VAT: EIGHT PER CENT. RATE

HC Deb 03 March 1975 vol 887 cc1127-71

Mr. Speaker

I have selected the manuscript amendment in the name of the right hon. and learned Member for Surrey, East (Sir G. Howe).

Sir G. Howe

I beg to move as a manuscript amendment, in page 1, line 16, leave out Clause 1.

The amendment relates to the entire contents of the clause, and I wish to begin by explaining what it does not seek to do before turning to some matters of importance with which the House would like to deal.

First, what we are not seeking to do is to increase VAT from 8 per cent. to 10 per cent. That is neither the effect nor the intention of the amendment. Indeed, if the amendment were carried, the 8 per cent. rate provided for by order laid by the Chancellor of the Exchequer last July would continue in force until next July, and other arrangements could no doubt be made to deal with it thereafter. We are not proposing any given rate in place of that now in force at 8 per cent. The purpose of the amendment is to afford the House an opportunity to have a short but important debate on several issues related to the general condition of the economy.

It is a long time since we had a general economic debate, and unless there is to be a debate on the public expenditure White Paper—which we should welcome—there may be no opportunity of a debate of this kind before the next Budget is introduced. Admittedly the frequency of Budgets under this Government gives the prospect of almost quarterly events of that kind, and almost continuous consideration of Finance Bills—we do not welcome that—but we feel that we should have this opportunity for this kind of debate.

I wish to deal with two specific matters, and one more general. I propose, first, to say something about the prospect of a multirate VAT which is exercising the mind of many people. Secondly, I propose to say something about the methods of enforcement and collection of VAT which is exercising the minds of perhaps many more people. Thirdly, I propose to say something about matters of more general economic policy in the light of the issues dealt with in the clause.

I come first to the question of multirate VAT. I know that this was discussed quite shortly in Standing Committee, but it is important that we should return to it on the Floor of the House at this stage, if only for a few minutes. The fact is that VAT as originally conceived was designed specifically to avoid the complications which would inevitably flow from the introduction of differing rates for that single tax. It is also the fact that documents have been circulating for some months suggesting that it is the intention of the Government to move over to a multirate system. The prospect of such a change causes anguish, dismay and horror in the hearts of the many small and medium-sized businesses which are responsible for collecting VAT.

A huge and growing burden of administration has been placed upon such businesses. Their lot is being made more and not less difficult by what the Government are proposing about national insurance contributions from the self-employed. Many of them are in that position, and we hope we can obtain from the Government an assurance that the added horror of multirate VAT is not in prospect.

The problem is that the Department of Customs and Excise has issued a notice—No. 727—describing proposals which may be necessary to meet the need to prepare for additional rates of VAT and this has been the subject of representations to many Conservative Members and, I am sure, to Labour Members, too.

These people, who are working long hours, devote a lot of time to the complicated accountancy consequences of VAT anyway, and they can carry out the additional task of collecting multirate VAT only if they extend the hours of work they put in outside their normal working hours. This is a prospect which fills them with horror, and I hope the Government can give an assurance that these documents are not even a ballon d'essai, not even an academic exercise, but some random activity quite unrelated to the intentions of the Government. I hope they will give us an assurance that there is no prospect of multirate VAT.

The activities which have been reported by a number of hon. Members and criticised by others concern inspectors of Customs and Excise responsible for the enforcement and collection of VAT. I want to make my statement with care. I recognise that an important and difficult duty rests upon people with responsibility for the enforcement and collection of that tax. I have seen a letter in The Times today from the Assistant General Secretary of the Society of Civil Servants quite rightly pointing out that the inspectors have a duty to the law-abiding majority to ensure that the tax-evading minority do not sponge upon the community for their personal illegal profit, and I do not quarrel with that proposition. The task of Customs and Excise will become more difficult if we move to the multirate system, which is another argument against it.

I do not wish to line up the Opposition with the minority of those who are seeking to evade the payment of taxes, nor to line ourselves up with those who regard exceptional misdeeds by inspectors and enforcement officers as characteristic of the entire group of such people, but, even so, there is here cause for concern if even a fraction of the matters being reported should turn out to be true. I hope that the Minister will deal with these points.

I know that the Chancellor of the Exchequer has received a long and detailed letter from my hon. Friend the Member for Barkston Ash (Mr. Alison), who will be able to speak for himself on the detailed aspects of the matter, but the cause for concern that emerges from that story and from some others is the suggestion that the investigators visited the premises concerned and apparently under powers to inspect the premises and any goods found there proceeded further than that and were conducting a search of the premises without any warrant allowing them to do so.

If that were the case, it is not only an example of the kind of complaint that is made but represents a serious matter about which people are entitled to be concerned, because the Act clearly draws attention to the distinction between the right under Section 37(2) to inspect goods found on the premises, and the right under Section 37(3) to search premises. It seems clear from the account given by the taxpayer in that case that the VAT inspectors were searching the premises without warrant and confiscating private property. If that single example is true it justifies wider concern than arises from that case, and I hope very much that we shall be told exactly what the Government are doing about this matter. There is anxiety lest a habit should be commencing, let alone developing, of high-handed, overbearing, insensitive or unjustified conduct.

It is most important for those concerned in this important duty to remember that they are not dealing with a minority of hard-bitten evaders of Customs and Excise duties. They are having to deal potentially with many citizens who are drawn into the network of tax collection. Many citizens are acting to the best of their ability as collectors of revenue. It would be dangerous if that large army of people, upon whom the Revenue depends for the collection of the tax, were to be disconcerted by reports of this kind of behaviour. It is important that the Government should take this opportunity to allay anxiety on this matter. Widespread anxiety certainly exists, and it is not completely without justification.

7.30 p.m.

My third point is of a more general kind and relates to the levels of VAT with which we are concerned. Is it right for the Chancellor now to propose consolidating the change in level effected last July? As I understand the position from what was said in Standing Committee, the highest rate hereafter attainable by use of the regulator becomes 9.6 per cent. That puts beyond reach of the Chancellor the arithmetical simplicity of the original pristine proposal of 10 per cent. I wonder whether it is right or sensible, for purely technical and arithmetical reasons of that kind, to consolidate in the way proposed?

There is a more fundamental point relating to the pattern of progress, so far as it may be described as progress, of the Government's battle against inflation. We have seen in the last week that the Chancellor has been receiving advice from both the General Council of the TUC and from the CBI. It must be acknowledged that he has received conflicting advice about the appropriate level of demand at which to aim in making his Budget judgment. There is no doubt that as he approaches his Budget judgment the Chancellor must be concerned—indeed, he has said that he is—about the overriding need to reduce the public sector borrowing requirement. It seeems probable that if import controls are to be avoided—that is surely desirable—and if inflationary wage settlements are to be moderated without resorting to a statutory policy—that seems equally desirable—the judgment of the CBI on the appropriate level of demand at which to aim is more likely to be correct than that of the TUC. I say nothing firmer than that at the moment, but that seems to be the right assessment to make at this stage.

If that is so, the Chancellor is unlikely to have room for making cuts in taxation. He is equally unlikely to have room for increasing public spending still further. Indeed, that is the last thing that any of us would want. If he is to follow the line foreshadowed in his last Budget statement last November, and if he finds that the social contract, so called, is not having the desired effect in moderating the level of wage inflation, he is more likely to be impelled in the direction of higher rather than lower taxes. That, again, is the background against which we must consider the wisdom of consolidating in the way proposed in the clause.

It is also probable, if taxes have to be increased, that the Chancellor should fight hard to avoid increases in direct taxation, especially in so far as those increases might fall on middle or higher managerial incomes and on the incomes of people who are not parties to the social contract. They are the people who have been harshly affected by inflation, by the combination of inflation with fiscal drag and by the effective reduction of the levels at which they begin paying higher direct taxes.

It is against that background that we would say, if an increase in taxation turns out to be desirable, that it is more likely to be desirable in the direction of indirect rather than of direct taxes. These are all speculative judgments at this point, but the background does not suggest that it is right to consolidate the VAT level in the direction of a lower central point at which the regulator should operate.

I close on a more general matter. We have all read with interest the reports of speeches made before and during the weekend by several of the right hon. Gentleman's colleagues. We have read with interest what the Secretary of State for Education and Science said. He apparently asserted in writing, if not orally referring to "every individual trade unionist", that the contract was agreed by his trade unionist delegates in his name". He then said: The Government have kept their share of the bargain. The trade unions must not welsh on their side. Later he said: Every member of the TUC General Council should stump the country in support of the social contract. … Every individual trade unionist must accept his personal share of responsibility. To me as an innocent, reading that report in the newspapers on Saturday morning, I thought that the right hon. Gentleman was saying something little different from what had been said on the same evening by the Secretary of State for the Home Department, and little different from what had been said by the Chancellor of the Exchequer and by the Secretary of State for the Environment in previous weeks. There seemed nothing miraculous on which to comment except the courage of the Secretary of State for Education and Science in joining the ranks of those asserting that wisdom. Then, towards the close of Saturday, the Secretary of State for Employment asserted: It is economic illiteracy for anyone to talk as though the wage problem is the only problem and that other parts of the social contract are irrelevant. He strongly repudiated the use of the term "welsh". He said: The term is offensive and should never have been used. The situation became more interesting. There was clearly a difference in emphasis between the speeches being made by the two right hon. Members. The disturbing feature appears, when it is reported in the way in which these matters are reported, that the Prime Minister is bearing down upon the hapless Secretary of State for Education and Science. If that is the case—we should like to know very much whether it is—it is a deeply disturbing development. A Minister is discredited by one of his colleagues following the total collapse of Cabinet collective responsibility. He is apparently thought guilty of economic illiteracy. It might be argued that he was asserting unarguable centralist policy already put forward by the Government. On 30th January when answering a Question in the House he said: The success of the Government's counter-inflation policy depends above all on the effective working of the social contract. He goes on to say: 75 per cent. of the working people covered by settlements … are within those guidelines. 25 per cent. are outside those guidelines, and I have said that that proportion is far too high."—[Official Report, 30th January 1975; Vol. 885, c. 597–8.] The ordinary observer must conclude that the Secretary of State for Education and Science was doing his best to interpret in a slightly different style of language—

Mr. Deputy Speaker (Sir Myer Galpern)

Order. I am afraid that the right hon. and learned Gentleman will have to indicate to the Chair how he relates this topic to the amendment under discussion.

Sir G. Howe

Indeed, there is a direct relevance. The important matter is the way in which the Chancellor is proposing to conduct the basis on which VAT should be imposed. Is he to proceed in the direction indicated by his right hon. Friend the Secretary of State for Employment or in the direction indicated by his right hon. Friend the Secretary of State for Education and Science? That is a relevant and important point.

I would have thought that the Secretary of State for Education and Science was far from guilty of economic illiteracy in reasserting what the Chancellor had said. It is important to know the answer to this conflict in considering the Chancellor's reaction to the amendment. Does the Chancellor agree with the Secretary of State for Employment? Does he agree with the Prime Minister that that which is going on, which he condemned in his oral Answer of 30th January, does not amount to a reneging of the social contract? Does he agree that there is no welshing upon the social contract?

Alternatively, does he agree with himself, with his own assertions, that 25 per cent. of settlements outside the contract is too many? Where does the Chancellor stand? He can state his position clearly in response to the amendment against the background that I have tried to sketch.

His answer to that set of questions is not merely an answer to matters of idle curiosity, because this Government—Heaven help us—are charged with responsibility for this nation's policy to defeat inflation, and not merely for the people of our country within our boundaries but in relation to the outside world. It is deeply disturbing for the people of this country to think, as they must in the light of this weekend's events, that there are divided counsels within the Government about the extent to which the defeat of inflation is overriding.

It is equally disturbing for us to think that people observing this country from outside might be wondering where the Government's emphasis is being placed. Is it being placed, as some of us have been hoping, along the lines indicated by the Chancellor since last autumn, or is it slipping away into the miasmic uncertainties indicated by the Secretary of State for Employment? We must know. The answer to that question has a serious impact upon the credibility, consistency and commitment of the Government's policy on this vital question.

My last point follows from that. Where are we to believe that the Government are taking the conventions of our constitution? Dealing high-handedly, as they are today, with the right and opportunity of Parliament to survey this kind of legislation, what are they doing with the doctrine of collective Cabinet responsibility? We have all been brought up to think that a Government are chosen from this assembly to hammer out coherent and consistent policies on which they are agreed. We have seen that proposition slipping away as the Government fumble in their approach to the European referendum, but to find it happening on this central question of how to defeat inflation is deeply disturbing. It erodes still further the limited degree of confidence that we in the House and the people of this country can still have in the Government's capacity to cope with the central problem. I hope that the Minister will give us some answers to those questions, which give us some anxiety about the degree of chaos which prevails in the Government's counsels.

Mr. Hordern

I am very glad that the Secretary of State for Employment is in the Chamber because the remarks of my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) in trying to sort out Government policy referred particularly to him. [HON. MEMBERS: "He has gone."] I see that the right hon. Gentleman has made a very quick exit. That will not help us to interpret Government policy, which is very difficult for anyone to interpret.

No one would accuse the Secretary of State for Employment of illiteracy, but, equally, neither the House nor the country would think of him as one of the economic savants of our time. His pronouncements about incomes policy, while always welcome, have put the Government's economic strategy in some doubt.

I had thought that the Secretary of State for Education and Science had been speaking very much in support of what the Chancellor, and sometimes the Prime Minister, had been saying earlier. Indeed, in his most recent speeches, the Chancellor has been placing great emphasise on the need to secure wage awards which are allegedly within the social contract. The clear implication of his recent statements, that many settlements are outside the contract, is that measures will have to be taken in the forthcoming Budget to correct the situation.

What the Secretary of State for Employment is saying—only this can be implicit in his criticising the Secretary of State for Education and Science so heavily—is that the situation is all right as it is and that no further corrective measures are required in the Budget. That is one point that the Paymaster-General should seek to make clear. It is difficult for us to understand the position of the Cabinet on collective responsibility. Whether on the EEC or economic control, it seems to be a question of the Ayes to the right, the Noes to the left.

7.45 p.m.

My right hon. and learned Friend referred to the VAT inspectors. Some astonishing cases have been reported recently in the Press. If accurately reported, they would appear to go quite outside the legislation. As one who opposed the legislation from the Government side at the time, I think that the Government owe us a statement about the powers of the inspectors and what they propose to do about any actions outside those powers.

The amendment in my name was designed simply to secure the kind of economic debate that we have regularly on the regulator. It is interesting to recall the position just under a year ago, on 22nd July, when the Chancellor reduced VAT from 10 per cent. to 8 per cent. He said: The first and main objective of the proposals I shall now describe is to attack inflation at its source. The General Council of the TUC has recently issued guidelines for collective bargaining which have been welcomed on both sides of the House. Those guidelines envisage that pay will rise in line with the cost of living."—[Official Report, 22nd July, 1974; Vol. 877, c. 1048.] That does not seem to be happening at the moment. Indeed, the miners' pay award was far above any increase attributable to the rise in the cost of living. I understand that earnings are rising at an annual rate of 30 per cent. and prices by only 20 per cent. Of course, the miners are not the only ones in the queue. According to this morning's Press, the electricity supply workers will be going for an increase of 34 per cent., on top of their average earnings of over £50 a week, to put themselves more or less in line with the miners. I do not know how that squares with the social contract.

In its economic submissions to the Chancellor the TUC has said that the economy needs to be stimulated by a further £975 million. The right hon. Gentleman should tell us the Government's thinking. After all, they are in no position to say that the evidence is not available. In his Budget Statement last March the Chancellor was able to make an assessment. Like all his recent assessments, it was not particularly accurate, but I hope that the Paymaster-General will say how the Government view the situation.

So on one side of the social contract, which appears to be the Government's only weapon, there is a rate of increase vastly in excess of the cost of living, which is not what the Chancellor said in July was his strategy. On the other side, one would have expected some diminution in the number of strikes, but, on the contrary, from last April to December, 8¼ million days were lost through strikes, as against 4.9 million in the period April-December 1973. Therefore, neither side of the social contract— not in the number of strikes or days lost through strike action, not in the rate of increase in pay settlements, not, at least, in inflation—has appeared to have had any success at all.

Inflation is the matter with which we are primarily concerned. It is now plainly out of control. Whether it is earnings or prices, or however one cares to look at inflation, we are in an extremely serious competitive situation. There was a time last year when in both Italy and Japan the rate of inflation was rising rather faster than it is here, but the fact is that inflation in Britain is now rising faster than it is in any other major industrial Power. This is serious enough. I hope that the Paymaster-General will announce what the Government's thinking is on these matters.

One matter, however, on which I hope he will comment is the borrowing requirement of the Government at present. Last July, when the Government announced their measures and the Chancellor made his proposals, I think that the House was surprised to find how large the borrowing requirement had become. So far as we know, the borrowing requirement is now no more than £6,400 million, but present estimates from outside commentators are that it must by now have reached £8,000 million. That sum represents no less than 10 per cent. of the whole of our gross domestic product. It is right that the Government should make some statement about the size of the borrowing requirement. After all, this figure and the money supply figures are given regularly in the United States so that people there know the position. If the borrowing requirement is anything like that sum, I do not believe that we can look at it with anything but alarm, in particular its implication in relation to inflation.

We have also to consider business opinion at present. The Financial Times produced a table only this morning giving its monthly survey of business opinion. Since the figures were first recorded there has never been such a large number of less optimistic forecasts than at present. Some 43 per cent. are now less optimistic about their future. That is a very high figure. There is also a record downward trend for new orders. The trend of recent orders is sharply down. Some 34 per cent. of the respondents say that they are working below target capacity, and 50 per cent. expect their investment to decline.

That, therefore, is the position in which business stands today. The measures that the Chancellor may bring forward in his forthcoming Budget must surely deal with the position in which business and industry find themselves today and the extraordinary loss of confidence which they have shown in the Government.

The position is doubly serious because our trade figures show that we are becoming less competitive as a nation. Although our prices have risen so rapidly in recent months that our export figures have been rather good, nevertheless the improvements in our export figures have largely come about because of the increase in the price of the products which we have exported, but the volume of increase is still very largely to be found in imports, and not exports. Taken over the three-month period the trend is of a very disturbing character indeed. The present position is very serious. The Government should now make some statement about it.

It is not a good point to talk about the reserves, which are now low enough, in all conscience, or to say that part of our deficit can be discounted because it derives from the import of oil. To use that argument would suggest that we have never imported oil previously. The fact that we have now a large petroleum deficit should not be regarded as a matter of comfort at all. Most other countries have managed to get their petroleum deficit out of the way altogether. Japan has done so; Germany has been in substantial credit; and the French are now in credit as well. I believe that only the United States has anything like the sort of deficit that we have and, as a proportion of the United States' gross domestic product, their deficit is very small indeed. Therefore, we should not make that sort of excuse about the size of our deficit being caused by imports of oil.

We ought also to take on board one other matter. The Government have, happily, been able to borrow quite significant sums, but whether such sums will continue to be available is not certain. One reads in the Press nowadays that even countries such as Iran and Kuwait are beginning to find that they have spent rather too much of their oil revenue, and they may not be in a position to lend such vast sums in future. That is another matter which the Government must bear closely in mind.

I do not recall a situation quite so serious as the one in which this country is at present. We are so very dependent on foreign borrowing and so utterly without hope of being able to borrow what is required for Government expenditure at home. The only similar occurrence I can find was one mentioned in The Times on 27th February. It is a very unhappy comparison indeed that was made by Peter Jay with the German position in the 1920s. In talking about that, the article states: It was noted at the time that 'once the (budget) deficit has become the dominating feature of the situation and has reached a figure of many millions, all saving of small amounts (of Government spending) seems useless … the financial administration is possessed by a spirit of dissipation and neglect'. It was also found that the Central Bank had to lend directly to industry to overcome their cash-flow problems in the face of rocketing nominal interest rates (up to 30 per cent. a day). In the early stages of the German inflation waves came to be linked to the cost of living index. But, as this could only be produced weekly, they were later linked to the (reciprocal of the) plummeting exchange rate and later still to a forecast of what the rate would be by the time the wages could be spent. There are very many disturbing similarities between the position of the United Kingdom and that of Germany in the early 1920s. It is incumbent upon the Paymaster-General to give a fair and lengthy account—if not lengthy, very full—of the present position of the economy, so that we can judge whether we should carry the amendment to omit Clause 1.

Mr. Gow

I was one of the 30 hon. Members on the Opposition side of the House who, on 24th July last, voted against the measures introduced by the Chancellor of the Exchequer. In particular, I opposed then the reduction in the rate of VAT from 10 per cent. to 8 per cent. I thought at the time that that would inevitably increase the amount of the Government's borrowing requirement. It was also a reduction in taxation introduced purely for electioneering purposes. Nothing which has happened since then has made me think that the judgment formed by some of my hon. Friends at the time was in error.

For my part, I believe that it would be right for the Government at this stage to increase VAT from 8 per cent. to 10 per cent. The fact that such a move would be unpopular seems to me to be almost certainly a strong point in its favour.

I want to follow up the remarks made by my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) about the level of the borrowing requirement. In his Budget Statement of 12th November, the Chancellor of the Exchequer admitted that the figure then of £6,300 million of borrowing requirement was, to use his own words, "disturbingly large". There is every reason to believe that the amount of that borrowing requirement, which in November was viewed by the Chancellor himself as depressingly large, has increased dramatically in the three intervening months.

8.0 p.m.

One of the dangers in the present situation is that even the astronomic sums which the Government are borrowing, mainly from Oriental potentates, is being used, not to finance capital investment, but to bolster up spending by the British people far beyond what they and the Government can afford. We are living in a world far divorced from harsh economic reality. The Paymaster-General should explain to the House to what extent the public sector borrowing requirement has increased since the figure of £6,300 million was stated on 12th November.

When the Chancellor introduced his July measures he said that he was proposing to attack inflation at its source. If he was being consistent he would, on his own doctrine, reduce the rate of value-added tax still further.

The debate enables us to offer the Government advice on their general economic policy. The advice I offer the Government is that the next Budget must effect a genuine and substantial reduction in public expenditure and, regrettably, a genuine and substantial increase in taxation. The increase in taxation should be an increase in taxation on spending and on consumption and not still further on personal incomes.

Britain is slipping dangerously towards economic ruin. It is a ruin which is being presided over by Treasury Ministers. National solvency and national self-respect require that there should be a rapid move towards a balanced Budget. I hope that the Paymaster-General will tell us that that is what we shall have.

Mr. Graham Page

I want to pursue two points raised by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe)—first, the question of a multirate VAT and, secondly the question of enforcement of VAT.

All right hon. and hon. Members will have received correspondence, particularly from small shopkeepers, expressing horror at the thought of having to administer a multirate VAT. This horror has arisen because of the receipt of many of them of a Customs and Excise directive which is obviously a preliminary to the introduction of such a type of VAT. I do not know whether this directive was authorised by the Chancellor or whether it was sent out on the initiative of the Customs and Excise officials, but it is the type of directive or circular which should not be sent to the ordinary small trader, who has sufficient anxiety already trying to administer, and indeed, collect taxes for the Government.

I hope that we shall get a repudiation of the circular and an assurance to small shopkeepers particularly that a multirate VAT is not in contemplation and that they will not be asked to embark on further complicated administration of tax matters in the course of their normal business.

As to enforcement, there is anxiety about the powers of Customs and Excise officials. This anxiety has arisen particularly in the last few days because of the case raised by my hon. Friend the Member for Barkston Ash (Mr. Alison) of the antique shop in Selby, Yorkshire, which Customs and Excise officials entered and where for two and a half hours they pestered the mother of the lady proprietor, the proprietor herself being ill. The officials then spent five hours searching the shop in the presence of the proprietor who, I repeat, was a sick woman. They searched articles, including her wastepaper basket, private stationery, handbag and personal diary. Their questioning reduced her to tears at one stage and an inspector told her to stop snivelling.

The powers of enforcement that are embodied in Section 37 of the Finance Act 1972 certainly do not empower inspectors to behave in that manner. Section 37(1) provides that any authorised person may at any reasonable time enter premises used in connection with the carrying on of a business". That merely authorises entry into premises.

Section 37(2) authorises any person who has reasonable cause to believe that any premises are used in connection with the supply of goods under taxable supplies to enter and inspect those premises and inspect any goods found on them". Section 37(3) allows the authorised person to enter if he has a warrant to search. That is the only time that inspectors can search in the way that the inspectors searched in the Selby case.

When the Financial Secretary was questioned about this matter he referred only to Section 37(1) and endeavoured to assure the House that VAT officers have no power to enter a trader's home as such. The hon. Gentleman refrained from mentioning subsection (2) which in its very terms allows an inspector to enter a trader's home if he has reasonable cause to believe that on those premises are goods under taxable supplies. So an inspector need only say" I have reasonable cause to believe that there are such goods in the trader's home."

Is it necessary to have such a power to enforce a tax of this sort? If it is necessary to infringe upon rights of privacy to this extent, we should think seriously about whether the tax is a proper one. However, it is not necessary to do that, because Section 37(3) gives the authorised person all the powers of search provided that he obtains a warrant from a justice of the peace. This is the protection for the public.

I appreciate that the Finance Act 1972 was passed at a time when I was a Minster in the Conservative Government, but this is now proving a wrong power to be given to inspectors when they are looking into VAT matters. They have proper power if they obtain a warrant to search from a justice of the peace. That empowers them to enter if they have reasonable cause to believe that someone is dodging the tax.

I hold no brief for those who want to dodge the tax. If the power to enter and search is being used as it was at the antique shop in Selby, we must amend Section 37 so that inspectors have the power to enter only if they have obtained a warrant from a justice of the peace first.

Mr. A. G. F. Hall-Davis (Morecambe and Lonsdale)

I, too, should like to say a word about the prospect of the introduction of multirate VAT and a little about the general approach to the economy by the Chancellor of the Exchequer.

At one stage of my business career outside the House of Commons I had the good fortune to work for a man who was a master at figures. He taught me one motto which I have had firmly in my mind ever since: whenever you can, keep it simple. That applies to rules for busines, for administration and, above all, for taxation.

I believe that VAT has already reached the limits of complexity that can be sustained and operated by many of our smaller traders. The choice that confronts the Chancellor of the Exchequer when he is considering whether to introduce a multi-rate VAT, I genuinely believe, is whether to drive out of business many small shopkeepers and traders who render a very good service to the community. This would be particularly serious in smaller communities and rural areas.

There has been a remarkable number of closures of shops in areas of that sort in the last year or two. An example is the disappearance of the sub-post office. In parts of my constituency it is now very difficult to get anybody to operate a sub-post office at all. This is the result of a combination of the complexities of Post Office administration and the fact that the supporting activities are encumbered with VAT.

I believe there is considerable resentment on the part of traders that they are operating an unpaid service in the collection of tax quite outside what one might call the normal course of duty. I Exchequer, and I know the amount of raised substantial revenues for the have been engaged in an industry which work involved. One-hundredth or perhaps one-thousandth of the effort per £1 of revenue raised had to be put in by firms in my industry compared with the effort required from the small trader in the collection of VAT. On those grounds alone there are very strong reasons for keeping VAT simple, and on a simple tax rate.

On the local and what the Chancellor might regard as the minor issue, I think that the concern caused by the action of some members of the VAT inspectorate is so great that it warrants a clear statement from the Treasury of the inspectors' powers and of the instructions that have been issued about their use. This is not a small matter. It is one of the fundamental liberties of the subject in this country that he shall be free from harassment by officials, and to let a different situation develop without protest would be a retrograde step. I hope that members of the inspectorate will be well briefed before they descend on traders.

I have in my constituency an owner of a small residential seaside hotel who was cross-examined by a member of the inspectorate because the percentage of his catering takings expended on food purchases was, as the inspector put it, much higher than is the case in London. This, to me, showed such an abysmal ignorance of the subject on which he was questioning that he should have been told to learn the subject or not make a fool of himself by asking such ridiculous questions.

8.15 p.m.

I turn to something much more fundamental—the economic argument against introducing a multirate VAT. Despite the existence of rampant inflation, it is a fact that we are in the severest recession that we have experienced since 1945. It is much graver than the present unemployment figures would indicate. Whereas in former times there have been periods when unemployment has risen because of a shake-out of labour by employers, if I may put it in that way, or because of a dramatic increase in productivity which had not been expected by the Chancellor, the exact opposite is the case today. The true level of unemployment is disguised for the time being—but only for the time being—by short-time working and by the curtailment of overtime.

I believe that we have all the classic conditions of recession present in this country and that they will develop during the next 12 months. In those circumstancees, to single out certain goods and industries for a sharp increase in tax, for perhaps the doubling or trebling of VAT—for one would not imagine that the Chancellor would introduce a multirate for an extra 2 per cent. or 3 per cent. on VAT—will be a leap in the dark, and it may well destroy industries whose continued existence is desirable.

I ask the right hon. Gentleman to look back at the experience of the consumer durable industry in this country since 1945, under the treatment that was accorded it by Chancellor, I regret to say, of all parties, but mainly of the Labour Party, with the arbitrary and quite disgraceful changes in the purchase tax rate. I have no doubt that the reason that the British market is a gold mine for foreign manufacturers, and particularly some European manufacturers with an industrial base broadly similar to our own, is that it was made quite impossible to operate an efficient consumer durable industry because of the leaps and slashes—but particularly the leaps—of purchase tax rates on those commodities.

I query the whole basis of thinking on the part of the Government in imposing such heavy taxation on petrol and the motor industry. I know that when the price of one commodity is apparently at the root of one's balance of payments difficulties, it is very easy to say that we must restrict the use of that commodity, but the purpose, of course, is to get the balance of trade on to a more favourable basis. Surely one should at least discuss with a reasonably open mind whether it is right to hit so hard at motoring or whether it would not be more sensible to apply a more broad-brush treatment by curtailing expenditure right across the field of spending.

I say this to the right hon. Gentleman because, day by day, evidence comes to me that for many people motoring really is a necessity of life. It is very easy to be censorious and to pass value judgments on these things. I do not smoke. I believe that people who smoke are throwing their money away and damaging their health, but I do not expect that they will take much notice of me and I do not expect that I shall achieve much of a reduction in the level of smoking.

One could say that there is plenty of scope for a reduction in the use of petrol, but for many families a car is today regarded as a necessity, certainly for travelling to work. It can be just as much a factor in people's minds when considering whether to press for wage increases as, for instance, the cost of the foodstuffs which the Government have subsidised.

I shall not take up the time of the House in discussing the subject in detail, but as petrol prices have been raised by the imposition of VAT, and as we are discussing general demand management, I must point out that, if the Government wish to pursue their apparent present intention not only of placing no limit on the price or of not offsetting the increased import prices of petrol by, perhaps, some reduction in internal taxation, but of adding to them as well, they must make out a case for so doing, and they ought to give their judgment on the question whether they believe that there will be a major shift in the economy in the amount of resources devoted, over a long period, to the motor industry.

If there is to be such a shift, it is worthy of discussion, just as we have in the past discussed the contraction of, say, the textile industry or the coal industry over the years, as well as the position of other industries which have found their historic place fundamentally changing.

I hope, therefore, that we shall have a statement on the VAT inspectorate and the instructions given to inspectors. Secondly, I hope that the Chancellor will draw back from the brink of a multirate VAT. Thirdly, I hope that he will at least do us the intellectual compliment of making, in more detail than hitherto, his case for imposing so much of the additional burden on the private motorist instead of curtailing expenditure by more general tax increases.

Mrs. Elaine Kellett-Bowman (Lancaster)

I have been greatly troubled by two matters on which many constituents have made representations to me. The first concerns not only the general position of all shopkeepers under a multirate VAT but, in particular, the position of pharmacists. It is extremely difficult nowadays to find trained pharmacists. Someone dealing with ordinary goods in an ordinary shop, if his time is limited, may ask his wife to take a hand or get an unskilled person to help. A pharmacist cannot do that. He must be present throughout the hours of dispensing, frequently including Saturdays and Sundays, and he must be on call. If the pharmacist, as the most skilled person in the shop, has to be on call for that purpose, he cannot devote his time to filling in the exceedingly complicated VAT forms which will flood in upon him if we have a multirate VAT.

I greatly fear that a large number of small pharmacies will close as a result In an area such as the one I represent, pharmacies are already closing all too readily, and it would be a disaster if more were to do so. But such is the burden of work of filling in the forms during their spare time that pharmacists are rapidly reaching the point of no return. I beg the Minister to assure people that he will not take this particularly damaging road.

I come now to the tax on petrol. In my constituency we already have an unemployment rate of 5.8 per cent.—worse than in many development areas, and still rising. My constituents are most reluctant to go on to unemployment benefit, and they will take jobs miles away in order to keep themselves employed. With petrol tax at the rate it is about to reach, this puts a catastrophic drain on their resources. Many of them would be far better off unemployed, but they refuse to be so, and, with the petrol tax rising as it is, and as is proposed, there is great hardship in a country area where people have to go, 40, 50 or 60 miles a day in travelling to work, especially without such costs being allowed against income tax—which would at least help somewhat.

I put those two matters to the Chancellor because I know from the many hundreds of letters which I have received that they are causing grave anxiety.

Mr. Ian Stewart (Hitchin)

I hope that the House will permit me, after some of the more technical comments on the application of value added tax, to turn for a moment to a subject raised by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), namely, the Government's general economic strategy as it is implied by a proposal of this kind to reduce the rate of value added tax.

It is ironic that, with the economic situation as it was towards the end of last year, we had a Budget the main immediate monetary effects of which, in taxation terms, were, on the one hand, in the case of VAT, to reduce the level of revenue and, on the other, with the relief in relation to stock values for companies, at the same time to transfer some benefit there.

It was difficult at that time to assess the Budget and economic strategy lying behind those decisions, especially at a stage when we were anxious about the Government's deficit increasing by an unknown amount, but uncomfortably rapidly.

Will the Paymaster-General make some comment, therefore, on the suspension last week of any restriction or restraints on the money supply in the banking system? I ask that because it seems to me that the relationship of the various weapons in a Government's armoury for controlling the economy is both delicate and difficult, and it is important for the House and the country, and for the financial community in particular, to understand the Government's intentions in this case.

The abandonment of restraints on the money supply could have come for three reasons. It could be because the growth of the money supply has been so low that restraints are no longer considered necessary. It could be that the Government expect that the requirements for lending in the banking and monetary system will be so great that the present restraints would be unduly onerous and, therefore, it is better to remove them to permit a substantial increase in the money supply during the coming year. Third, it could be that the Government are unconcerned about the future of the money supply. Each of those possibilities raises serious questions about which the House should be informed at an early stage in a debate of this kind.

Experience since restraints were applied has been that about one half of the permitted increase in the growth of the money supply took place in 1974 and there is, therefore, substantial slack within the banking system. If the restraints have been removed in anticipation of a large increase in the money supply, it should be understood by hon. Members that an increase of about 25 per cent. could be contained if the present system were merely to be continued. I hope, therefore, that it is not for that reason that the restraints have been removed.

If the restraints have been removed because the growth in the money supply has been so low and the Government feel that such restraints are therefore no longer needed, the implication seems to be that the recession which we are entering is likely to be deeper and longer than many of us have already come to fear.

If, however, the restraints have been removed because the Government are unconcerned at the prospect for the money supply in the coming year, they should note that there is a strong psychological impact in whether there are or are not restraints applicable at any time.

As we view with concern and anxiety the increased Budget deficit, as we hear an apparent diversity of voices within the Government about restraint of inflation through control of incomes by voluntary or other means, and as we discuss a Budget which permits a growing deficit on the current account, there is an urgent need for an explanation from the Government of their motive in removing these restraints.

8.30 p.m.

Mr. Mayhew

I should like briefly to support what was said by many of my hon. Friends, in particular my right hon. Friend the Member for Crosby (Mr. Page) and my hon. Friends the Members for Morecambe and Lonsdale (Mr. Hall-Davis) and Lancaster (Mrs. Kellett-Bowman), about the possibility of a multirate VAT. The debate gives us a welcome opportunity to explore to what extent the Government have at heart the interests of retailers, particularly shopkeepers, upon whom they rely so heavily to collect so much Government revenue.

Do the Government have the faintest idea of the sheer administrative burden they place on the shoulders of retailers? Do they know the work which has to be done and the time it takes, the wages it costs and the leisure time that it claims? Do Treasury Ministers understand the increasing burden of the other administrative work that the Government impose upon this class of Government agent? Collecting VAT is not the only task. That has to be done at the same time that retailers administer PAYE, national insurance and graduated pension contributions, the butter and beef coupon schemes for old-age pensioners, the requirements of the new prices legislation, and so on.

All of this is done without compensation and, so far as I have been able to discover, without any thanks. The only compensation has been the imposition of an extra 8 per cent. in the national insurance contributions of the self-employed. It is not surprising, therefore, that the possibility of a multirate VAT has been greeted by retailers with horror. The smaller the business the greater the burden that it will impose. I referred only to the possibility of multirate VAT because when pressed in Standing Committee the Financial Secretary refused to give any assurance that it would not be introduced at an early date.

A VAT circular has given an added weight to these fears, and we are now at a stage when shopkeepers are actually admitting defeat under the weight of the administrative burden cast upon them. I know that a great deal of my argument has been outlined already in the debate and I hesitate to repeat it. I shall not do so at any length. The difficulty about the procedure under which we operate is that until a Minister replies we have no idea whether our arguments have sunk in or not. It is rather like making submissions in court to a completely silent judge which, fortunately, is a rare experience.

I take the opportunity to emphasise once again the urgent necessity of not increasing the burden of Government administration on the retailers. Value added tax is a tool which government nowadays may use in the management of the economy. I believe that my hon. Friend the Member for Eastbourne (Mr. Gow) was right when he said that VAT should be increased to 10 per cent. and that it should not be used as a means of forgoing income but should be used as a tool for increasing revenue. In whatever direction VAT is moved its movement should be uniform and not variable. I trust that although an assurance to that effect was not forthcoming in Committee on 23rd January it will be given to the House tonight.

Mr. Peter Rees

I congratulate my right hon. and hon Friends who put down the amendment on giving us the opportunity to explore some of the darker areas of VAT. Recently we have heard disturbing things about the administration of VAT which reinforce the conclusion many of us must have reached that the Customs and Excise over-armed itself with power under Section 37 of the Finance Act 1972. I remind the Paymaster-General, because he was not privileged to take part in our debates upstairs, that this section was often cited to us as a precedent for Clause 17 and Schedule 4 of the Bill. If it was a precedent, it was a very ominous one. The charms of Section 37 are not enhanced because it happened to be introduced by a Conservative administration. I hope that the right hon. Gentleman will not advance that rather threadbare argument in support of anything that may have happened.

One appreciates the difficulties which the Customs and Excise has encountered with the introduction of a new and fairly complex tax. I know, because I meet many of them in my constituency, that individual members of Customs and Excise are people of integrity with a stern sense of duty. However, they collectively sometimes manage to convey the impression to the people with whom they have to deal over VAT that they are still hunting the 18th-century smuggler.

It is crucial that they should appear to have a tender feeling for the susceptibilities of traders and small shopkeepers with whom they have to deal, people who often cannot afford an elaborate accounting department. Some kind of mutual respect should develop between traders and shopkeepers and the Customs and Excise. It must develop from a realisation by the Customs and Excise of the intricacies of the businesses with which it has to deal.

Over the weekend a pharmacist in my constituency told me that the representatives of the Customs and Excise who had visited her appeared unaware that people in her line of business carried considerably greater stocks at the beginning of the winter than at the end or in the summer. The Customs and Excise representatives gave her the impression that they suspected, because her stocks were low in the summer, that there had been a failure to make proper returns for VAT purposes. It may be that she was given the wrong impression, but that could have been avoided by a slightly more sensitive handling of the situation and by a deeper knowledge on the part of the Customs and Excise of the businesses with which it has to deal.

As I am prone to repeat in debates on the Bill, there is a contract between Government and taxpayer. I do not want to be tempted into probing more deeply that rather threadbare object, the social contract. I hope that, with the assistance of the Secretary of State for the Home Department, the Secretary of State for Employment, the Secretary of State for Education and Science and the Chancellor of the Exchequer, we shall be able to determine with rather more precision at a later stage who has welshed on whom and exactly what the social contract now amounts to. On that matter there is an interesting amendment to Clause 16 which I hope will be selected for debate.

I revert to the implied contract between the Government and those who collect VAT on their behalf. There is a growing feeling of resentment in businesses that they have to act as unpaid and unregarded tax gatherers. As my hon. Friend the Member for Lancaster (Mrs. Kellett-Bowman) has so perceptively remarked, this bears especially hard on small businesses where there may be only one person or only one person with special qualifications.

I have in mind, as did my hon. Friend, the business of pharmacy, where there may be only one person with the right qualifications. I know from first-hand knowledge how much such people, who are highly qualified, grudge having to spend their valuable time on preparing the VAT returns. I know that their patience—and they are not alone in this—would be driven beyond endurance if, as we have reason to suspect, the Chancellor of the Exchequer introduced multiple rates for VAT in his next Budget. I believe that VAT is tolerable, and then only barely tolerable, if we have one rate, disregarding the zero rate. I hope that the Paymaster-General will be able to allay the widespread fears and suspicions that have been generated by the notice recently issued by the Commissioners of Customs and Excise.

In conclusion, I should like to go to the more general economic questions raised by several of my hon. and right hon. Friends. There is the question of how far and in what way the Government should meet the deficit for which they have obviously budgeted. I happen to believe that one of the most ill-judged of the many ill-judged measures of this Chancellor was the cut from 10 per cent. to 8 per cent. in the rate of VAT in July. I believe that it was designed as no more than a crude bribe to the electorate. I also believe that it was intended as the basis of a highly dishonest projection of inflation rates.

I believe that this Chancellor has damaged beyond repair his own credibility. We shall remember against him, and we shall quote against him in our economic debates so long as he holds his present important and honourable office, his projection in July of inflation running at 8¼ per cent. It may be that he will never recover his credibility, and from a national point of view that would be a great pity, but he may in some measure redeem his reputation and lack of judgment. He can do it if he is minded to put up taxation in his next Budget as I believe he will be obliged to do, by resisting the stern puritan calls that so often evoke a response from Labour Members, to introduce sumptuary rates of VAT; secondly, by resisting any further rise in direct personal taxation, because our present rates, by far the highest in Western Europe, have reached the level where they are practically self-defeating; and, finally, if it be necessary, and I believe that it will be, by raising VAT from 8 per cent. to 10 per cent. so that we are at last back to our position of July last year.

Mr. Fairbairn

One of the phenomena of modern fiscal life is that, as a member of the public, the shopkeeper is compelled for part of the time of his ordinary life to become a servant of the Government, a publican as it is called in the Testament, although not necessarily a sinner, although apparently judged by Customs and Excise to be both publican and sinner. An increasingly large number of officially employed civil servants are required to check on the activities of those many millions of citizens of simple education who indulge in the industry of shopkeeping. As the burden increases, it is far too much to ask of a citizen who runs a shop of any kind in a small town that he should be involved in the absurd mathematics of VAT.

I remember someone asking the question "How do you take 2 per cent. off the price of a Mars bar?" A variation in the rate of VAT involves ordinary people in absurd mathematics, and I trust that the Paymaster-General will heed that and will tell his right hon. Friend the Chancellor of the Exchequer that differential rates of VAT would be catastrophic for those who run a sweet shop, or a pharmacy, or a grocery.

8.45 p.m.

One of the absurdities of decimalisation is that it has made us count on a bad system. I understand that it was one of the brainchildren of the Secretary of State for Industry. He is probably responsible for more idiotic proposals for which the Labour Party have eventually fallen, such as the referendum, than any other hon. Member.

Decimalisation involves counting on the 10 system. The 10 system involves two prime factors, five, which nobody ever uses, and two, which is used. If we were changing anything we should have changed the counting system either to the octaval system or to the duodecimal system. If the rate of VAT were to be changed, it would be comprehensible under either of those systems. However, if we change the rate of VAT from 10 per cent. to 8 per cent., we get into quite impossible mathematics with the decimal system, especially for people who are "economic illiterates", if I may use that term. While the Secretary of State for Education and Science may be an economic illiterate, it does not bode well if the Government impose upon those who have an ordinary education and who are not illiterate, economic burdens which are quite impossible for them to bear.

If the pythons of the Excise Department raid this section of the community and accuse them of doing ill by the Government, we are making another bureaucracy and creating an even bigger bureaucracy to be nasty to them.

It is for these reasons that this is a proper amendment. The rate of VAT should not be amended. Such a move introduces mathematical complications and improperly invades private activity. For those reasons I support the amendment.

Mr. Robert Cooke (Bristol, West)

I am happy to agree with my hon. and learned Friend the Member for Kinross and West Perthshire (Mr. Fairbairn) and my hon. and learned Friend the Member for Dover and Deal (Mr. Rees). I hope that we shall not be faced with any further complications in what is already a complicated tax. I agree with my hon. and learned Friend the Member for Kinross and West Perthshire about the occasional inhumanities of "VAT-man". Certainly the small trader is lost in the present complexities. My hon. and learned Friend the Member for Kinross and West Perthshire has mentioned the difficulties of the small trader. As a small trader, I have no idea whatever how many souvenir bookmatches I possess. I have no intention of counting them, but the VAT-man can come during the hours of daylight and count them for himself if he wishes.

I hope that the Government will not fall for a large number of different rates of VAT. There are rumours to that effect. Sometimes these rumours turn out to be true. Sometimes the Government—this is the only unkind thing I want to say—are prone to give way on these things. Certainly if the Secretary of State for Industry had heard of the octaval system I am sure he would have wanted to try it.

If we are to have various rates, there is a class of activity which must surely be high on the list for a low rate or possibly even a zero rate. The British Tourist Authority has just estimated that £1,000 million will be earned by tourism this year. That healthy market must be based on a healthy home market. It is no good saying that overseas visitors can pay VAT or any other tax.

I wish to mention the plight of the small hotel keeper and the guest house proprietor. Recently I had the pleasure of addressing a substantial meeting of these people in Swanage, Dorset, not far from my home. There is no doubt that the great personal interest which these people take in those whom they welcome into their homes in the summer will to some extent be disturbed by having to calculate at 8 per cent. or any other percentage which the Government decide to dream up. Tourism flourishes on what people come to see, and the arts and the national heritage are high on their list. Indeed, those are the principal things that people come to Britain to see. We must congratulate the Evening Standard on its campaign to have VAT removed from the living theatre.

When VAT was introduced it was to be a comprehensive tax at a low rate. Nobody suggested that it would be right and fair for all. This was recognised soon after, in that the Arts Council made a quite substantial grant by way of relief of VAT which had to be paid in some sections of the theatre. There is no doubt now, however, that all sections of the theatre are in difficulty, and the losses made by many theatres exactly equal the amount of VAT which they have had to pay to the Revenue.

I therefore believe that the theatre has a strong claim to be at the top of the list if concessions are to be made. I say that against the background to which my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) and other of my hon. Friends have rightly referred.

Mr. Neville Sandelson (Hayes and Harlington)

The point which the hon. Gentleman has made is sufficiently important for me to intervene to say that he speaks for a large number of hon. Members on both sides of the House who hope that my right hon. Friend the Chancellor will feel it right and proper to take away this tax, or the major part of it—possibly by other financial provisions in due course—which bears so heavily on the theatre.

Mr. Cooke

I am grateful to the hon. Gentleman. If he and a substantial number of his hon. Friends were to support us, we could, without any difficulty, carry an amendment against the Government and take away this tax. I leave him to think about it.

The theatre has a strong claim to be at the top of the list, but we must bear in mind the arts generally. The Royal Opera, which is in a special category and is substantially supported by the State, despite the heroic efforts of such organisations as the Imperial Tobacco Company and the National Westminster Bank, pays in VAT an amount equivalent to 3.5 per cent. of its total income. That is worth mentioning in passing.

There is the extraordinary anomaly that some musical enterprises are heavily hit by VAT and others are not. I hope that the Government will bear that in mind. There are admission charges to historic houses, which bear £1 million worth of VAT, gardens, museums, exhibitions, and so on. I must not forget sport, because for all those interested in art an equal number are interested in sport. The Government must therefore consider that matter if they decide to change the 8 per cent. rate and have differential rates.

I must mention the question of VAT on repairs to historic buildings. The Exchequer has given the Historic Buildings Council an extra £500,000 to take care of VAT and rising costs generally. But the private owner, who, in partnership with the Historic Buildings Council, aims to carry out the repairs, has had no corresponding increase. Indeed, he is hit by inflation and VAT if he is a trader.

If we are to have differential VAT rates—some high, and some low, with some zero rating—let the Chancellor of the Exchequer recognise that there is great concern about the burden on the theatre and similar institutions and the national heritage in general, and that there is considerable support for relief. I leave the right hon. Gentleman with those thoughts and hope that he will refer to them.

Mr. Nott (St. Ives)

The previous debate on the Chancellor's motion was about incompetence and the Government's inability to prepare properly and bring forward in due time the capital transfer tax measure, which the Chancellor has described as the most important tax measure since the war. Illiteracy seems to be the topical charge and my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) began by referring to the comments made by the right hon. Member for Ebbw Vale (Mr. Foot) during the weekend. The right hon. Member for Ebbw Vale, privy as he is to the Cabinet's inner deliberations, apparently found a high degree of economic illiteracy amongst his colleagues, and in that respect it is not for us to question his judgment.

Our little amendment had a charitable purpose, and it had in mind the comments of the right hon. Member for Ebbw Vale. Believe it or not, one day he might be right. It is extraordinary how human endeavour is sometimes rewarded. There seems little purpose in consolidating a tax reduction in this Bill when the 1974 VAT order runs until July and when it seems more than probable, as the days go by, that the Chancellor will have no option but to increase taxation once again in his Budget in April. Although we cannot expect the Paymaster-General to anticipate his right hon. Friend's Budget statement, I hope that we shall hear from him whether it is illiterate for Ministers to speak out strongly in favour of the social contract. If it is, there is perhaps a yawning cavern in what we have been led to understand is the cornerstone of the Government's economic policy.

I ask the Paymaster-General to give us some general answers to one or two of the questions posed by my hon. Friend for Horsham and Crawley (Mr. Hordern) for, as he said, inflation is palpably out of control. Wages are rising at about 30 per cent. on an annual basis and prices at 20 per cent., and there is no sign that wage demands in the public sector are decelerating, as witness the power workers' demand which is shortly to come forward. The social contract, that mysterious entity—that mirage which seems to disappear as one approaches it in the thirsty desert—is apparently dead, if, indeed, it ever existed. The situation now is that not only is inflation apparently out of control but the confidence of British industry is at its lowest ebb. All that is undoubtedly contrary to the main objectives of the Chancellor as expressed in his Budget Statement in July this year.

As my hon. Friend the Member for Horsham and Crawley said, we have seen a welcome improvement in our balance of payments, but I do not think that that can be due to the improved competitiveness of British industry. Our costs are rising faster than those of almost any of our competitors. The balance of payments position looks as if it has improved, because the terms of trade have, luckily, turned in our favour, but the terms of trade are to a great extent out of our control and we cannot take much credit for that. Neither can we take much blame if the terms of trade turn against us.

Most worrying of all on the economic side is the point made successively by my hon. Friends the Members for Horsham and Crawley, Eastbourne (Mr. Gow) and Hitchin (Mr. Stewart), namely, what appears to be the escalating size of the public sector borrowing requirement. We are all concerned about the out-turn. We do not expect the Paymaster-General to give us any indication, but surely it cannot be running at the level suggested by some Press commentators for whom we all have a great respect. Some suggest that the out-turn of the public sector borrowing requirement will be in the region of £8 billion. That is a staggering figure.

9.0 p.m.

With falling interest rates, I can well believe that the Government are selling a lot of gilts. With depression all round us, bank advances in the private sector may well be at a low level. Therefore, when my hon. Friend the Member for Hitchin speaks of the money supply, I can well believe that it is at the moment rising well below the rate of money GNP.

To the extent that I believe the figures on the money supply at all—and that is another subject—I can believe that at the moment the level of the money supply is satisfactory. But assuredly the money supply is not under control. As each day goes by and as public expenditure apparently accelerates, we become more and more vulnerable to the interests and whims of our creditors abroad, some of them the Oriental potentates to whom my hon. Friend the Member for Eastbourne referred.

Whatever the level of the money supply, this country is placing itself in an increasingly dangerous and vulnerable position by its dependence on deposits from overseas. This is far and away the most critical part of our economic situation.

My right hon. Friend the Member for Crosby (Mr. Page) spoke about the public expenditure White Paper. He said that he hoped we would debate it in due course. Speaking from memory, I recall the resource table in the public expenditure White Paper. That indicates that, even on the public expenditure figures announced by the Government earlier in the year when the PESC exercise began, this country faces the most critical situation in terms of the necessary level of private consumption. If the public expenditure has exploded in the way in which we believe, the position that the country faces is one of extreme danger.

I hope that my hon. Friend the Member for Bristol, West (Mr. Cooke) will forgive me, having said all that, if I do not embark upon further increases in the public sector borrowing requirement by commenting on VAT on the theatre, on historic houses and on other matters. I understand his arguments fully, and I have no doubt that we shall wish to consider them on a future occasion.

I come, then, to some of the remarks made about VAT enforcement by my right hon. Friend the Member for Crosby, my hon. Friend the Member for Morecambe and Lonsdale (Mr. Hall-Davis) and others. If the allegations made by my hon. Friend the Member for Barkston Ash (Mr. Alison) are accurate—and I believe that the Government have not only to investigate this matter but to say something about it—Clause 37 has not been complied with. If the allegations are accurate, surely a warrant from the justices of the peace must have been required. I hope that the Paymaster-General will have something to say about this.

I recall the views expressed in Committee on the enforcement powers in relation to VAT. At that time, I was a Treasury Minister. My hon. Friend the Member for Horsham and Crawley moved a number of amendments put forward by the Bar Council and other reputable bodies. I recall that my hon. and learned Friend the Member for Dover and Deal played a prominent part in those debates.

It was the Chancellor of the Exchequer himself, sitting on the other side of the Committee, who was the most strenuous opponent of the powers which we were giving to Customs and Excise at that time. Interestingly enough—this goes to the heart of the matter raised by my hon. and learned Friend the Member for Dover and Deal—the Chancellor of the Exchequer made great play of the privilege of communication between a lawyer and his client. I quote but one sentence from the then Shadow Chancellor, who said: No Government in their right senses, certainly no Government with a sense of Britain's legal traditions, would ever have considered the introduction of powers of this nature."—[Official Report, Standing Committee E, 12th June 1972, c. 806.] We all accept that indirect taxation and the collection of Customs and Excise duty and VAT is a much more difficult and sensitive matter than direct taxation. The Chancellor was protesting in that Committee at the powers that we were giving to Customs and Excise. We hope, therefore, that he will personally investigate some of the allegations which have been made against Customs and Excise in this case.

It is obviously counter-productive for such allegations to be made and for them not to be followed up, and I have here the main leader in the Sunday Mirror, yesterday, which ended with the statement: So come on, Denis. On with your crusading Batman suit and put those arrogant VAT-men in their place. We all know that they are not arrogant VAT-men, but I hope that the crusading Denis referred to in that leader will investigate the matter with care.

My hon. Friends the Members for Lancaster (Mrs: Kellett-Bowman), Tonbridge and Malling (Mr. Stanley) and Bristol, West and my hon. and learned Friends the Members for Kinross and West Perthshire (Mr. Fairbairn), and Dover and Deal are concerned about the prospects of multirate VAT. We already have a multirate VAT with three rates—8 per cent., the car rate, and zero rate. If the Government add to the three rates, the burden upon traders will become intolerable. They are already suffering under the stringencies of the Price Code and the increased national insurance contribution, and if we are to ask traders to act on behalf of Customs and Excise and pay an increasing amount of tax it is important to retain their confidence in the system, because we could easily tip all these unpaid tax collectors over the edge into civil disobedience. Taxation in this country depends more and more upon consent, and at the moment that consent is under great strain.

I conclude by reminding the House that it was the reduction in VAT to 8 per cent. which enabled the Chancellor to make the disgraceful suggestion during the General Election campaign that inflation was running at 8¼ per cent. Our short debate on this amendment brings back the memories of that VAT reduction and the consequences that it had. But as we have turned the debate, unwittingly perhaps—and perhaps not wholly with your consent, Mr. Deputy Speaker—into a short and rather fragmentary economics debate, I remind the Paymaster-General of what his colleague the Home Secretary said over the weekend, because his remarks seem to have paled beside the charges of his right hon. Friend the Member for Ebbw Vale and the charges of economic illiteracy which have been thrown about.

The Home Secretary said "This country faces at the moment the gravest danger since Hitler". I hope that I have quoted the right hon. Gentleman correctly. We shall have many economic debates in the future, and perhaps during the course of the Bill, but the right hon. Gentleman put the problem faced by this country very succinctly, and perhaps the Paymaster-General will briefly answer the debate.

The Paymaster-General (Mr. Edmund Dell)

May I first congratulate the hon. Member for St. Ives (Mr. Nott) on what I believe is his first speech on his return to the Opposition Front Bench. He certainly improves the Shadow Treasury team. In the past few months we have always listened with great interest to his views on the honesty of a balanced Budget set against the performance of the Chancellor under whom he served.

The hon. Gentleman said that we have had a fragmentary economic debate. It has indeed been fragmentary. I took some comfort from his assurance that he would not expect from me any anticipation of my right hon. Friend's Budget Statement or Budget judgment, or figures relating to the public sector borrowing requirement. In so far as I can I shall deal with the specific points that have been put to me during the debate. I am sure that the House will not expect any new announcements this evening. We would have chosen a different way had there been any such intention.

I was asked whether I could give an assurance whether there would not be a multirate VAT. I cannot give any such assurance, any more than could my hon. Friend the Financial Secretary when speaking in Standing Committee. The whole of the consultation that has taken place on this subject has made it clear that no decision has been made. If there were a decision to introduce a multirate VAT system it would need new legislation. The House would therefore have full opportunity to examine whatever proposals were brought before it.

Equally, I cannot comment on the speech made by the hon. Member for Bristol, West (Mr. Cooke) on VAT on the living theatre, the performing arts and sport. As the House knows, representations have been made on these matters to my right hon. Friend. Those representations are under consideration. I hope that I shall be forgiven for pointing out that there are difficulties in this area that are not the choosing of this Government.

Mr. Robert Cooke

The right hon. Gentleman said that there has already been consultation. Perhaps he will tell us more about the scope of that consultation. If there were to be a multirate system of VAT, would the arts and sport be high on the list for a low rate?

Mr. Dell

I will not give the hon. Gentleman any encouragement. I have said that the matter is under consideration, and I shall not go beyond that. The matters that have been under consideration include a special retail scheme and the general operation of a multirate system of VAT were it to be introduced. I emphasise the point, as the consultation has made clear, that no decision has been made.

Many right hon. and hon. Members have spoken on the methods of enforcement of VAT. Deep concern has been expressed about the way in which VAT has been enforced and the way in which powers of inspection have been carried out in certain cases to which Conservative Members have referred. It is important that the House should be alert to any abuse of power. I hope that abuses have not occurred. The first point to make is that the previous Conservative Government decided that as VAT was a system of self-assessment it was necessary to have the power of inspection. That power is embodied in Section 37(2) of the Act. The power of inspection is different from the power of search. That point is met in Section 37(3), where a warrant from a justice of the peace is required. The power of inspection should be a fairly routine matter where notice is almost always given to the person whose premises are to be inspected, and normally this has been carried on without difficulty.

9.15 p.m.

There are 1,200,000 registered traders and so far there have been 180,000 control visits, out of which there have been few complaints. Indeed, I believe that the current complaints concern only 10 visits although that would be too many if any proved on investigation to be justified. The need for these powers was decided, understandably in the circumstances of VAT, by the previous Government.

If complaints are made it is obviously of the highest importance that they should be thoroughly investigated and that if there is reason for complaint appropriate action should be taken. Particular reference was made to a case brought forward by the hon. Member for Barkston Ash (Mr. Alison), but I would remind the House that that complaint was made in a letter to the Chancellor of the Exchequer dated 26th February. There has not yet been time to investigate the complaint, but it will be investigated thoroughly. I am sure that the House will require that it should be so. Certainly inspectors must act within the law but the instructions to them make it clear what the limits of their power are and the distinction between the power of inspection and the power of search.

Mr. Hall-Davis

If the instructions have no particular reason for secrecy it would be reassuring to traders if they could be published.

Mr. Dell

I shall discuss that question. I am not sure whether the instructions are written or verbal, but I shall see whether I can help the House in that respect.

Mr. Hordern

I think that the hon. Gentleman said that only 10 cases were being examined by the Customs and Excise at the moment. I know of at least one case in which a constituent is complaining about these powers and I should have thought that many of my hon. Friends have had similar cases. The Press has reported other cases. I know that the right hon. Gentleman will treat this matter with the seriousness that it deserves, because it appears that the practice is much more widespread than he has said.

Mr. Dell

If the hon. Gentleman knows of any case which he believes is not currently being investigated but which he thinks should be investigated, I hope he will let us know. It is our desire that legitimate complaints should be investigated so as to establish the truth.

Mr. Peter Rees

I have today received an Answer from the Financial Secretary to the effect that 21 people have been searched under the VAT powers since 1st April 1973. That alarms me a little. I am not certain of the circumstances in which it becomes necessary to search so many people in a mere year and a half. I do not expect details of all the 21 people searched and why, but would the right hon. Gentleman include that in his area of investigation?

Mr. Dell

If the hon. and learned Gentleman has further questions about those cases in which evidently there was a search, of course we can try to deal with them, but I take it that if those cases have been described as cases of search, a warrant from a justice of the peace would have been required.

Mr. Rees

The right hon. Gentleman misunderstands. I understand that these people were personally searched. I have asked another Question and received the reply that 97 informations have been laid and search warrants issued in each case—that is, search of premises. But the purpose of my other Question was to discover how many had been physically searched. There is, for example, a reassuring provision that a woman may be searched only by a woman Customs Officer. It was in that connection that I asked that Question.

Mr. Dell

I obviously cannot give an answer to that question today, because I have not seen the Answer that my hon. Friend has given. If the hon. and learned Gentleman has further points, of course we shall look at them.

The right hon. and learned Member for Surrey, East (Sir G. Howe) came on to what he described as matters of general economic policy. Among these he discussed the actual effect of the clause under discussion. May I make it clear to certain Opposition Members that the clause does not change the rate of VAT. It merely consolidates the position created by the order changing the rate to 8 per cent. Therefore, any hon. Member who thinks that by supporting the clause he is reducing the rate of VAT need have no such worry.

The right hon. and learned Gentleman asked whether it was right to consolidate the new rate of VAT. As I am sure he knows, we have to consolidate it within one year or bring in a new order. I believe that it would be wrong not to follow what has been the normal practice in the past where the regulator has been used—that is, to consolidate at the earliest opportunity. After all, the intended margin for the use of the regulator power is 20 per cent. It would be wrong that it should be increased by a failure of this House to consolidate the rate when the opportunity occurred. This does not affect the right of the House to change the rate by subsequent legislation. But there I would enter questions of budgetary judgment, which clearly I cannot do this evening.

The right hon. and learned Gentleman made what he described as certain speculative judgments about our present economic situation. He spoke of the need to achieve the right level of demand. That need certainly exists. One of the most important elements in achieving the right level of demand at present is to ensure that there is a sufficient transfer of resources into the balance of payments. Here during the last year we have had some success. Hon. Members of the Opposition have pointed out the extent of our continuing deficit, and that is a matter of serious concern. But there has been some success in the matter.

During the last year the volume of exports rose very substantially more than the volume of imports. I think that it was the hon. Member for Horsham and Crawley (Mr. Hordern) who said that that was not the case recently. It is certainly true that for the last three months the volume of imports has fallen by 2.6 per cent. and the volume of exports has also fallen by a similar amount. This is due, I suspect, perhaps to some loss of competitiveness, but perhaps also to the deteriorating world trade situation which has made the task of our exporters very much more difficult. However, it is of vital importance—no one in the Government would deny this—that we should rectify our balance of payments situation as rapidly as possible and reduce our borrowing as rapidly as possible. That is an important aspect in the demand management situation which my right hon. Friend the Chancellor of the Exchequer has to consider.

The right hon. and learned Gentleman discussed the social contract. Again, my right hon. Friend the Chancellor of the Exchequer has stated perfectly clearly his view of the present situation. He has said that 25 per cent. outside the contract was too high, and there is no division within the Government on that point. Certainly there is a serious inflationary situation, and the prime source of inflation at present is wage settlements. At any rate, we may now gain some advantage from the decline in the use of thresholds after the end of Stage 3, because threshold agreements were no small element in the problem of dealing with inflation which the Government have confronted since coming into office again some twelve months ago.

Mr. Gow

The Paymaster-General has just told the House that there is no difference of view within the Government about the operation of the social contract and the methods which are to be used to fight inflation. Is he asking the House to believe that there is no difference of view on this matter between the Secretary of State for Education and Science and the Secretary of State for Employment?

Mr. Dell

I do not think that the hon. Gentleman would wish me to devote too much attention to that intervention.

The hon. Member for Hitchin (Mr. Stewart) asked whether the suspension of the supplementary scheme represented a change in the Government's policy for controlling the money supply. The reason for putting the scheme into abeyance—it has not been scrapped—is that it is not at present biting. In the latest three months for which figures are available the average level of interest-bearing liabilities was only 6¾ per cent. above the base level compared with the guideline of 18 per cent. It therefore appeared sensible in this situation to put the scheme into abeyance, but it does not represent any change of policy on the money supply. The hon. Gentleman will know that the increase in money supply under this Government has been below the increase of money GDP.

I have already said that I cannot give the House any information in response to questions about the size of the public sector borrowing requirement. It is normal to do that each year at the time of the Budget. My right hon. Friend did it a second time last year in November when there was a significant change that he wished to announce. I certainly cannot help hon. Gentlemen in that respect at the moment.

Mr. Gow

The Paymaster-General knows that my hon. Friend the Member for Horsham (Mr. Hordern) and I put specific questions to him about the level of the public sector borrowing requirement and we asked him specifically by how much that had increased since the Budget Statement on 12th November. Why is the right hon. Gentleman so coy about giving these figures? Will he be more frank with the House and with the country?

Mr. Dell

Not this evening.

The hon. Member for Horsham referred to the level of investment in Britain, about which he has legitimate concern. I do not know whether he has seen the Press notice issued today about capital expenditure in the manufacturing, distributive and service industries for the fourth quarter of 1974. These figures give some comfort. They are better than some forecasters had expected. They show that the level of investment was still slightly short in manufacturing industry of the 1970 figure but at any rate was well up on the figures for 1971, 1972 and 1973. That does not mean that the level of investment in Britain is regarded by the Government as adequate or that steps are not needed to encourage higher investment.

Mr. Hordern

Has the right hon. Gentleman seen what I was referring to—that is, the Financial Times Business Survey which referred to the lowest level of confidence amongst business men and particularly their investment intentions? What do the Department of Trade inquiries show? It is the trend for the future with which we are concerned, not figures for the fourth quarter of last year.

Mr. Dell

I realise that the hon. Gentleman is concerned about intentions for the future. I was pointing out that pessimistic forecasts made over the last few months have, fortunately—I am sure that the hon. Gentleman will welcome this—not yet been borne out. I in no way wish to contradict the view that there is a serious danger in this respect. That is why my right hon. Friend took steps in November to increase company liquidity by a figure which we now estimate to be about £1,800 million, which we hope will help in that respect. However, it may well be—indeed, it is part of the Government's policy—that further action should be taken to improve the level of investment in Britain.

Some hon. Members asked me questions about VAT on petrol and the motivation of the increase from 8 per cent. to 25 per cent. I do not believe that I should enter into those questions in any detail because in Clause 2 there are certain amendments which are concerned with that matter and it might be better if we left the discussion of that problem until we reach that point.

I have tried to deal with questions which have been put to me, and I hope the House will now decide not to remove this clause from the Bill. As a matter of fact, it would not make much practical difference if the House decided to remove it, but I think it would be right to take the first opportunity to consolidate the change of rate. That is what this clause does, and I hope the House will approve it.

Amendment negatived.