts of proposals as to how to improve our competitive position. The hon. Member for Luton, West said that British Leyland makes only six cars for every worker and I think he said that Nissan makes 26 for every worker. My figures are slightly different. I thought that it was five cars for every worker in British Leyland and 37 in Nissan. In any case, whether or not we have a downward float, we must still put this position right. But there is no easy way out through import controls. That would invite retaliation, whatever the hon. Gentleman says. It would also totally distort our own economy into the bargain.

The consequences of allowing the pound to fall are considerable, and we should not deny that. [Interruption.] I was coming to inflation. The impact on import prices immediately—because this acts immediately, far more immediately than the impact on export prices, unfortunately—will raise the cost of living and will, therefore, give an extra push to the wage spiral. It will have to be faced.

We cannot borrow and borrow for ever. Indeed, we have to recognise, as I think the right hon. Member for Down, South was indicating, the problem of how we look the world in the face. As long as we have to go on borrowing, the whole of our foreign policy becomes mortgaged to various sections of the world which are prepared to lend us money and upon which we are so dependent. The time will come when we can borrow no more. We shall then be forced to cut consumption drastically and to raise unemployment drastically. That is the wrong time to do it. We should do it gradually now and let it happen to us.

I take the point about unemployment made by the hon. Member for Luton, West. But the time has come in the management of our economy to redefine the term "unemployment". I do not believe that those who are in retraining should be categorised as being unemployed and added to the unemployment figures, about which we then get terribly worried. After all, we do not say that people who are at school, at technical college or at university are unemployed, so why should we say that those undergoing industrial retraining are unemployed?

We need a much more active manpower policy and far more retraining if we are moving into a situation of unemployment—which is inevitable. Every time we start up again after a recession we find ourselves desperately short of the right skills in the right places. We need to get this matter right now as we move into this period of recession.

I am not advocating unemployment. However, I believe that the Chancellor is coming very near to advocating unemployment as possibly the only way out of his difficulties if the social contract fails, as fail it clearly will. But there is no guarantee that unemployment will solve our problems, will break down the rate of inflation or will even have very much immediate effect on the level of wage settlements. Certainly it did not do so last time, and we have behind us the period in the early 1970s when unemployment and inflation took off, both of them at the fastest speed we had witnessed for many years.

We undoubtedly need a limited public works programme, particularly in housing. Here again I take the point made by the hon. Member for Luton, West. Mobility of labour is essential if we are to place the people whom we have retrained into the jobs that will exist after the recession, and housing is essential for mobility of labour. One of the greatest barriers to this mobility has been the chronic housing shortage. A limited public works programme in that regard would be very valuable indeed.

However, if we are to avoid the collapse that now faces us—if it is not already upon us—we must face the problem of trade union monopoly bargaining power. We cannot shirk that problem either. I believe that the cause of modern inflation is basically the commitment to full employment and the effect which that has had of enormously increasing trade union monopoly bargaining power. I do not want to ditch the commitment to full employment. Therefore, I am prepared to recognise that we must do something about trade union monopoly bargaining power. We can do it only by changing the whole bargaining system, which is now a form of social insanity in Britain. We must do it by industrial democracy, and by industrial democracy we must make profitability respectable.

One of the troubles at present is that to a very large section of the community —not only those whom one may call the disaffected Leftists, the Marxists and the "Trots" but also the great many ordinary moderate people of the centre—"profit" is a dirty word. We must change that and make it desirable that profit should be earned. We can make it desirable only if we give people a share in profit and make it an important part of their total remuneration.

We must change the whole of our methods of demand management. We cannot continue in the present manner, when every time a new Government come to power the whole policy of demand management is thrown out, almost for the hell of it. We cannot pursue a modern demand management policy in shifts of two and a half years, which is the average length of a British Parliament. Therefore we must achieve a much more bipartisan policy, a policy in which we shall have to bring in some form of Select Committee procedure to ensure at least that we get the kind of united approach which the right hon. Member for Down, South was advocating.

We then have to go for a wholesale policy of protecting the lower paid. The fairness which the Government want in that respect can best be obtained through the tax credit system. If they are not prepared to go that far, we must have statutory minimum earnings and higher family allowances. The cost of giving family allowance for the first child would be about £350 million, but the tax allowances for first children amount to about £620 million. So we are paying out in tax allowances for first children £620 million when it would cost only £350 million to provide family allowance for them.

Lastly we have to implement an incomes policy. There is no alternative. We shall never maintain full employment unless we have some form of statutory restraint on incomes. I was delighted to see in The Guardian yesterday that the Government have at last come round to the view that the best method of doing this is to tax the inflation-makers, to levy a tax on those who cause inflation by excessive wage increases. I hope that the section of the Cabinet which is now advocating this splendid Liberal proposal will win the debate. I hope that it will break the Labour Party and that we shall finally get the social democrats separated from the Marxists. Then we can get on with a sane form of Government for Britain.

7.19 p.m.

Mr. Denzil Davies (Llanelli)

The hon. Member for Cornwall, North (Mr. Pardoe) covered such a wide area and offered so many solutions to our problems that I hope he will forgive me for not following up in detail what he said. I should like to say, however, that I am in disagreement with practically everything he said. I shall be dealing with some of the matters he raised.

I found it particularly horrifying that he should be advocating letting the pound find its own level. If it is allowed to do that we shall find that the level will be extremely low. At a time when we are paying almost £3,000 million for imports of oil nothing could be more irresponsible than allowing the pound to find its own level. This would increase our import bill and our borrowings and would make us even more dependent on Arab and other foreign money than we are at present.

Unfortunately, this is not the first debate on Second Reading of a Finance Bill that has been conducted during a period of acute economic crisis. Unlike the Opposition I believe that the Bill is highly relevant to our economic problems, especially those parts which establish for the first time a stringent gifts tax, and particularly those parts of the gifts tax relating to trusts. By introducing such a tax the Government are again going out of their way to show their determination to honour their obligations under the social contract.

With the proposed wealth tax, with the gifts tax and with all the measures they have taken I believe the Government have fulfilled their part of the obligations they entered into under the social contract. The Government and the Labour Party in Parliament are playing their part. The intricacies of the discretionary trust, for instance, may not be a familiar and regular topic on the shop floor or at the coal face, but the Bill provides that the discretionary trust, which for the last quarter of a century has been one of the main vehicles of tax and estate duty avoidance among the wealthy families, is now entering the period of its demise. It is great credit to my right hon. Friends that they have taken this step, and it should be fully recognised throughout the country, and in the trade union movement, that the Government are fulfilling their obligations under the social contract by fiscal and other measures.

Because the Government are doing these things it is the duty of Labour MPs to do everything they can to ensure that the other half of the obligations under the social contract is also fulfilled.

The hon. Member for Cornwall, North claims that the social contract is not working in regard to some pay settlements. I believe that that is an unfair criticism. Some pay settlements are outside the guideline imposed by the social contract. However, a large number of pay settlements have fallen within the terms of the contract, and therefore the hon. Members criticism does less than justice to the TUC and to the many union leaders who have done their best to make sure that the guidelines are observed through a difficult time of rising inflation.

Even though some settlements may seem to be outside the guidelines of the social contract, in terms of a gross percentage payment to the employee they are, after deductions of the marginal rate of tax of 33 per cent., failing to keep up with the rise in cost of living in terms of take-home pay. I am not suggesting that that is an excuse for excessive rises, but it is a fact which should be borne in mind.

The hon. Member for Cornwall, North, like other hon. Members, was seeking to write the obituary, or pretending or prognosticating the demise, of the social contract. Others have done the same. We have seen comments in newspapers to that effect. We are told that there will have to be an alternative and that the alternative may be a statutory incomes policy, a wage freeze, or the Liberal idea of taxing the increase where it violates the guidelines. No doubt, some of these suggestions are well meaning and made in good faith. I believe that their authors are engaged in a form of escapism. They are not prepared to face the harsh reality which would follow if the social contract were to break down.

If the contract did break down it would be because there was no consensus and no agreement. Without that consensus and agreement a statutory incomes policy, a wage freeze, and the sophisticated methods of taxing pay increases will not work either, because they are all variations of the one theme, and if the theme is out of key the variations will be useless. The only alternative to a collapse of the social contract would be a tightening of money supply, and that would lead to bankruptcy and unemployment. That is the harsh reality. If the people of this country are not convinced by argument and are not prepared to adhere to the guidelines of the contract or to accept the self-discipline involved in it, the bankers and money markets of the world will impose their own discipline, and we know from past experience that that discipline will be harsh and will hurt many of the people whom we on the Labour benches want to protect.

Not only do my right hon. Friends have to contend with the Scylla of unemployment but they have to face the Charybdis of the balance of payments. The hon. Member for Cornwall, North said he wanted to solve the problem by allowing the pound to find its own level. Some want to see major devaluation of the pound followed by a policy of deflation which, of course, would be necessary if we were ever to get back to the situation we were in to begin with. A policy of devaluation and deflation would be disastrous. It would create unemployment and destroy confidence and investment.

The Government seem to be hopeful of floating to salvation on an Arabian carpet, basing this policy on the widely held assumption that creditors prefer live debtors to dead ones. It is said that the Arabs will not pull the rug from under our feet because we have borrowed so much from them that they cannot afford to do so. The other argument is basically that their money is locked in London and they cannot take it out. May be that is true and perhaps that gamble would succeed. However, I would prefer that we place less faith on oriental potentates and instead take active steps to control the import of goods including, in a limited way, imports of petroleum.

I appreciate that any mention of import control is likely to create apoplexy among distinguished economists who were, no doubt, lectured on their mother's knees about restricting the free flow of inter-tional trade. If there were no economic crisis I should be the last to advocate import control.

Mr. Wigley

In advocating the possibility of import controls on petroleum does the hon. Member take that argument a stage further and advocate the rationing of petroleum for domestic users in the United Kingdom to ensure fairness in its distribution?

Mr. Davies

If we have import control of petroleum, and depending on how we wished to enforce it and how much control we wished to impose, we might be pushed into the situation where there would have to be some kind of rationing for private motorists and some kind of quota system for the trade. If not, there would have to be rationing by price.

Import controls are emotive matters, especially for economists. I realise that many of our trading partners would dislike them, but if our balance of payments gets much worse, and if we have to borrow more and more money, one of these days we shall have no money to trade with them in any case. It would not be a question then of import controls preventing us from trading with them. We are in a difficult position and we face the prospect of taking such action to preserve the trade we already have.

One reads that firms could become bankrupt—

Mr. Tony Newton (Braintree)

Surely this is precisely the prescription which was adopted through the 1930s and which led everyone steadily into a downward spiral. The hon. Member is saying exactly what would have been said from this side of the House 40 years ago.

Mr. Davies

I accept that this has been said before and I agree that there are dangers. However, we are importing goods which we do not need: we are far too dependent on imports. This country is in a special position as distinct from the countries on the Continent and the United States.

This brings me back to my point about being bankrupt. We are so dependent on imports, and as as a result must have foreign exchange to purchase them, that this country, unlike others, can very well be brought to the verge of bankruptcy if our import bill goes higher and higher, as it seems to be going. I do not think that our trading partners would complain over-much about import controls. They would realise that the United Kingdom is in a special position because of our extreme dependence on imports of raw materials to maintain our industry.

Some people would say that the Arabs would not like it, because it would mean reducing oil imports, but it would be in the interests of the Arab countries, because they do not want to see the pound going down and down. The have vast sums invested in this country, and a reduction in our oil imports would improve our balance of payments and thereby keep the value of the pound reasonably stable.

Back benchers can produce solutions to our economic ills, knowing that we shall not be called to account for what we say. We can be slightly irresponsible, but I suggest to my Front Bench that a combination of three policies might be the least painful way—it would still be painful—to get us out of our difficulties. The first is a rigid adherence to the terms of the social contract. I do not believe that there is an alternative. The second is a gradual reduction in the borrowing requirement—no more borrowing, if possible a reduction in the borrowing requirement, and possibly an increase in taxation. The third policy is strict controls on the import of goods and petroleum. A combination of those three measures might get us out of our economic difficulties less painfully than some other measures which might follow if they did not succeed.

Whatever measures are pursued, we can at least say that if our balance of payments position becomes worse, if the borrowing requirement increases, and if the social contract collapses, the financial and economic holocaust which will follow will leave such scars on the face of the country as will take a long time to heal.

7.32 p.m.

Mr. Michael Spicer (Worcestershire, South)

There was one fallacy in the argument we have just heard. It seemed to be based on the proper working of the social contract, and the social contract is not working. With wages rates currently increasing by between 20 per cent. and 25 per cent.—a national newspaper today suggested that it was 28 per cent.—I ask the hon. Member for Llanelli (Mr. Davis) at what point he will accept that the social contract is not working.

One of the things that seem to have been agreed by most speakers in the debate is that an assessment of the Bill must ultimately depend on the view one takes of the Budget judgment—although that has already been accepted to be considerably out of date—and the economic and political circumstances behind the Bill.

There seems to be little dispute about the facts of the economic crisis. The whole House can probably accept that the position is desperate. It is not gloom but a sense of what is to be done that we are short of. With the possible exception of the Chancellor of the Exchequer, all hon. Members know that the current rate of inflation is explosive, probably cumulative, and certainly intolerable. There is also a growing acceptance that we cannot continue to borrow abroad at the rate of nearly £100 million a week. Most hon. Members probably also share a premonition of the massive unemployment to come.

There is less agreement about the root causes of our misery. There are those who believe that the entire blame must be laid at the feet of the Arab oil sheikhs. The fivefold increase in oil prices in the past 12 months has certainly been an irritant of immense seriousness, but it is not the cause of our troubles. We have only to consider the continued economic viability of West Germany and Japan, for example, to realise that it is not the cause.

The root cause of the British question can be put blandly. We have become a spendthrift, short-sighted, indolent and inevitably now somewhat spiteful people. To put it another way, we have become the world's biggest spenders and the worst producers of wealth. It is no coincidence that over the past 50 years so much thought should have been given in this country by our theorists to the distribution of wealth, and so little to its creation. That theme is clearly reflected in the Bill—particularly Parts II and III, Clauses 5 and 17, and also Clause 49, which is concerned with the Government borrowing requirement. It was a theme adopted by the hon. Member for Lincoln (Miss Jackson), who said that the basic question was how we shared our wealth, not how we created it, although she added paradoxically that to have wealth to share we had to have the right economic circumstances.

This distortion in favour of those who spend as against those who create wealth goes very deep. It explains the reluctance of our more able citizens to take up management positions in industry. It embraces the unwillingness of employees to move jobs or houses. It takes into account the restrictive practices of trade unions and the feeble-mindedness of many managers when it comes to taking risks. It also includes the cowardliness of many politicians who have consistently refused to legislate in favour of those who save and invest at the expense of those who consume.

These matters add up to a tragedy of Shakespearian proportions, because to a large degree these distortions are not seen to exist. So long as that situation persists, it remains almost impossible to ask how we are to get out of the mess, let alone to answer the question. For the answer depends in large measure on an assessment of how we got into it.

In the immediate future, there is little choice. Even if we wish to ignore the balance of payments and inflation crises, as I believe the Budget judgment behind the Bill largely does, our creditors would not let us do so.

In theory, there are two courses open. On paper, we should be able to choose between deflation and some variant of an incomes policy. In reality, the option has effectively been closed. That is a matter on which I disagree with the hon. Member for Cornwall, North (Mr. Pardoe). People talk in terms of "when the crunch comes", when at least in one sense it has been and gone. When the country decided in February effectively to support the only trade union which had successfully stood out against a wages policy, the prospect of an effective incomes policy was at an end.

The only way in which a wages and prices policy could be introduced effectively today is through the machinery of a police State. In that sense, the watershed has been passed. Unlike many speakers today, I believe that massive unemployment and bankruptcies are inevitable.

The only question now is whether the Government will be able to provide the leadership and sense of direction to take the people of this country through the appalling year which lies ahead without the complete breakdown of our democratic way of life. The pressures now from the militant left and from the militant right are growing daily. It is by no means inevitable that our democratic institutions will survive. I believe that the only way to prevent chaos is clearly to show the people of Britain that the inevitable sacrifices will be both shared and ultimately worth while.

To achieve that objective there must be a complete switch in Government priorities. The whole focus of Government attention must change dramatically from an emphasis on boosting spending, and thus admittedly winning short-term political popularity, to providing the conditions in which national wealth can be created.

The problem has many aspects. It will involve, first, taking the sting out of unemployment, not so much by increasing benefits—which I calculate to be somewhere between 20 and 25 per cent. below average earnings—but by preparing the labour force for the better times which lie ahead. This will both ease the frustration and the wastage which goes with unemployment and will also create the kind of skilled, adaptable and, above all, relevant labour force which will be so desperately needed.

In response to a question I asked of the Secretary of State for Employment— who, because of a slip of the tongue, was addressed, perhaps not inaccurately, by an earlier speaker as the Secretary of State for Unemployment—I was told that the number of people currently undergoing Government retraining schemes amounted to 10,507. That number will be totally inadequate to meet the needs which lie immediately ahead.

Secondly, there must be a complete reappraisal of our energy policies. Above all, the country must possess in 10 years' time, as we are peculiarly well placed to possess, a range of alternative and competing energy sources, including coal, oil, and nuclear power. Specifically to my mind this means reversing the Government's recent decision not to import foreign nuclear technology. The argument that in the long term this would be a drain on our balance of payments is nonsense. Surely by now we should have learned from the experience of the Japanese that the assiduous importation of technology can, with little ingenuity, be turned into the massive export of physical goods and services.

Above all the Government must reverse everything they have done, and are planning to do. in the Finance Bill to destroy the confidence of private industry and individuals to invest. The resilience of the investment plans laid down towards the end of 1973 and the beginning of 1974 is one of the great unwritten facts of recent history. They held up until very recently despite the impact of so many shocks. It is only in the last few months that the mass of investment decisions has been cancelled.

One of the great mistakes made by civil servants and many hon. Members is to believe that confidence can be turned on and off like a tap. Above all, it demands consistency of Government policy and a knowledge that Government are in a true sense working for and with industry, and not against it. The lesson of the last two or three years is that the time lags are considerable.

The path ahead demands most unpleasant and yet largely unrecognised short-term measures. But it also demands a consistent, long-term policy, which cannot be brought about by political parties bidding against each other for short-term favour and reversing each other's policies merely to demonstrate political masculinity. The rebuilding of this country demands not merely a sense of direction and a gift of leadership but, above all, time.

As long as we are bickering amongst ourselves in the House and elsewhere about questions which are not always matters of philosophy, but which are often matters of degree, there can be little hope either for the economic or for the political future of this country. Great sacrifices will have to be made, and there is no certainty that our people will respond unless there is some singleness of purpose amongst our leaders. For that reason I am convinced that sooner or later there will have to be some form of a national coalition Government.

The prime, and limited, objective of this Government will be to save our existing freedoms from destruction. There will be those in this House and elsewhere who do not wish to save our way of life. Let those who would destroy the system provide the future Opposition. The issues at least will then be clear.

7.46 p.m.

Mr. Tam Dalyell (West Lothian)

For the first time in five years I shall not participate at the Committee stage of the Finance Bill since I have been appointed to serve on the Select Committee on the wealth tax. Therefore, I should like to take this opportunity—I hope I do not stray by bringing up too many Committee points—of once again raising points concerning the London art market in general and the preservation of our national heritage in particular.

I welcome many of the provisions of the Finance Bill. I welcome the action to be taken with regard to loopholes and discretionary trusts.

I should like to raise one, perhaps narrow point, concerning the future of private collections, the future of secular country house architecture, and indeed the future of ecclesiastical architecture in respect of which the State may have to assume obligations if it is to be preserved.

First, there exists a real problem of preserving private collections of books and papers and collections of scientific, engineering and technological interest, because if they are broken up, the truth is that they will not remain here. They will be exported. That option must be considered.

Some people would regard it as a great pity if the major private collections were to find their way into the London sale rooms. I quote one example.

In West Lothian there exists a formidable private collection of books owned by the family of a former Prime Minister. One cannot begin to value a major collection. For example, how do we put a value on the Prayer Book of King Charles I containing annotations in his own handwriting? This is one of the possessions at Barnbougle—a basic document of our civil war, and impossible to value. I give that as an example of the real problems experienced by owners of the great private collections, which may not be shown to the public because of the specialised interests involved. However, the families concerned, whenever anybody is interested, are in my experience very willing to show them. The problems arising in those situations must be looked at.

I should like to focus the attention of my right hon. Friend the Chancellor of the Exchequer on the capital transfer tax on historical buildings, their curtilage and contents, particularly those of the larger country houses. Such buildings form Britain's most important contribution to the secular architecture of the last three centuries. There are probably no more than 1,500 large country houses. A study was recently made, in about 1950, of the most notable houses, which showed that 430 are privately owned and not open to the public, the majority being furnished and in reasonable condition. About 225 are adapted to other uses, and the remaining 135 belong to the English National Trust, to the Department of the Environment or to local authorities. Therefore, in numbers the problem is quite small, involving between 500 and 600 houses, and the capital transfer tax makes it likely that many of these houses will come on to the market.

If in present economic circumstances they come on to the market, the real truth that we have to face is that they are unlikely to find buyers. I do not have a personal interest of any kind to declare, but I should say that I live in a National Trust houses and I can assure hon. Members that the expenses even of keeping up a smallish to medium-sized house in this context are such that no one in his right mind would buy any of the major or semi-major English or Scottish country houses which come on to the market.

The provision in Schedule 6 that gifts for public benefit may qualify for exemption will secure the future of only a limited number of houses partly because of the implicit requirement in Clause 29 that buildings accepted should be accompanied by endowment to pay for their preservation. Houses which are not endowed and for which no buyer is forthcoming either will have to be demolished and their contents sold or will have to be taken over by a public authority for conversion to new uses or for museums. Either of these latter alternatives would involve a heavy charge on public funds both for capital and maintenance. If there is any dispute about what is argued here, hon. Members need look no further than the examples of Heveningham Hall and Audley End.

Unless we look carefully at what we are up to, quite a number of our major mediaeval, Victorian and Georgian architectural heritage will fall into disrepair. It is all very well to say that these houses should be taken over by the State. Anyone who has anything to do with the National Trust knows that it simply does not have the financial resources to take over many more of these buildings. In a recently tightly argued booklet— "Country Houses in Britain—can they survive?", commissioned by the British Tourist Authority—John Cornforth has shown how extraordinarily difficult it will be for the National Trust to take on many more financial responsibilities. Therefore, I hope that before the Committee stage the Government will give some indication of their thinking on these matters.

Many of us are now extremely concerned about the future of ecclesiastical architecture, in England especially though much less in Scotland. Many of our major cathedrals are in an acute situation. If hon. Members have not been following the colour supplements in the major Sunday newspapers, they need only visit our major cathedrals and many churches to realise how all at the same time decay is setting in. It may be that after 400 years there suddenly comes a point when stone needs major repairs. As a nation we have to think about how finance is to be made available to the ecclesiastical sector.

I should have much hesitation in following the French example of the State paying for the upkeep of ecclesiastical architecture. But I am attracted to what the Dean of Salisbury and others have done in charging some kind of entrance fee to what basically are tourist attractions. The great Chapter House at Salisbury is a tourist attraction, just like Blenheim, Chatsworth or any other private or National Trust property.

Before the discussions in the Select Committee on the wealth tax and those upstairs in the Standing Committee, it will be interesting to hear what thought the Government have given to these matters. The problem is not covered in Clause 29 and Schedule 6.

7.56 p.m.

Mr. Jasper More (Ludlow)

Like the hon. Member for West Lothian (Mr. Dalyell) I wish to concentrate on a very narrow area which has many analogies with the country houses which he has been discussing. I wish to say a few words about forestry, to which my right hon. Friend the Member for Finchley (Mrs. Thatcher) referred.

It is no exaggeration to say to the Government that if their proposals for a capital transfer tax go through in their present form they will stop all future planting in the private sector, and will leave a situation where all existing planting will increasingly become neglected, to say nothing of the situation that they will provoke where every private owner will be forced to fell as soon as possible any mature timber that he has. This is a truth which has become apparent to at least one Government supporter, as may be seen by anyone who cares to refer to the agricultural debate that we had last month.

Our forestry industry is now divided almost equally between the public sector, represented by the Forestry Commission, and the private sector, represented by a large number of private owners. I have to declare an interest as a private owner who in the past 30 years has planted something like 300 acres of mixed plantations, and I am not stating anything very novel when I say that there is no profit in planting trees. After 1945 planting grants were provided by the Government and a special income tax code was provided for private owners. The fact remains, however, that even with these aids the net result of planting trees is an annual loss to him who plants.

This leads up to what is the Government's forestry policy. Fifty-five years ago, we started the Forestry Commission with the idea of building up a strategic reserve to save the country from the perils that had become apparent as a result of the submarine campaign launched by the Germans in the First World War. We endured a similar experience in the Second World War. There are now more potentially hostile submarines at large in the seas of the world than ever there were in 1914 and 1939.

If we look at the economic considerations affecting forestry we see that the situation at the moment is that it is estimated that in the year 1974 we shall be importing timber and timber products to the extent of £2,000 million. Our vulnerability in balance of payments terms is illustrated by the fact that in 1973–74 the retail price of timber doubled in 12 months.

Another aspect of forestry is that the social policy of providing employment, especially in Scotland and in the remoter areas, must be of enormous importance. A major consideration which has entered into forestry is what we call environmental—that is, the enjoyment to be had by the British public from existing forests. Primarily, this means hard woods, and statistics show that some 86 per cent. of hard woods are in private ownership.

The general policy on forestry was reaffirmed by the Minister of Agriculture as recently as 5th July of this year. In a consultative document about forestry produced as recently as 1972 it was stated specifically that no change was contemplated in the fiscal arrangements affecting forests.

What the Government are now proposing to do by way of capital transfer tax is, for practical purposes, to bring private forestry to a halt. If this does not quite succeed in bringing private forestry to a halt, any imposition of a wealth tax will certainly complete the process. If that happens, what have the Government in mind regarding our forestry? Is it intended that the Forestry Commission take over all private woodlands, no matter how small, complicated or difficult they may be? Is the Forestry Commission equipped to do this?

I would like the Government to look realistically at the fiscal arrangements that now exist as they affect forestry. We are discussing here certain special arrangements for forestry that, although introduced by a Liberal Government, are, curiously enough, based on common sense. They date from the Finance Act 1910, which established the principle that one does not impose capital taxation on standing timber; one imposes capital taxation on timber as soon as it has been felled and cash has been realised for it. Surely anybody with any heart and consideration for the future of forestry in this country would wish to preserve that fiscal arrangement. There is no logical reason, merely because it is decided now that capital taxation is to be imposed in lifetimes as well as on deaths, for altering the long-established concessions in favour of forestry.

The Government should incorporate the existing estate duty provisions in the capital transfer tax, and they would, I think, find that in the national interest, in the strategic interest, in the economic interest, and in the interests of our people who love and appreciate our forests, that would confer a real boom on the country as a whole.

8.2 p.m.

Mr. John Ryman (Blyth)

Unlike other hon. Members who have so far spoken in the debate I am not an expert on economic affairs, and, therefore, I can approach the matter with an open mind, unimpaired by any knowledge of the specific subject under debate. The vast majority of ordinary men and women in this country are not economic experts either, and what they want are plain, simple, honest answers instead of a succession of pompous platitudes from successive Governments. The ordinary man and woman are tired of hearing esoteric arguments by self-styled economic experts writing unintelligible, incomprehensible English in various learned journals, and talking, for example, about the pressure on the pound, as if the pound were a sick patient. Phrases are used such as "The pound had a good night. The pound is feeling better this morning. The pound will make a recovery tomorrow afternoon." The country is sick and tired of this sort of gibberish, and wants plain answers to plain questions.

May I, in my ignorance, please put forward two specific questions to my right hon. Friend? Perhaps he would be kind enough to deal with them at some stage in his speech.

The first thing that is absolutely bewildering is the operation of this extraordinary tax, VAT, which, as the House will appreciate, was introduced by the previous Conservative administration. The administration of VAT is absolutely scandalous. The people who operate it are either mad or completely bereft of any sensible administrative knowledge in these matters, and it is high time that the Treasury did something about this.

I have a small example to illustrate my point. Her Majesty's Customs and Excise is comprised of very able and efficient people who have been set an almost impossible task by the legislation of the Conservative administration. What happens in practice is that a vast army of bureaucrats is employed to deal with what is a bookkeeping situation in which VAT is paid by one Government Department to an individual and that individual then has to fill up a form and in due course make a return to the Customs and Excise and the VAT is then collected by the Customs and Excise Department from the person who has filled up the form. I was very confused regarding the form that I had to fill up in connection with a VAT return a few weeks ago. I filled it up and in due course was visited by a frightful little man who told me that my form had been filled up wrongly and that a computer, situated at Southend, was confused by my form and several other forms which had been filled up wrongly in the same way. Because this seaside Customs and Excise computer in Southend was confused a great many people, with a great deal of important work to do, spent several days talking to gentlemen from the Customs and Excise who were doing their best to perform an impossible task to fill up the forms correctly.

I support the spirit of the Budget, aimed at producing fairer taxation, but I would be most grateful if my right hon. Friend would tell the House what is the Government's thinking—if they are thinking at all—about this matter, and what proposals the Government have to make—if they have any proposals to make—as to the simplification of the administration of VAT, or possibly its abolition and replacement by some other form of tax, such as the preceding purchase tax.

The other matter to which I wish to refer specifically concerns what I regard as a terrible position. Here I disclose a personal interest in that from 1969 until a few weeks ago, when I was elected to the House for the first time, I was the senior Treasury counsel for the Inland Revenue at the Central Criminal Court. Having disclosed that interest may I draw my right hon. Friend's attention to the fact that the army of fax fiddlers in this country is now reaching alarming proportions? We talk about raising the general level of taxation, or reducing it, but I wish to make it perfectly clear that because there are so many people now engaging in tax fiddling the honest and hard-working people have to pay more tax in the end. I would very much like to hear what specific measures the Government are proposing to strengthen the hand of the Commissioners of Inland Revenue, and the Inland Revenue inquiry branch in this matter.

A happy medium must be drawn. On the one hand there should be imposed no sort of bureaucracy which breaches privacy and civil liberties. On the other hand it is absolutely scandalous that huge frauds are committed daily, often, but not solely, by very wealthy people, expertly advised by accountants, brokers and the like, and the Inland Revenue is powerless to do anything about it in the face of lack of evidence.

May I give the House two illustrations, please? There is no doubt that most working-class men and women have to pay their tax on pay day. They are taxed each week or month under the PAYE system. There is no question of a cat and mouse game with the inspector of taxes, of the sort which management, directors, executives and self-employed people can engage in, delaying the payment of tax, and becoming involved in huge appellate procedure for saving money in the face of roaring inflation.

The proposed aim of the Government, behind the Bill, is to make the tax system fairer. In my opinion it is monstrously unfair that working-class men and women should have to pay tax on the nail, which they gladly do because basically they are honest, while management, directors, self-employed people and many other categories are able under the existing law to engage in all sorts of devious manoeuvres with the result that the Treasury loses money again and again. I should be grateful if my right hon. Friend could in due course tell me what the Government will do about this.

The crimes and penalties involving tax evasion have reached proportions hitherto unknown to the criminal and civil courts. At the Old Bailey one of the leading crown courts in the country, the people in the dock now are often solicitors, accountants, insurance brokers, underwriters and people of that kind, who previously would not associate with the criminal classes—

Mr. Sedgemore

And barristers.

Mr. Ryman

A sorry state of affairs has been created when that happens.

Men and women who enjoy a high standard of life today enjoy it not because they work harder than working men and women but because they are the principal shareholders or directors of companies which buy their cars and their flats and pay for their holidays. Company payrolls have on them people like wives and girl friends and the rest, ostensibly typists —who do not know one end of a typewriter from the other.

What will the Government do about this? What did the previous Government ever do about it? If there is one thing worse than a sexual scandal it is a financial scandal. If we can have the two in one, that is even better—or worse. The previous Conservative Government had nothing to be proud of because, again and again, whether in the Lonrho affair or other financial scandals, the evidence appeared of activities which led to men and women who did no work obtaining vast sums of money—legally, under the law as it stands now—because of clever manipulation of tax matters, whether in the Cayman Islands or somewhere nearer home. That is the second point, in what I hope will be a short speech, on which I hope that I shall have some positive answers from the Government.

Mr. Arthur Lewis (Newham, North-West)

The hon. Member must be kidding.

Mr. Ryman

The cynicism which my hon. Friend displays I entirely share.

Ordinary working-class men and women are disgusted that successive Governments—I do not want to inject a partisan note—should have allowed this inequality, which means that they have to pay tax on the nail while vast tax-free gains are made by people in wealthy positions.

The hon. Member for Ludlow (Mr. More) talked about the Government's forestry policy. My heart bleeds for the hon. Member, who apparently has only 300 acres in which to plant trees. The planting of trees and forestry is one the biggest tax fiddles by rich men who, legitimately under the present law, wish to reduce their tax liability.

Mr. Nicholas Winterton (Macclesfield)

Rubbish.

Mr. Ryman

It is not rubbish at all. I received a document through the post the other day, as, no doubt, many other hon. Members did, from a firm of brokers who were touting for work in giving advice on how to avoid taxation. One of the longest chapters in that pamphlet was devoted to the advantages of investing in forestry, since under the present law it is a perfectly legitimate way of avoiding tax.

I would ask my right hon. Friend to investigate closely this sort of fiddle in the upper income and capital brackets. We want a fair policy—

Mr. Jasper More

The hon. Gentleman should be under no illusion about tax fiddles. It was a Labour Government in 1945 that deliberately introduced a special code of tax for those who were prepared to incur the great personal expense of planting trees. When one talks of tax fiddles, I would only say that no one to my knowledge has ever made any money, whether through the income tax arrangements or in any other way, by planting trees. If the hon. Gentleman could give an example, I should be delighted to hear it.

Mr. Ryman

The hon. Gentleman is incorrect. Under the existing law—it does not matter a hoot who introduced it; if it is wrong, it must be changed— capital invested in forestry is for certain purposes exempt from tax, or the taxation levied against the company owning the land is reduced. That is the fact. That is the law. It is no use the hon. Member seeking to evade that fact by seeking to gloss over the situation by blaming the Labour Government for introducing the legislation.

Mr. Arthur Lewis

Is my hon. Friend daring to suggest to me and the House that no hard-working miners, bricklayers or carpenters have forests in which to invest their capital to set against tax?

Mr. Ryman

I thought that I had already made it clear that hard-working miners—there are many in my constituency—pay their taxation religiously on the nail each month under the PAYE system. If there are any miners with money to invest in forestry I have yet to meet them.

These sophisticated tax evasion devices, whether forestry, life policies or anything else, are unfair when people are being asked to make sacrifices and working men and women have to do these things without any of these benefits—

Mr. Winterton

Rubbish.

Mr. Ryman

Hon. Members cry "Rubbish" only because they know that the situation that I am describing is accurate and truthful—

Mr. Winterton

Absolute nonsense.

Mr. Ryman

I would ask my right hon. Friend to tell us how he will tackle these serious problems. How will he hit the wealthy, and the people who contribute nothing to our society, while working-class men and women who have been carrying this country for years—

Mr. Winterton

Hypocrite.

Mr. Ryman

I will ignore that offensive remark by an hon. Member who obviously has no sensible argument to offer.

We have heard tonight the usual hysterical, nauseating and unpatriotic speeches from Conservative Members about the state of the country and the lack of confidence that industry has in the present Government. I am sick and tired of hon. Members opposite up and down the country sneering at the Labour Government who have done more to restore confidence since March than the preceding Government did in four years. It is all very well for hon. Gentlemen on the other side of the House to smirk sanctimoniously. They had a very long time in which to do something about it. We have had a very short time indeed. Within that very short time, although we all recognise that there is still a great deal to do, we have taken positive steps to bring this country back to work and to instil a sense of pride in working-class men and women.

I end on this note. In the North-East, where my constituency is, there is a great need for industrial and commercial investment. Wages are lower there than anywhere in the rest of the country. The unemployment rate is higher, and there has evolved over the years a system whereby manufacturing industries have gone to the North-East and, having done so, have paid wages lower than they would have paid in the Midlands or the South-East. If any manufacturer in light or heavy engineering or the private motor car industry, in the current atmosphere of that industry, will have the courage now to go to the North-East it will be a venture that will in the long term pay off.

There used to be a saying, "Go West, young man." I would respectfully submit to the House that the cry now should be "Go to the North-East", because in the years to come the North-East will become a very prosperous area. There is great talent and expertise there. There are great natural resources, and it is the North-East that should be exploited for investment.

8.23 p.m.

Mr. Tony Newton (Braintree)

The House will not expect me, and would probably be astonished if I were able, to follow the hon. Member for Blyth (Mr. Ryman) in his progress from plain man to Treasury Counsel, mob orator and travel agent. The only thing in which I may follow him is some small reference to my constituency towards the end of my speech. I want to spend a moment getting back to the Bill we are nominally debating before turning to the broader paths which have earmarked most of the speeches in the last hour or so.

I want briefly to reinforce one or two things already said from this side about particular points in the Finance Bill. For myself—and from what was said by my right hon. Friend the Member for Finchley (Mrs. Thatcher) from the Front Bench this would go for my party as a whole—I certainly do not quarrel with the idea of the capital transfer tax in principle as a means of tidying up our system of estate duty. It seems to me to contain a good deal of sense, in particular in respect of its far better treatment of transfers between husbands and wives. This would mark a quite significant advance on our existing system.

I hope nevertheless that the Government will find it possible to look again at many of the practical details of what we are proposing. The Chief Secretary in his opening speech placed emphasis on fairness and it sounded very good, but the longer he went on to describe the proposals, and the more one looks at what is actually in the Bill, the clearer it becomes that what is really in mind has little to do with fairness and a great deal to do with the straightforward political doctrines of Labour Members.

At a time when we need all the food we can get, hon. Members opposite bring forward proposals which in practice will seriously damage the agricultural industry. At a time when we need all the savings we can get, they bring forward proposals which will harm savings. At a time when we need business expansion and investment to the best possible extent, they bring forward proposals damaging to confidence in many firms, particularly small firms.

Secondly, I hope that the Chancellor will look again at the cut-off point in stock in appreciation for small firms. Quite rightly he laid emphasis on his concern about jobs. At one point in his speech I thought he considered that small firms did not provide jobs and that only big firms provided them. In fact, the number of jobs at stake in small firms now threatened with bankruptcy is very large. Though it may not be much in the context of a huge community like Birmingham, there are many small towns where the loss of one firm means a serious employment problem. Those are the risks which the Government run with this proposal.

I need hardly say that I also support what was said by my right hon. Friend and many others from this side about the treatment of the investment income of retired people. Among other points on the proposals in the Bill—and perhaps, on this occasion, proposals not in the Bill— is one on which I would particularly like to hear the comments of the Financial Secretary in replying. Many on this side, after our experience with the Chief Secretary, upstairs and downstairs, during the summer, in pressing the case for special tax reliefs for retired people and increases in special personal allowances such as those for the blind, were delighted that the cheerful but utterly hardhearted Chief Secretary of the summer had managed to convert the Chancellor by the autumn so that we had the special allowance for old people and also an increase in relief for blind people for which we were pressing in the summer, which at that time we were told for various reasons could not be done.

I would specifically ask the Financial Secretary why the Government have not taken the opportunity at the same time to look at some other special personal allowances. I have particularly in mind those for dependent relatives and in particular the single woman supporting de- pendent relatives, also raised during the summer, for whom the case for upward adjustment is at least as strong as those with which the Government have already dealt or are proposing to deal.

Turning from the minutiae of the Bill to the broader front, there is no doubt the Finance Bill falls to be judged and has to be judged, certainly by us on this side, not just as a set of detailed tax measures which we can discuss in Committee, whether on the Floor of the House or upstairs, but as part of an economic and social strategy alongside which we have to judge it. At the time of the Budget it seemed to me that it was virtually impossible for any of us to form an effective judgment. We heard what the Chancellor said in his Budget speech. We knew what his tax proposals were, within limits, but we did not know in any detail his public expenditure, which is an important part of the judgment one has to make. We did not know the details of the energy conservation programme. This was indicated in a general way in the Budget speech but only in outline—not in detail until now; and, frankly, we are not in much better position now for forming a detailed judgment of the Chancellor's strategy, economic and social, as a whole.

It is generally agreed on both sides of the House that the energy-saving package has proved little more than a small mouse, and as far as public expenditure is concerned, as the right hon. Member for Down, South (Mr. Powell) pointed out earlier—he welcomed it, but I do not welcome it so much—we have not yet got details of the Government's proposals on public expenditure and the House is still left in a difficult position for judging Government strategy as a whole and not simply in a technical or statistical sense. What is clear is that there is plenty of room for argument, that there always will be and that it is sterile to argue whether the Chancellor's judgment is right to within £100 million or even £700 million.

As the right hon. Gentleman himself rightly said in the Budget debate, estimates are always wrong and arguments which pretend to precision simply expose their users to ridicule. I shall not argue now whether his judgment is precisely right or even within £1,000 million of being right. What I am interested in is the way he is approaching the problem, whether he is doing so in the right way and whether he is making the right kind of appeal to the country and calling for the right kind of response, treating us and the electors as responsible people in facing the country's problems.

On that basis—this is at least as much a political and social basis as an economic and statistical one—I believe that the Bill, with what lies behind it, does not deserve the support of the House. In the Bill we are still a long way from even beginning to bring home to the people the scale and the nature of the problems we face.

I have little doubt that in my constituency most people will think that this is just the politicians and the economists trotting out the same weary old bits of gloom and platitudes that they have trotted out in the successive economic crises of every two or three years since the war. The people have heard the cry "Wolf" so often that they are not really listening any longer. We still have a great way to go if we are to bring home the scale of the changes which have occurred in our strategic situation in the world as a result of what has happened in the last year and that we are not simply facing another of those standard British post-war economic crises.

The Government have contributed to this attitude by the way in which they behave, which is much the same way as the Labour Government behaved in 1967 and 1968, when we had devaluation followed by soothing remarks, then, within a month or so, public expenditure cuts and, a month or so after that, even more public expenditure cuts, followed by a swingeing Budget. At no point was the country faced with a coherent, clearly set out assessment of the situation and a package which would enable it to judge what needed to be done.

That is very much what is happening now. We hear talk about the crisis, but the measures are dribbling out, accompanied by soothing statements, and the people do not know quite what is expected of them and what has happened while industry becomes more uncertain. The whole psychology of the situation is wrong. The energy conservation package announced last week symbolises that as clearly as anything could.

The point I wish to make most forcefully, arising out of that general thought about the way in which the Government approach the country, relates to public expenditure, on which we have some figures about what kind of growth the Government are thinking of over the next year or two, which may or may not be realistic, but no real details.

My fear is that the Government will not genuinely face, and will not help the country to face, the kind of searching reassessment of every aspect of public expenditure we shall have to conduct. I do not believe that our local authorities, let alone ordinary councillors and electors, are yet facing the possible consequences of the present situation in terms of what we shall and shall not be able to afford over the next few years and, therefore, are not facing some of the choices and priorities.

In the last few weeks I have had approaches from four primary schools in my constituency about their rebuilding problems. They have been cut out of the programme under both Governments. They have been told that the country cannot afford the £100,000, £200,000 or £250,000 required to give their children decent, modern school buildings. At the same time, however, Parliament has voted £29 million for subsidised tea, and only last night we discussed an order relating to milk prices, when it was made clear that we are spending about £300 million a year on subsidising milk.

I shall not argue now whether it is right to subsidise milk or tea. We can do that some other time. But I find it difficult to say to my constituents "Your schools cannot be rebuilt because the county council has not the money with which to do it. The Government will not let them have the money but are spending £29 million to subsidise tea." This is the kind of argument we should be considering, and we should be failing in our duty if we did not look at the situation and consider the priorities by which we should be spending money. The Government fall a long way short of what is required.

The hon. Member for Cornwall, North (Mr. Pardoe) thought that the social contract would not work. If I have understood the Secretary of State for Employment aright, he says that we shall be able to judge how it is working in six to eight months' time.

My sympathies are with my hon. Friend the Member for Worcestershire, South (Mr. Spicer), who said plainly, and in a way that we have not heard from the Government benches, that by any plain man's judgment the social contract not only is not working but has already failed and that to most people it is no more than a sick joke. It is a sick joke to those who feel that it has no relevance to their situation. I am thinking of the self-employed, who are facing the new burdens being put on them, and of ratepayers such as my constituents who have found their mortgage interest rates rising from 11 per cent. to 12½ per cent. despite what they thought was a Government undertaking to restrain the level of interest.

I ask the Financial Secretary to deal with the question of mortgage interest rates when he replies to the debate. I know that the responsibility for local authority mortgages spreads to other Departments, but I nevertheless ask the hon. Gentleman to deal with the matter tonight because I have the greatest sympathy with my constituent who says, "Is it any surprise that the workers insist on higher salaries when faced with increases of this magnitude—from 11 per cent. to 12½ per cent.? ", and with another constituent who says "Had this been even a proposal by a building society to increase its rate, there would have been a national outcry and probably further Government intervention."

There ought to be a national outcry about what is happening to some local authority mortgages, and there ought to be Government intervention in a Bill containing proposals such as those now before the House. I cannot believe that it is beyond the wit of the Government to devise means of assisting with this problem, and I hope that we shall hear something about it tonight.

Unless something is done to tackle these problems and ease the anxieties of many people in other sectors of our society, instead of trying to satisfy only the powerful unions the social contract not only will not work in restraining wages but will turn out to be damaging in terms of accentuating rather than easing social divisiveness. A growing number of people believe that the social contract not only has nothing to offer them but amounts to a conspiracy against their interests and is nothing much more than an alliance between the Government and the most powerful organised sectors of our economy.

Mr. Bob Cryer (Keighley)

I have followed with interest the hon. Gentleman's remarks about the social contract. Does he want it to succeed or is he, as so many of his hon. Friends appear to be, intent on destroying it?

Mr. Newton

That argument has outworn its usefulness to Labour Members. If carried to its logical conclusion, it would mean that no theoretically desirable policy could ever be attacked. There would have to be a conspiracy of silence about all the aims that we agree to be desirable in case the suggestion that they were not being achieved was seen as undermining them. In that case we should be wasting our time on issue after issue.

My worry, and I suspect that it may be shared by the hon. Member for Luton, West (Mr. Sedgemore), though he may not share my conclusion, about the coming choice that may have to be made between inflation and unemployment, between dealing with one and dealing with the other, leads me to the conclusion that it is time we spoke out on the social contract. It also leads me to the conclusion that we must have a return to a statutorily-backed prices and incomes policy.

I am aware of the imperfections and problems of such a policy, but if I am in the situation of having to choose between escalating inflation and high unemployment, or, more likely, of having to deal with both, and if the only practical means of minimising and reducing the scale of the disaster is to make a choice, I would rather return to a statutory incomes policy than have a pretence in a social contract which I no longer believed was working.

Whatever analysis of the social contract one accepts, and whatever one's view of a compulsory prices and incomes policy, the risk we run is of another six or eight months' delay while inflation steadily escalates, undermining employment now or in the future and the whole cohesion of our society. For Labour Members to say "Let us not breathe on the social contract in case it breaks' is to build up more and more trouble for the future. That is the choice which they will ultimately have to make. I do not want the responsibility which they are perhaps taking on themselves, and I shall be more than happy to vote for the amendment unless I hear a great deal more sense of reality in the winding-up speech than I have heard either in the Budget Statement or in the opening of this debate.

8.41 p.m.

Mr. John Tomlinson (Meriden)

I want to deal with the part of the amendment which relates to Clause 14 of the Bill and to which the right hon. Member for Finchley (Mrs. Thatcher) did not address herself. It is necessary that the argument for the necessity for Clause 14 should be restated. The clause provides for the restoration of provident benefit income relief for the period of the operation of the Industrial Relations Act or for the period from six months after its inception until the Trade Union and Labour Relations Act took the Industrial Relations Act off the Statute Book. It restores to the trade union movement the £10 million that was taken away by the taxation changes on provident benefit income.

The matter has been debated before, but the necessity for my right hon. Friend to bring back the measure to the House has to be stated. We wish to restore the entitlement of the trade union movement to funds which it was never the intention of the then Conservative Government to deny them. Statements made by right hon. and hon. Gentlemen on the Opposition benches when they introduced the Industrial Relations Act show clearly what was their intention. For example, the right hon. Member for Carshalton (Mr. Carr). who was then Secretary of State for Employment and responsible for the Industrial Relations Act, said, The assurance which I gave, and which 1 stand by, is that it should be possible for a union which decides not to register under the new scheme of registration to take measures without insuperable difficulty to enable it both to protect its present provident funds and continue its provident fund activities."— [OFFICIAL REPORT, 4th August 1971; Vol. 822, c. 1714.] There could not be a clearer statement of intention from the right hon. Gentleman when he introduced the legislation.

Later, the right hon. Gentleman had to come back to the House and confess that the advice he had received was perhaps based on a misunderstanding of what exactly was in the legislation. Be that as it may, he clearly stated that it was not the intention to raise that £10 million from the trade unions. He made clear in the legislation that in view of the new legal advice he had received he would try to find a way round raising the money in that way. He assured the House that there would be no great difficulty in trade unions hiving off their friendly society activities so that they would not attract the tax.

The TUC eventually took counsel's advice and on that basis told its affiliate unions that the only way to protect themselves was by hiving off their friendly society activities. Those activities had to be completely separated from the normal activities of an unregistered union, and separately controlled.

The advice the trade unions received was that there would have to be separate contributions and separate accounting systems, and there could be no overlapping of the membership in respect of the management of friendly society activities and trade union executives. Therefore, even when the right hon. Member for Carshalton tried to make hiving-off arrangements, such arrangements from a practical point of view were impossible. Such a system would involve every trade union member who contributed to a union provident society fund having to approve the resolution to hive off. In other words, the trade union would have to set up two sets of books, one within the union and the other hived off and exempt from tax.

The action taken by the right hon. Member for Carshalton at that time involved five stages. First of all, the right hon. Gentleman in introducing his legislation did not believe that he had taxed the income of provident societies. The second stage related to the occasion when the right hon. Gentleman discovered that he was wrong. In the third stage he tried to rectify his error. The fourth stage involved his failing in that task. The fifth stage involved his hiving-off mechanism, which was quite ludicrous.

We are seeking in this legislation to help the right hon. Gentleman out of his difficulties. Therefore, the whole House should welcome the fact that my right hon. Friend the Chancellor of the Exchequer seeks to help the right hon. Member for Carshalton in achieving what he said he wanted to do but never had the capacity to do.

To turn to other aspects of the Budget, I disagree with the hon. Member for Braintree (Mr. Newton) who posed the alternative of social contract versus incomes policy, as if there were a choice. I believe that that choice is not available. I believe that there are three courses. The first comprises the social contract, the second embraces a statutory incomes policy, and the third comprises deflation and, inevitably, unemployment. I believe that the pursuit of an incomes policy on statutory lines is unlikely in the present circumstances. The hon. Member for Braintree almost implied that a statutory incomes policy envisaged the apparatus of a police State to enforce it.

In the end we are left with the social contract. It would be ludicrous to pretend that all is well with the social contract. It has its imperfections and does not work as well as many of us would like to see it work. However, the choice is between the social contract and massive deflation—in other words, unemployment. I believe that the Government have played their part in forwarding the social contract. They have created the right atmosphere and both sides should do their best to honour their side of the bargain.

Clause 14 of the Finance Bill goes one stage further towards honouring the Government's obligations in respect of the social contract. I hope that we shall now see people making a constructive contribution towards the social contract rather than indulging in a negative approach. I repeat that the only alternative is deflation and massive unemployment and that is an alternative which everybody will unite in rejecting.

There are problems as to how the social contract is working. There has been no reticence amongst my right hon. and hon. Friends on the Front Bench in saying that the social contract is not working as well as they would have liked. After years of statutory control, with all the suspicion and hostility that was built up between the trade union movement and the Government, it would have been an exceed- ingly foolish man who believed that attitudes that had been soured over a decade could suddenly change, particularly when large sections in this House were howling and screaming for a statutory incomes policy. Against the background of the last decade and the alternatives being put forward by hon. Gentlemen, there was a direct incentive to trade unionists to go forward for maximum pay increases in anticipation that the pressures for change might succeed.

The greatest hope of making the social contract work is to create an atmosphere in which it is clear that there will be no return to a statutory incomes policy. There would then be no incentive to try to jump the time barrier and to get massive pay claims in anticipation that there might be a statutory incomes policy.

The more we talk of a return to a statutory incomes policy as a viable alternative, the more encouragement we give to the trade union movement to seek massive increases for its members because of the fear of statutory control in, say, six months.

Mr. Winterton

Will the hon. Gentleman tell us what average wage increase has resulted since the ending of the statutory prices and incomes policy?

Mr. Tomlinson

That figure is easily available to the hon. Gentleman to find out for himself through the usual channels, if he wishes.

Mr. Winterton

Over 20 per cent.

Mr. Tomlinson

What I am suggesting is still perfectly valid.

Mr. Winterton

It is 24 per cent.

Mr. Tomlinson

The fear of a statutory incomes policy will mean that that 20 per cent. if that be the figure, will become 30 per cent. or even more. People with a 12-month negotiating period who have gone only four months through that period and who fear that in six months, just before the new negotiations begin, there will be pressure for a statutory incomes policy, will be encouraged and provided with the incentive to apply for increases more than once a year.

I believe that greater emphasis must be put on the low pay end of the social contract. There can be no doubt that the greatest disincentive to productivity is the infrastructure of low pay in many of our basic industries. By "low pay" I mean low rates of pay rather than low earnings.

Mr. William Clark

I am following the hon. Gentleman's argument with great interest. Does he agree with the productivity deal that the National Coal Board tried to get the National Union of Mineworkers to accept? Does he agree that, in the light of the NUM's recent claim, it would have been a good thing if one Minister at least had said, "This is breaking the social contract. You should accept the productivity deal offered by the National Coal Board."?

Mr. Tomlinson

I do not agree with that view. There are genuine arguments about the necessity for an industry-wide productivity agreement in the coalmining industry. Otherwise, it discriminates against pits with low capital investment and poor working conditions.

The overall position on low pay is clear. One of the greatest disincentives to productivity is an infrastructure of low basic rates of pay which do not encourage people to work productively during their normal 40 hours, but deliberately to work unproductively to get overtime on which they depend for reasonable take-home earnings. I should like trade unions to devote their greatest concern and endeavours to that end of the social contract. I should also like the Government to give the greatest possible assistance towards achieving not only social justice, but economic common sense.

Finally, I turn to the public borrowing requirement. I emphasise what I have said previously in the House. I am one of those Members on the Government side of the House who are grievously concerned about the increase in the public borrowing requirement. To have increased the borrowing requirement by £800 million in the Budget was regrettable, for a number of reasons. First, there is the obvious reason of the increase in the total of the borrowing requirement in itself. The more serious reason is the fact that it does not create the right psychological atmosphere in which we can get across to the people the fact that we are facing a real crisis. At present we have a public borrowing requirement of enormous magnitude, and one which we should not have increased in the present economic circumstances.

I do not accept that the only way of tackling the borrowing requirement is to cut public expenditure—albeit there may be areas of public expenditure where cuts are desirable. Projects such as the Channel Tunnel have been suggested for such cuts. However, I should like to see a clear statement that where an increase in public expenditure is necessary to finance essential services, we should be prepared, in circumstances such as those we face today, to raise the additional revenue by taxation. That could and should be done. Had it been done, the Budget would have created a better psychological atmosphere in relation to the crisis we face.

Overall, I welcome the Finance Bill. I shall look forward to further discussions on a number of points during the Committee stage. For the reasons I have outlined, I shall be voting against the Opposition's amendment.

8.57 p.m.

Mr. Geoffrey Pattie (Chertsey and Walton)

In the recent General Election campaign it seemed that everyone was agreed, if about nothing else, that we live in very critical times and that inflation is our major challenge. It is, therefore, particularly sad that, with the exception of the allowance for stock appreciation, which could be described as the first reluctant step towards inflation accounting, the Finance Bill fails to address itself to the real problems faced by every individual and family in the country. This is understandable, as it requires considerable economic courage— one might even say that it requires economic courage of the highest order— really to face up to the problems. From what I have seen so far, economic courage is not a commodity in plentiful supply on the Government Front Bench at present.

What would have given me some cause for hope would have been a readiness on the part of the Government to introduce indexation, linked with the appropriate demand management policies. Indexation itself is not a remedy; nor, taken in isolation, is strict monetary control. Indexation without monetary control could produce further inflation. Strict monetary control without indexation would certainly mean massive unemployment. I certainly do not want to see that.

Wherever indexation has been linked with gradual reductions in the money supply in other countries—I emphasise the word "gradual"—it seems to have worked. Specifically, I cite the examples of Brazil and China, where indexation with strict monetary control reduced huge inflation rates at apparently little cost in terms of unemployment or lost output.

The situation in this country is that if inflation continues at the present rate— the present Government have done absolutely nothing to reduce it so far—by 1978 the prices of most things will be exactly double what they are today, and by 1984 they will be six times as high. One example would be £3.50 for a gallon of petrol. This assumes a steady rate of inflation of 20 per cent., but inflation, as we all know, rarely obliges with a steady increase. Unless we are given a major change of policy direction, and soon, to tackle inflation, it will roar ahead totally out of control.

The present measures are as effective as flogging an elephant with a feather duster. When we see a borrowing requirement of the order of £6.3 billion and a rising increase in the rate of money supply it is easy to understand the pessimism about our prospects. We seem to be aware of the problem but unwilling or unable to do anything about it. It could be that the Government's reluctance to introduce indexation, especially in taxation, is because it would mean the end of fiscal drag and the end of a view of inflation as a tax in its own right and one which, in the words of Milton Friedman, requires "no specific legislative enactment ".

Apart from this Machiavellian reason for inactivity there would appear to be something of a psychological barrier to introducing any form of indexation. It appears to be that such an introduction would in some way concede that inflation is here to stay, that we have to learn to live with it, and that this would be unfortunate. In my view that is the kind of realism the country wants to see. It is not as though indexation is a revolutionary concept. It has crept into various areas, such as matrimonial settlements and payments in divorce cases, and so on.

The key point is the purchasing power of the pound which has to be periodically adjusted, how often depending on how bad inflation is. Pensions would need to be reviewed far more frequently than twice a year if pensioners were to keep up with the vast increase in the cost of living. Indexation will enable people to keep pace and thereby reduce some of the very serious dislocations and instabilities which otherwise occur in a society subject to severe inflationary stresses. Pension and social security benefits, in my view, should be increased.

In taxation the impact of inflation is especially severe for the low-paid because when they move up from the zero rate to the standard rate they move to a different level of taxation even though in terms of purchasing power they are no better off. If adjustments were made to their allowances, and if the income levels at which different tax rates apply were also amended in line with other changes in the price index, this would substantially reduce the impact of inflation on such people. Apparently, such schemes operate perfectly well in Canada.

The Government seem to be going half way towards conceding the idea of indexation in a general sense by their limited measures to allow for stock appreciation due to inflation. This is extremely significant, because it is important that companies do not have to pay taxes on money they either have not got or never have had. Indexation would also serve to reduce distortion in the question of interest rates.

I believe there is an acute need for an index-linked security as well as for indexing the rate of interest on National Savings. Such measures would competitively encourage the banks, the insurance companies and the building societies to offer similar terms, and that must be a good thing. This could lead to higher mortgage interest rates unless indexation applied to the amount of repayment of the initial borrowing as well as to the interest rate itself. The borrower must, therefore, repay a true proportion of the original borrowing each year, and in this way the borrower borrows in real terms and the lender is protected.

No one has suggested that indexation is the remedy for inflation, but it could substantially reduce its impact. I believe that it must surely be introduced soon, and I predict that we shall see it in some form in 1975.

I refer in detail to some other points in the Bill. Following the failure of the Government to introduce any form of indexation there is one glaring case where indexation would be fair. This is in relation to the maximum amount a child can earn before the parent is taxed on earnings over that sum. The limit is £115. As far as I am aware, it has obtained since 1963–64. Any child doing a Saturday job would soon be over that limit. There is a strong case for indexing and recognising the changing value of money in the past 10 years.

Clause 15 deals with sales at undervalue and overvalue, and gives the board power to decide and direct about specific transactions. There is a danger that multi-national companies could be driven to reduce their manufacturing capacity in the United Kingdom, manufacture elsewhere, and then export to this country. I hope that this power, if it is kept in the Bill, will be made subject to Treasury control, in the belief, I hope not too naive, that the Terasury would put specific cases into the wider context of the national interest.

The provisions for changes in stock values, dealt with in Clause 16 and Schedule 3, require considerable clarification, not only as to the precise definition of trading stock but in cases where a company has two accounting periods ending in the 1973 period of account. It could easily happen that such a company would have 12 months in the 1973 period and, say, five months in 1972. Companies in that position will need to know which period will count for relief. Will it be the 1973 period at 52 per cent. or the earlier period at 40 per cent? As the relief is retrospective, there can be no avoidance, as no company could have so ordered its accounting period in anticipation of the relief.

Those are but detailed points on a Bill which fails in other respects to meet the needs of the economic situation.

9.7 p.m.

Mr. Nicholas Fairbairn (Kinross and West Perthshire)

I would not have intervened but for the speech of the hon. Member for Blyth (Mr. Ryman), which must have contained more cant and bias than most speeches in the House. It started with the often-repeated assumption that the workers are the only people who work and the only people who are desirable and that every other member of the community, such as the self-employed person and the higher-earner, is undesirable and anti-social and should be punished for that.

The hon. Gentleman is a rich man and a self-employed man. He is a Treasury Counsel, and cannot be other than rich. He said so in his speech. I do not suppose that he goes out of his way to pay tax that he can avoid. It is improper for him, as a lawyer, to tell the House that to look at the tax laws and to pay only what they demand is a fiddle. It is obedience to the law, and it is improper for a Senior Treasury Counsel to come through Blyth with that cant and nonsense.

That bias is also reflected in the Budget and the Bill. It is a bias against those who save, against the self-employed, the small shopkeeper, the small industrialist, the farmer and the person in forestry. Forestry and farming and all rural community activities are savagely punished in the Bill—as a matter of policy and on purpose, I believe. It is that bias that the Opposition must right in every way that we can. It is no oddity that on the day the Government propose to repay £10 million to the trade unions they propose to increase the price of school meals.

There is a crisis in the country with which the Bill merely fiddles. The Government will not admit it. They invite us to believe in a myth—the social contract. If one told the hon. Member for Blyth, ' Draw up a contract. I don't know who the parties are and I don't know what the terms are ", he would say that it was a mythical contract.

There is not only a crisis that the Government will not admit but a civil war between one type of person and another, being waged during the crisis. It is a war being waged against the people in favour of those whom the Government believe are their financial friends.

9.11 p.m.

Mr. David Howell (Guildford)

I congratulate my hon. and learned Friend the Member for Kinross and West Perthshire (Mr. Fairbairn) on the robust conclusion to his speech. I know enough not to get in the way between quarrelling lawyers. However, I think that my hon. Friend showed a great deal of good common sense in a marvellously brief manner. It would have been a happy occurrence during our economic debates in many years past if such sentiments could have been put with equal brevity.

Other speakers during the debate have strayed a good deal away from the narrow confines of the Finance Bill. That is by no means improper. We are by no means strangers to Finance Bills and economic policy and budgetary statements coming one after the other. If my memory serves me aright, we were in the middle of the Report stage of the previous Finance Bill when the Chancellor delivered an economic statement and gave details of a number of measures and proposals, some of which are contained in this Finance Bill. I have no doubt that before we are through with this Finance Bill further economic statements and announcements of great economic significance will be made. If we stick true to form, and if the present Government are still in office, we shall be considering the outlines of future financial legislation, as well as the present financial legislation, coming after the scarcely digested financial legislation considered by the House earlier this year.

It is worth remembering, as we plough into this the second Finance Bill of this calendar year—although strictly it is the first Finance Bill of the new Parliament— that there have been only three other years this century apart from the war years, when two Finance Bills have been considered by Parliament. The first occasion was in 1931, after the National Government came to office. The second was in 1947 during the coal crisis. The third was in 1964, after the Labour Government came to power and felt that they needed a new Budget.

A second Budget has been presented during the calendar year 1974. What- ever the reasons for the second Finance Bill, I think this must be the first occasion this century, perhaps almost within historical record, when a Government have had to introduce a second Finance Bill in substantial part to correct the errors of their first Finance Bill. That is the position with which we are dealing tonight.

Output, investment and exports in real terms have been reduced. However, financial legislation and the output of paper connected with it have increased, are increasing and will no doubt continue to increase.

The Finance Bill is somewhat different from that promised by the Chancellor of the Exchequer in his Budget speech in March and during the Second Reading of the Finance Bill in May. In March there was a great deal of fine talk about the forthcoming, as it was then called, inter vivos gifts tax. It was said that the forthcoming wealth tax would march forward in a climate of confidence, fairness and justice to be created. Great stress was laid on the basic trade-off between the prevailing atmosphere and the fairness and confidence to be generated in the economy.

Nothing was said during March or May about tax relief for stock appreciation. Nothing was said about saving jobs. Indeed there were confident assertions that employment was holding up well. The Chancellor was delighted at how well the CBI trends seemed to indicate investment would be going. In March we were told that businesses were flush with cash, which I always thought a nauseating phrase. The Chancellor told us that there was a new confidence. I suppose that we are used to this.

Perhaps we were a little naive back in March. Sometimes, however, it is difficult to adjust to the fact not merely that the Chancellor was wrong—because all Chancellors of the Exchequer are wrong from time to time. What we find so difficult is that the Chancellor is unable to come within 1,000 miles of admitting that he is wrong. In present circumstances we find that a terrifying characteristic.

Another difference between what was heralded in March and May and what is laid before us today is to be found in the figures. My right hon. Friend the Member for Finchley (Mrs. Thatcher) was right to draw attention to this. The figures look the same. The figure which the right hon. Gentleman wanted in March was a starting point for the investment surcharge of £1,000. That seemed to him a "more reasonable figure". A number of my hon. Friends have made known their feelings, as have many thousands of people in the country, about the vindictive and petty nature of this measure. It may be that the Chancellor needed to get his account in balance with his Left wing. But that makes it no less vindictive and mean.

However, £1,000 in March or May is only £900 today. Already, with a rate of inflation of 18.4 per cent., the figure is dwindling. On elderly people who have saved and have retired, anxious to eke out their savings and to draw a modest income, the squeeze proposed in March which the right hon. Gentleman was frustrated from imposing in the summer has been brought back with a plus. It is worse than when it was proposed in March. I hope that the right hon. Gentleman takes satisfaction from that, because it caused a lot of suffering and bitterness.

The same applies to the other figures in the first Finance Bill and in the present Bill. When we come to the capital transfer tax, this Bill talks of an accumulating figure of £15,000. However, at the rate we are going, in five years that will be £5,000—that is 5,000 1974 pounds, which themselves do not hold a candle to 1973 or 1972 pounds. If the £2,500 wedding present allowed as a capital transfer dwindles away in a Socialist future—from which I hope that we are preserved—in the foreseeable space of time it will scarcely pay the marriage licence.

In all these areas a major adjustment of thinking is needed. Let us remember that we have to live with appallingly high rates of inflation, and there are few who would dare argue that they will not go higher still. The sooner the Chancellor of the Exchequer adjusts to that new reality, however unpleasant, the better it will be for significant economic and financial discussion.

The Government have argued today and up and down the land that the capital transfer tax will redistribute wealth. My right hon. Friend the Member for Finchley shot a torpedo through the middle of that. That is the one thing that it will not do. It will concentrate wealth. It will divert wealth from a number of hands into the hands of the State. That is one reason why the argument does not add up to a row of beans.

The second point worth making is that the confident statements by the Government and by the Treasury that they have some clear idea of the present distribution of wealth, that they know where they are so that they can set about a redistribution from the present pattern, is not based on fact. There is very little idea of the distribution of wealth. The figures available are out of date. They are based on outdated estate duty figures. Certainly it is worth questioning whether the Treasury and Treasury Ministers have the least idea of the present pattern of wealth distribution before they set out on their crusade to redistribute it into the hands of the State.

Then there is the third argument, favoured especially by the Left, that this kind of tax on wealth can be mobilised as revenue to subsidise prices. This is the way, we are told, in which the level of prices can be held down and in which the rich, in some Utopian way, can support the poor in the best ideals of Utopian Socialism, and inflation will help along the way.

We hear members of the Labour Party and others say from time to time what a powerful instrument for Socialist redistribution inflation will be in enabling a greater degree of equality to be achieved in a Socialist society—

Mr. Arthur Lewis (Newham, North-West)

The hon. Gentleman has just referred to what he claims Labour people have said. Can he give the name of even one person who has made the remark?

Mr. Howell

What particular quotation is the hon. Gentleman talking about?

Mr. Lewis

The hon. Gentleman was telling us what Labour people had said, and I asked him to name just one Labour person who had said it.

Mr. Howell

I am sure that if the hon. Gentleman reads some Socialist documents—or Tribune, in which these things are stated week after week—he will find the sort of remark to which I refer. I could certainly draw his attention to these. What we are concerned with here is a facile theory which has no basis. It has been shot down, as my right hon. Friend reminded us this afternoon, by the Labour Party's own Labour Economic Finance and Taxation Association, a document which was quoted by my right hon. Friend.

The truth is that to believe that inflation and taxing the wealth can pay for maintaining living standards is not a policy: it is a superstition. The less we hear about it in Committee from the Chief Secretary or from other Treasury Ministers, the more easily we shall get on. The Chief Secretary this afternoon told us about how he was going to redistribute wealth by this tax, but he knows that this is a complete nonsense. There will be no redistribution of wealth whatsoever, and the sooner that is admittted the better.

The real effect of a capital transfer tax—we did not hear much on this from the Treasury Bench this afternoon—will be on thousands of jobs in the private sector. In this area the Government win first prize for solicitous and wordy hypocrisy. Ministers fall over one another to express concern. The hon. Member for Newham, North-West (Mr. Lewis) can ask me for a quotation on this, if he wishes, and I will provide him with many about small businesses and the need for a lively, vital, vigorous, alert—I cannot remember all the adjectives used by the Chancellor—private sector.

Even in the absurd document "The Regeneration of British Industry" there are solicitous words about the need to maintain private industry. To be fair, there is a Minister in the Government with responsibility for small businesses, and he has the sympathy of the House. He believes that all these expressions of concern are meant, but they are not meant. His colleagues do not mean what they say, because when it comes to deeds every effort is made to destroy what Ministers claim to be concerned about. [HON. MEMBERS: "Name the Minister."] He is the Under-Secretary of State in the Department of Industry, and he is concerned with small businesses. I could say his name, but his constituency escapes me. He comes from Scotland. When it comes to deeds as opposed to solicitous words, every effort is being made before our eyes to destroy the small businesses of this country. Bankruptcies in the third quarter of this year were 59 per cent. up on last year.

If sympathy is felt by the Chancellor and Treasury Ministers for small businesses, it is the sympathy of the undertaker. The capital transfer tax is designed to smash up the independent sector, in three ways in particular. First, as my right hon. Friend said this afternoon, the estate duty concession for industrial assets is withdrawn. Secondly, the capital gains element has to be included. Thirdly, if owners of small businesses are looking for a respite from elsewhere—from the new stock appreciation provisions—we are told that these are to be limited this year to above £25,000 value of closing stock. We have still not had from Ministers—we would like to have it from the Financial Secretary tonight—a clear answer as to why this is necessary. We do not accept it as good enough to put the blame on administrative reasons. Most of the calculations are done by the auditors and accountants for the firms concerned. There appears to be no difficulty on their side, yet the Government apparently see a difficulty.

There is a promise of relief next year which the Chancellor says is a bankable asset. What on earth does that mean? It certainly does not mean that interest will be paid on it. The use of the phrase is a loose and irresponsible use of words with which the Chancellor is not familiar and it misleads companies, which is a serious problem when small business is in desperate straits. [An HON. MEMBER: "What about the sugar agreement?"] The hon. Member talks of the sugar agreement, but the Chancellor says that he is dealing with the plight of small businesses. He is telling them to go to their bank managers with this bankable asset. It is no such thing, and any business man who does not see that before going to his bank will rapidly spot it as soon as he does.

Mr. Adley

Could it be that the Chancellor has reached an accommodation with the Shah of Persia or King Feisal in regard to these assurances?

Mr. Howell

There is much that we have not been told, and we should like to know about that aspect. In the meantime, small business has been misled by being told that this is a bankable asset when it is not. I know that the Chancellor does not really care about this, but many small businesses do. They want to know the reason when what they have been told is a bankable asset turns out not to be so.

For those who survive this onslaught by the Government there is the weath tax. In this regard we are talking about between one-quarter and one-third of our work force who are a source of vitality in the economy; they are the people who are going under. There is nothing in the Bill to rescue them, and everything in the Bill, particularly the CTT, will hit them.

I want a full-scale effort by the Government to rescue the independent sector. This is desperately needed. The Government's whole effort seems to be to destroy the private business, to make it a one-generation business, to destroy the ability of small firms to build up and bring in new recruits and new management, which is one of the most important aspects of the economy today. The only talk of rescue by the Government is talk of the National Enterprise Board, which offers the same kind of rescue as that offered in the knacker's yard.

Mr. Dalyell

Are we to take it, then, that those Members of the hon. Gentleman's party who are appointed to the Select Committee on the wealth tax will approach it in a destructive and not a constructive spirit?

Mr. Howell

I do not see how the hon. Gentleman can draw that implication from what I have said. I am sure that all hon. Members will fulfil their parliamentary duties on all Select Committees in the proper way. I am merely expressing the widely-held view that the Government's preliminary ideas on the wealth tax—let us pray that they get no further than that—on top of the finalised ideas in this Bill would destroy the private sector and go flatly against their solicitous words about trying to create a vital and profitable private sector. They are not creating it; they are destroying it, and the more clearly and honestly that is said, the better for all of us.

My hon. Friend the Member for Braintree (Mr. Newton) said that he could not discern a Budget strategy. Of course there is a strategy at the centre of the Budget, and it is the drearily familiar one which has been announced by successive Chancellors. It is that somehow, in ways yet to be specified and announced, there will be more exports and investment and less consumption. If that means anything, it means that the hole which is being torn in the economy by the vast increase in oil prices and the world recession should not be filled automatically by higher consumption, by allowing wages to mop up consumption or allowing public expenditure to rise. That is what it means if it means anything at all. Personally I fear that the Chancellor's phrase is an incantation and means nothing I see not the slightest chance of his aims being achieved.

Peering ahead, we on this side see two things. First, we see disaster if the present trends continue, and my right hon. and hon. Friends will no doubt return to this aspect tomorrow in the debate. As the hon. Member for Cornwall, North (Mr. Pardoe), said comment is divided between those who see disaster in the immediate future and those who see it a little further down the line after a few months of illusory attempts to shore up the situation and postpone the inevitable. That is one thing we see.

Again looking ahead, we also believe that recovery is possible. If consumption can be held down, if there is a serious attempt to rein back public spending on the lines mentioned by my hon. Friend the Member for Hertfordshire, South-West (Mr. Dodsworth), if there is an attempt to change the psychological attitude to public spending and to recognise that public services are for the time being not to improve, and if above all wages can be checked, recovery is possible. We still believe that across the Floor of this House, if we ever get the attention of the Chancellor or the Treasury Ministers, we could agree on some sane moderate policies to ride the storm and minimise the coming hardship instead of plunging us into higher unemployment which, whatever the Chancellor may say, is almost inevitable.

That is what we look for, but where is the moderation? Where is the serious attempt to divert resources into exports and out of consumption? There may be the beginnings of realism on the energy crisis. I expressed a hope on that during my Budget speech. Others said that I was being sanguine and that nothing would come of it. I still like to think that the Chancellor meant what he said and that there is to be a substantial increase in energy prices to bring home to the people of this country the realities of the situation we face. Certainly, the announcement this afternoon that petrol is to cost 72p per gallon could be taken as evidence of a start in that direction, although a Written Answer was hardly the most courageous way to announce it. I would rather have expected the Secretary of State to come and tell his Friends on the Left wing exactly how petrol prices are to move, just as I expect the Chancellor and the Chief Secretary in due course to come and speak openly and tell the rest of us how prices are to move in the nationalised fuel industries. Could it please be noted that we do not want any more Written Answers tucked away in HANSARD in future when important statements which cut into living standards are made?

If any progress is being made, it is offset by what we have been discussing this afternoon because here we have a Bill reeking with hostility to investment and private enterprise designed to destroy small business—most of us are agreed on that—to smash up small traders and to break up farms—as my right hon. Friend has said, the concession, even for working farmers is a very feeble one—to weaken commercial undertakings, to penalise partnerships and to destroy woodlands, as my hon. Friend the Member for Ludlow (Mr. More) reminded us.

The outcome of this particular bit of grand strategy which is supposed to create a new climate of confidence is a dreary list. Its message is perfectly clear: that the big battalions will be all right for a while and the independent sector of the country will bear the brunt We divide tonight on our amendment more than anything else because we wish to drag the Government back from the edge, to jerk them out of their fiscal fantasies, to wake them up from their sleep-walking trance.

So far in this calendar year 1974 we have had from the Chancellor three Budget Statements and two Finance Bills. HANSARD is littered with assertions that the right hon. Gentleman wants to restore the private sector, increase productivity, raise investment and check inflation, with adjectives like "vitality" and "vigorous" tripping off his tongue. We believe that nothing has been done to give any substance to his words. I agree with my hon. Friend the Member for Braintree that one has a growing, agonising suspicion that they are mere words and that when it comes to action nothing materialises.

On the other hand, everything has been done by the Bill to undermine precisely those whom the Chancellor claims so insistently and continuously he is trying to help. We say that we are against this kind of political ambiguity and schizophrenia—there are less polite words for it. That is why we shall vote for our amendment.

9.35 p.m.

The Financial Secretary to the Treasury (Dr. John Gilbert)

As the right hon. Member for Down, South (Mr. Powell) observed, the House has converted this one-day debate on the Finance Bill—due to be followed by a one-day debate on the economy—into the first day of a two-day debate. He said that in effect it would be a two-day debate on the economy. I suspect that one could be forgiven for thinking that it was a two-day debate in connection with the leadership stakes of the Conservative Party.

Mr. Healey

A two-day selection conference.

Dr. Gilbert

Or a two-day selection conference, as my right hon. Friend puts it. This would explain the uncharacteristically shrill speech of the right hon. Member for Finchley (Mrs. Thatcher), whose contributions we have greatly enjoyed in her previous appearances in these debates, and I hope that the latter will be more typical of her contributions to the Bill in Committee. At the rate we are going, we can no doubt expect shortly to have the pleasure of maiden contributions on the Finance Bill from the right hon. Member for Bridlington (Mr. Wood) and the right hon. Member for Penrith and The Border (Mr. Whitelaw).

I must turn to the debate and to the Bill, although the two unfortunately have not today always been synonymous. Several points of detail have been raised. My hon. Friend the Member for West Lothian (Mr. Dalyell) inquired about the problems of stately homes, several of which, he felt, might come on the market simultaneously through the operation of capital transfer tax and therefore there might not be buyers in the market available for them. I am happy to give him the assurance that houses that would qualify as part of the national heritage could be accepted in part or in full payment of the tax, just as they have been acceptable in the past for estate duty purposes.

The hon. Member for Caernarvon (Mr. Wigley) inquired about the cost of administration of the tax. The present cost of the administration of estate duty is between 1 per cent. and 1½ per cent. of the yield. Our best estimate at the moment is that the cost of the new tax will be about the same.

My hon. Friend the Member for Motherwell and Wishaw (Dr. Bray) inquired about wedding gifts to parents. If I understood him correctly, he referred to a situation in which a widow or widower remarries and receives gifts from a son or daughter of a previous marriage. Gifts of this sort would rank for the £1,000 exemption on marriage gifts but not for the £2,500 at present contemplated for such gifts to children or more remote descendants' marriages.

My hon. Friend the Member for Blyth (Mr. Ryman) spoke of the personal problems he has had with value added tax. If he would like to write to me about them. I shall be happy to look into them.

My hon. Friend also raised serious points about the extent of tax evasion. This has been a problem for Treasury Ministers in successive Governments. The powers of both the Inland Revenue and Customs and Excise are constantly under review. We had strenuous debates, as the Opposition will recall, when VAT was introduced, on the nature of the powers being given to Customs and Excise at the time. I would not say more now except that we may have proposals to bring forward in this general direction in due course.

The hon. Member for Braintree (Mr. Newton) inquired why we are not adjusting personal allowances. He mentioned the blind allowance. That was put up earlier this year. We adjusted the additional person allowance to which he made oblique reference; we increased it from £130 to £180 during the summer.

Mr. Newton

The blind allowance has not yet been increased. It is to be increased next April. I was referring to the dependent relative allowance, especially that of a woman supporting dependent relatives, about which we argued during the summer.

Dr. Gilbert

I take the hon. Gentleman's point. All these personal allowances, not merely the subsidiary ones, will fall to be reviewed by my right hon. Friend when he brings forward his next Budget, and they will be looked at at that time.

That applies equally to the remarks of the right hon. Lady the Member for Finchley about the appropriate level for commencing the investment income surcharge, because in a period of inflation levels of allowances will get out of date right across the whole spectrum of taxes. The right hon. Lady is as aware as we are that all these matters are considered from time to time and are not normally adjusted within the course of a given financial year.

My hon. Friend the Member for Luton, West (Mr. Sedgemore) made by far the most interesting contribution to the general economic side of the debate and raised many important questions about how full employment was defined. He was good enough to acknowledge that whereas certain countries had done better than we had in the past under both types of administration, unemployment is rising rapidly in both Germany and the United States, and we can only hope that the backlash from that will not affect us here more seriously than we now envisage.

My right hon. Friend nailed his colours to the mast in this respect quite unambiguously. From the moment of his first Budget at this Dispatch Box he made it clear that he did not propose to try to solve our economic problems by throwing men and women out of work and that he considered the defeat of unemploymen as cardinal a feature of his policy as dealing with inflation. At that time, only six or seven short months ago, he was very much a lone voice amongst the Finance Ministers of the world. I think it is a tribute to him that within the last three or four months he has found himself leading the chorus, because Finance Ministers of all the industrialised countries of the world are addressing themselves more and more to the question of full employment and recognising that far greater economic damage, loss and misery to society is on the horizon if we do not see to it that our policies take care of that as a major problem that can be as productive of social strain, misery and hardship as can rising prices.

Finance Bills rarely become objects of affection, except possibly of a somewhat macabre nostalgic sort, and I should not suggest that this Bill will be the most loved measure that the House has ever seen, certainly not on a bipartisan basis. Despite the labours of the parliamentary draftsmen, some may claim that the Bill is lacking in brevity, clarity or elegance, but I maintain that it contains all those qualities in high degree.

What I do say emphatically is that this is the best-explained Finance Bill that has ever been presented to the House of Commons, and I should like to pay tribute—and I am sure that the House would wish to join me in this—to the Inland Revenue officials who produced the explanatory material on the Bill—a procedure that is unprecedented. This material runs to no fewer than 70 pages.

Mr. David Howell

The Bill needs it.

Dr. Gilbert

The hon. Gentleman says that the Bill needs it, but the fact is that for many years Finance Bills have been the most esoteric and arcane legislation but they have been the only Bills to be presented without an Explanatory and Financial Memorandum. I think we can claim credit for being the first to introduce an Explanatory Memorandum, which we did in the spring, and this has been improved on by the memorandum that is available with this Bill. There are short notes on every clause, and detailed notes on the capital transfer tax, on the life assurance provisions and on the relief for stock appreciation. Incidentally, we also honoured another commitment to make both the Bill and the memorandum available to hon. Members at the same time as it was available to the Press.

Mr. Cormack

I should jolly well think so.

Dr. Gilbert

I should jolly well think so, too. That is a precedent. The hon. and right hon. Friends of the hon. Member for Staffordshire, South-West (Mr. Cormack) never did it. I am glad to have his commendation. We could hardly go further unless we were to show the Opposition the detailed briefings that Ministers receive. I have often thought that that was an idea worth considering, but it depends upon the reasonableness of Oppositions. Who knows, with the passage of time and the maturescence of hon. Gentlemen opposite, there is no knowing what miracles will ensure, but there is no inevitable correlation between those two processes. "Maturescence" is a word that is occasionally applied to alcoholic spirits and relates to the coming to maturity, which can be a painful and long-drawn-out process.

My hon. Friend the Chief Secretary was good enough to delegate me to deal with certain minor clauses. My hon. Friend has become a polished expert in the art of delegation in the last few days. I shall address myself to Clause 1, which consolidates the 8 per cent. standard rate of VAT which was introduced by my right hon. Friend on 29th July. The clause removes the former 10 per cent. standard rate from the statute law and establishes 8 per cent. as the standard rate unless that rate should itself be varied in the future. The clause supersedes and revokes the order which introduced the 8 per cent. rate, and also removes the spent and unused provision which allowed the 10 per cent. rate to be varied before VAT began.

The July reduction of the standard VAT rate from 10 per cent. to 8 per cent. represented the maximum downward use of the VAT regulator. Were this clause not to be enacted, it would, of course, remain possible for my right hon. Friend to increase the standard rate up to a maximum of 12 per cent., that is to say, the original 10 per cent. plus 20 per cent. of the original 10 per cent. But without the clause no further downward movement would be possible. So what the clause in effect does is to restore my right hon. Friend's freedom to alter the current standard rate in either direction, upwards or downwards. The new theoretical limits of VAT will thus be 20 per cent. either side of 8 per cent., that is to say an upper limit of 9.6 per cent. and a lower limit of 64 per cent.

Clause 2 applies VAT at the rate of 25 per cent. to light hydrocarbon oils— except oils which go into mechanical cigarette lighters—which have not been relieved wholly or in part of the full revenue duty on hydrocarbon oil, which is at present 22½ per cent. The oils which are liable to the 25 per cent. rate will include petrol and aviation spirit.

The clause applies the 25 per cent. also to petrol substitutes and power methyllated spirits. However, heavy hydrocarbon oils delivered for use as road fuels, that is to say, derv and gases for use as road fuel, are not affected by the clause and remain liable to the standard rate of VAT of 8 per cent. Such heavy hydrocarbon oils, including paraffin oils used for heating, and lubricating oil and gases, are not affected by the clause and remain zero rated. Once again we have preserved zero rating.

Mr. Arthur Lewis

My hon. Friend is aware that there are many old-age pensioners and people on limited incomes who have to rely on paraffin for heating and in some instances for cooking. In view of the almost daily dramatic increases in price, is there not something that can be done to help these old people, as well as the sick and infirm, to meet these increased prices?

Dr. Gilbert

I take my hon. Friend's point. It is for precisely that reason that paraffin is not subject to VAT at the standard rate.

Mr. Lewis

Paraffin is going up by 3p on Friday.

Dr. Gilbert

I take my hon. Friend's point and I will draw it to my right hon. Friend's attention. My hon. Friend is on a serious point, and I am sure that he will welcome the fact that these fuels remain zerorated, as they always have been.

Clause 3 provides for a refund of value added tax on purchases of goods and other materials made from registered traders by people who are building their own houses. I know from the correspondence which I have received from hon. Members on both sides of the House that this will be a welcome concession.

Clause 4 is a provision which one often finds in Finance Bills enabling the Government to make refunds of VAT to diplomatic missions on the importation of hydrocarbon oil. This arises out of our obligations in respect of the Vienna Convention on Diplomatic Relations in 1961. It remedies the anomaly in the situation, since those fuels would be subject to VAT, although not to Customs and Excise duties.

Mr. W. R. Rees-Davies (Thanet, West)

Will there be any opportunity in Committee to consider exemptions? For example, on the question of the racehorse industry and exemption from VAT and the zero rating of bloodstock and similar considerations, will there be any opportunity in Committee to table amendments within the scope of the Bill, or will they be excluded?

Dr. Gilbert

As I understand it, discussion of the zero rating of the bloodstock industry will not be in order in the terms of this Bill, but of course these matters are subject to the rulings of the Chair and are not a matter for me. However, as I understand it the resolutions are framed in such a way that debates on those subjects would not be relevant in Committee.

Turning to Clause 6, I am delighted to pay tribute to the hon. Member for Croydon, South (Mr. Clarke), who is one of the true authors of the Bill—

Mr. Cormack

Not of the Bill—the clause.

Dr. Gilbert

Yes, of the clause. Authorship can go so far. I still do not believe that any major economic effect will ensue from the clause, although we can agree to differ on that topic and we shall see what happens with the passage of time. However, it is a useful little clause and the hon. Gentleman is to be congratulated on his efforts at placing it on the Statute Book.

The hon. Member for Chertsey and Walton (Mr. Pattie) raised a few questions on Clause 15, although he acknowledged that his questions were largely Committee points to be dealt with upstairs. I hope that he will recognise that something of the nature of that provision is needed to deal with abuses of transfer pricing between various elements of multi-national empires. I assure the hon. Gentleman that these powers are not intended to harass but are intended to police the proper collection of revenue.

I turn to Clause 47 which is a brief, updated clause. We still in this House enact far too much legislation by reference—

Mr. John Wells (Maidstone)

If the hon. Gentleman is jumping from Clause 6 to Clause 47, will he say a few words about the clauses that come in between? In particular, will he say something to paragraph 3(2) of Schedule 8 relating to agricultural transfers and the position of farmers in a limited company?

Dr. Gilbert

I do not often regret giving way, but that was one of those occasions.

Mr. Wells

Answer the question.

Dr. Gilbert

If the hon. Gentleman had done the House the courtesy of being here for the earlier part of the debate he would have known that all those clauses and schedules had been dealt with by my hon. Friend the Chief Secretary and by his right hon. and hon. Friends.

Clause 47 is a brief updating clause and needs no further comment from me.

Clause 48 transfers the jurisdiction of certain capital gains tax appeals, on the application of the parties, from the Special Commissioners to the General Commissioners.

Clause 49 was alluded to by the hon. Member for Hertfordshire, South-West (Mr. Dodsworth). I do not see him in his place. He raised the whole question of control over local authority spending. I should like to emphasise that these new borrowing limits do not sanction any increase in local authority capital expenditure, nor do they imply any relaxation in the Government's intention to control that expenditure. Local authority capital programmes are subject to an entirely different system of scrutiny by the Treasury and individual Government Departments.

Clause 50 is designed to achieve some improvement in the administrative arrangements in the Treasury by allowing certain documents dealing with daily transactions to be signed by Treasury secretaries or officials.

I trust that Clause 52 will be welcome particularly to Ulster Unionist Members as it extends to disabled passengers in Northern Ireland the benefit of the concession on vehicle excise duty that their Great Britain counterparts have enjoyed since Section 50 of the Finance Act 1974 came into operation.

Finally, on a matter which is not in the Bill but which we hope to introduce in Committee, I am glad to make a more detailed announcement about fire safety expenditure. When I introduced the clause to provide tax relief for fire safety expenditure on 16th July, hon. Members were concerned that the provisions would deny tax relief to those who had carried out fire safety work in hotels and boarding houses without a formal notice under the Fire Precautions Act. We intend to introduce a new clause extending the relief to include work specified in writing by a fire authority for the purpose of issuing a fire certificate under Section 5 of the Fire Precautions Act 1971. This provision will apply to expenditure incurred on or after 1st June 1972.

I turn now to some of the general points made by the right hon. Member for Finchley. The right hon. Lady said that the Budget was not fair and that my hon. Friend the Chief Secretary was the only person in the House who would think that it was fair.

I have some news for the right hon. Lady, who displays a remarkable choice of reading matter for a putative leader of the Conservative Party. The right hon. Lady quotes in extenso from Socialist pamphlets at the Dispatch Box and never bothers to read the Daily Telegraph. If she has any back copies of the Daily Telegraph lining her larder shelves—perhaps she could move a few tins of vegetable soup, sardines or ham, or if she cannot find the Daily Telegraph for Friday 22nd November then it might be in the garage wrapping up hundredweight sacks of custard powder—she will see that the Gallup poll that day showed that 59 per cent. of all voters thought that the Budget was fair, that 27 per cent. thought it was not fair and that Conservative voters were evenly split whether it was fair or not.

I say to the right hon. Lady that that is not the only bad news for her in the Gallup poll of 22nd November. It also said that whereas 52 per cent. of the people thought that the right hon. Member for Sidcup (Mr. Heath) was not making a good leader of the Conservative Party, 62 per cent. of the Conservative voters thought that he was doing so. I must say that on the evidence of the competition before him this evening, I am not at all surprised.

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