FINANCE (NO. 2) BILL

HC Deb 08 May 1975 vol 891 cc1628-757

Order for Second Reading read.

4.2 p.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

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

I hope that the House will find it convenient if I pick out only the more important or controversial clauses in my opening remarks.

The first clause of the Bill provides for the increases in the duties on tobacco and alcoholic drinks which came into effect at midnight on Budget Day. The length of the queues the previous week suggests that these increases did not come as great surprises. Nor do I believe that many people will have felt that it was unfair to raise these duties at a time of rapidly rising inflation and severe economic stringency.

As the House knows, these duties are a fixed sum levied on a given quantity rather than a percentage of prices. So a substantial increase was necessary if the real value of the revenue from these sources was not to fall. In other words, these increases are just one of the inevitable consequences of inflation.

Clauses 5 and 6 give effect to the substantial increases in revenue which I am seeking from road users. Altogether, the increases of 60 per cent. in the rate of duty on private cars and one third in the rates on commercial vehicles will yield some £270 million in a full year. As I explained to the House in winding up the Budget debate, I faced a choice between increasing the rates of vehicle excise duty and increasing the burden of taxation on petrol. It was not an easy decision, since either course was bound to inflict greater burdens on some sections of the community than on others.

There were three main reasons which led me to my conclusion. First, the vehicle excise duty had not been changed for the last seven years, during which the general price level has risen by about four fifths. Unless specific taxes of this kind rise broadly in line with prices, the necessary revenue can be raised only by further increases in the burden of other taxes—in this case, the tax on petrol.

The second reason was that the price of petrol has risen enormously in the last 18 months because of the five-fold increase in oil prices. On top of that, I have myself already acted twice to increase the tax on the use of petrol by private motorists. I confess that there is a serious case for abolishing vehicle excise duty altogether and raising the equivalent revenue by a further increase in the tax on petrol. This would bring some administrative savings and might be a more sensible way of further graduating the tax on road users according to vehicle size than by introducing a differential vehicle excise duty. Moreover, there is undoubtedly significant evasion of the vehicle excise duty, and this type of evasion would not be possible if the revenue were raised by taxation on petrol.

On the other hand, the increase in the price of petrol has already fallen very heavily on shift workers and people living in rural areas who are bound to use their cars more intensively than others. But to abolish vehicle excise duty at this time and to raise the equivalent of the revenue expected from the new rates of vehicle excise duty would have meant adding 16p per gallon to the cost of petrol. I felt that it was right to avoid imposing this extra burden at this time, although I must recognise that the increases in vehicle excise duty fall particularly heavily on certain groups, for example, retired people who make comparatively small use of their car.

There was, however, a third reason for concentrating on the vehicle excise duty this year, and that was the position of the British motor industry. Another large increase in the price of petrol would have substantially increased the incentive which already exists for the purchase of the smallest and most economical cars. Of course, if one's only objective were to save fuel, this would be desirable. But the British car industry does not at present possess such a wide range of small cars as its European and Japanese competitors and cannot quickly produce new models. A further increase in petrol prices could have led to a new flood of small foreign cars into Britain and to still higher unemployment in the British car industry.

I believe that on balance the choice I have made of an increase in vehicle excise duty was the best available one in the circumstances of this year. But if these circumstances changed, I would certainly consider moving in the other direction in a future Budget.

Mr. A. J. Beith (Berwick-upon-Tweed)

The Chancellor has kindly expressed concern about retired people. Will he think again about those who pay their vehicle excise duty by instalments because they have no alternative? The higher rate to which they are subject bears very heavily on those who are retired and are struggling to keep up the overheads on a car.

Mr. Healey

I considered this problem. I did not think it possible to do anything about it. However, no doubt the hon. Gentleman will raise this question when we discuss the Bill in Committee.

Measures concerning value added tax are covered in Clauses 17 to 20 and Schedule 7 of the Bill. The most important is the application of VAT at 25 per cent. to certain goods and associated services. The details of the coverage of the higher rate are by now well known, and as there will be ample opportunity to discuss them in Committee I do not propose to describe them now. As I said in my Budget speech, at a time when some sacrifices are required from all of us the consumer must play his part. But I think it is the right thing in this as in all other fields of taxation to try so far as possible to impose the extra burdens where they can most easily be borne. In the contex of indirect taxation, this means concentrating on tax increases on less essential consumption. The items we have selected do represent less essential expenditure, though by no means all of them can be considered as luxuries, for undisputed luxuries like furs and jewellery could not in practice produce much revenue on their own.

I accept that individuals may and do disagree about what is more or less essential, and I do not claim that the border I have drawn is the only one which can be envisaged. But I do believe that it is reasonable in present circumstances to increase the burden of taxation on the goods which I have selected. Moreover, another factor had to be considered besides the question whether an item was more or less essential. I wanted to create a structure for the new 25 per cent. rate which would not impose insuperable administrative difficulties on retailers. That meant concentrating so far as possible on goods which were not sold in large numbers by very many small shops.

Much has been made already of the anomalies which result from these proposals and I dare say we shall hear a good deal more this afternoon and in the Committee stage, but the fact is that unless the House is prepared to accept uniform taxation of all goods and services there are bound to be anomalies in any system. I doubt if there is any hon. Member of the House who would wish to tax all necessities and less essential goods alike. Certainly the Conservative Party, when it introduced VAT, created hundreds of anomalies when it rightly decided to zero rate nearly 50 per cent. of goods and services. It legislated, for example, for a situation in which value added tax was paid on a sandwich eaten inside a shop but was not paid if it was eaten on the pavement outside, and I believe that certain cafe owners are still wrestling with the problem of the right way to tax sandwiches eaten between the counter and the pavement.

It was the Conservative Party, as I reminded the House in the Budget debate, which raised the number of rates of purchase tax to seven, the highest ever, creating by far the highest number of anomalies.

Indeed, there is in almost every form of tax an inherent contradiction between the claims of elegance and equity. To the extent that the Government attempt to make the system fair, they are bound to introduce administrative complications and anomalies. But I believe that this is a price worth paying and that in our current situation, when an increase in the yield of value added tax was a necessary component of the increased revenue required, it was better to introduce a higher rate for less essential goods than to make a straight increase in the standard rate of VAT across the board, covering not only those goods and services now in the higher rate but also items such as crockery and cutlery, pots and pans, household linen and bedding, clothes, and other articles which are an essential part of most people's spending on any definition of the term.

I imagine there must be very few hon. Members of the House who have not received some communication protesting against the application of the 25 per cent. VAT rate to existing rentals of television sets. We shall no doubt have an opportunity to discuss this fully in the Committee stage, but it may be useful if I remind the House now that this charge is an integral part of the basic VAT system as it was introduced by the Conservative Party in 1972. Under that legislation, value added tax has to be borne on hirings of goods as if there were a series of supplies each time an invoice is issued or payment is received, and each successive supply is charged at the rate in force when it takes place. A customer who hires a television set will find his rental tending to go up when the rate of value added tax is increased, but he should equally find it tending to go down when the rate is decreased, as indeed the standard rate was last July.

While I am speaking of value added tax I should say a word about the VAT regulator power. Clause 20 of the Bill allows the limit of that power to be extended from 20 per cent. to 25 per cent. on either side of the going rate, and Clause 17 provides that it should apply to the higher rate as well as to the standard rate. As far as the standard rate is concerned, the reason I introduced 25 per cent. for the new regulator is that it enables me to substitute simple round figures—6 or 10. But it has been pointed out to me in a number of Questions tabled during the past few days that an exactly equivalent alteration of the 25 per cent. rate would not be so satisfactory. Accordingly, on further consideration, I am persuaded that it would be desirable to have power to operate the regulator separately for the two rates, though always within the limit of 25 per cent. on either side of each going rate.

We shall be tabling amendments to Clause 17 in the Committee stage, and the necessary Ways and Means Resolution will be moved immediately after this debate to provide for that measure of flexibility.

Clause 31 contains, as I had foreshadowed, provisions to remove the unjustified tax benefit which a minority of shareholders have been able to enjoy by taking their dividends in the form of additional shares in place of cash. I realise than these schemes may have helped some companies to conserve their cash, but any possible advantage they have gained does not justify a situation in which a few better-off shareholders could in effect opt out of immediate tax liability. This cannot be defended when others are being asked to carry a heavier burden.

Mr. Peter Walker (Worcester)

The right hon. Gentleman has omitted Clause 23, presumably because he thinks this increase in income tax is not controversial. Has he introduced that clause as a penalty for the large wage settlements made? Since his Budget there have been 10 wage settlements averaging 30 per cent. and there are currently 10 demands averaging 40 per cent. Would he consider Clause 23 was appropriate or inappropriate, adequate or inadequate?

Mr. Healey

I am interested that the right hon. Gentleman is so much in love with the speech he made this morning that he has decided to repeat it this afternoon. No doubt if he catches your eye, Mr. Speaker, he will repeat it a third time later on in the debate. I regard the income tax increases I made as appropriate in current circumstances.

Mr. Kevin McNamara (Kingston upon Hull, Central)

Before my right hon. Friend continues, on the question of VAT on caravans is he aware that this is a labour-intensive industry in areas of already intensely high unemployment almost reaching SDA standards? We are very concerned about the effect of this on employment in Humberside and particularly in Hull. Does he not think that this is worthy of mention now?

Mr. Healey

I think almost everything in this excellent Finance Bill is worthy of mention but I fear that the opening remarks which I have to make would last far too long if I mentioned everything. I know the concern of my hon. Friend, and there is a good deal in what he says. No doubt he will seek to raise this when we discuss the Bill during the Committee stage.

I come next to the clauses dealing with rates of income tax and changes in the amounts of personal allowances—the point which the right hon. Gentleman the Member for Worcester (Mr. Walker) has just mentioned. I explained in my Budget speech why I found it necessary to raise income tax rates for two years running. So long as the warnings about excessive increases in incomes go unheeded I shall be obliged to take such measures. The choice is not for me but for the British people as a whole. Either we moderate our demands for income we have not earned or moderation must be imposed through the tax system. There really is no alternative.

Mr. Nigel Lawson (Blaby)

I am most grateful to the right hon. Gentleman for giving way. Why does he say there is no alternative when in his speech on 23rd April he said there was the alternative of cutting public expenditure?

Mr. Healey

I am grateful for the courteous and friendly intervention of the hon. Member and I shall be dealing with his point later in the speech.

Nevertheless, I have sought in the Bill, as I did last year, to protect the most vulnerable members of the community from extra taxation on personal incomes. I have done this by simultaneously raising the tax thresholds; by £50 in the case of single people, which also includes those who are widowed or divorced, and £90 for those who are married. The increases in these and other personal allowances are dealt with in Clause 28.

I fully appreciate that the increased allowances do not fully keep pace with the fall in the value of money last year. I made no secret of this fact when I announced these increases in my Budget Statement, but I told the House that in our present difficult economic situation they were as far as I felt I could go. Of course, I have been criticised for this. Hardly had I sat down than the right hon. Lady the Leader of the Opposition was saying that in the view of the Conservative Party the single allowance should have gone up by £117 and the married allowance by £163 to take inflation fully into account. I do not quarrel with her arithmetic, but what she did not say was that these increases would cost an additional £550 million in a full year or £450 million in 1975–76—much more than the increases I have proposed. Nor, Of course, have we been told how that extra cost would be found.

Mr. Lawson

By cutting public expenditure.

Mr. Healey

I asked the right hon. Lady and every Opposition Front Bench speaker in turn—and no doubt I shall ask them again this afternoon—exactly where they proposed to cut public expenditure and what they proposed to do about the pledge to increase public spending by £3,000 million on which they fought the last General Election. If we do not get answers from the Opposition Front Bench we may get answers from hon. Gentlemen on the back benches. The Conservative Party right through the Budget debate claimed that I should not have increased taxation but that I should have taken it all off public expenditure and given further handouts in the form of a rising tax threshold. Never on any occasion did we get the slightest hint of where these savings in expenditure were to be found.

Mr. John Nott (St. Ives)

Before the right hon. Gentleman leaves tax allowances, as he has always claimed that his increases in taxation will fall on those who can most afford to bear them will he explain why there are now 1 million more people paying tax than there were when he came to office? I do not know whether he has read the memorandum issued by the Child Poverty Action Group. but why has he not raised the threshold to ensure that there are not a million more poor people in the country paying tax?

Mr. Healey

I have taken 400,000 people out of tax by the current Budget. As the hon. Gentleman knows, it is the high rate of inflation that has brought people into tax. If the hon. Gentleman wants to make something of this perhaps he will answer these questions—and I will concede the Floor to him to allow him to do so. First, is he, as is the Liberal Party, in favour of indexing tax allowances so as to prevent people from ever being put into tax by the operation of inflation? If so, how does he propose to find the offsetting money? Secondly, if the hon. Gentleman wants specifically to raise the allowances, as the Leader of the Conservative Party suggested, how will he find the £500 million in addition to the extra £1,000 million that he wants to find out of public expenditure instead of taxation in the current year?

Mr. Nott

All I ask is that the Chancellor should do exactly the same as Lord Barber did and protect the poorer section of the community by ensuring that the additional 1 million referred to by the Child Poverty Action Group are not brought into tax as a result of his measures.

Mr. Healey

I think I am right in saying—and I shall be corrected if I am wrong—that Lord Barber specifically did not do that in 1973. We can discuss that later, and if I am wrong I will concede that in advance. The hon. Gentleman still has not answered the questions on which I gave way to him. Does he propose to index tax allowances, as the Liberal Party does, and, if so, where will he find the money, in addition to the extra money he proposes to find from cutting public expenditure and the additional money he proposes to find because his leader on the finance team in speak-on the afternoon of the Budget debate said that the Budget was too soft?

Mr. John Gorst (Hendon, North)

May I put it to the Chancellor that the question he asks is the wrong question? It is not a question of where the money would be saved. The question the Chancellor has to answer is: how much money has he got to spend?

Mr. Healey

The hon. Gentleman may well call it the wrong question when his hon. Friend is incapable of answering it.

Mr. Gorst

The Government are spending money they have not got.

Mr. Healey

With great respect, that, too, is a matter which I discussed at great length in the Budget debate. If the hon. Gentleman disagrees with the Budget, let him tell us precisely what he would do instead so that we may give his protestations of fiscal rectitude some respect. If not, we shall regard them, as we regard so many statements from the Opposition Front Bench, as hypocritical humbug. If I may continue from where I was so rudely interrupted—not by the hon. Member for Blaby (Mr. Lawson), who is never less than courteous, and rarely more than courteous—I will come back to the tax allowances.

If we index tax allowances and raise them every year to take account of the full effect of inflation, in a situation like the current one we should have to find additional money either by increasing income tax still further, which would be undesirable, or by increasing indirect taxation, and what effect does the Conservative Party think that that would have on the level of wage settlements?

I purposely increased the married man's allowance by more than the single allowance because in recent years the married allowance has tended to fall behind. When the Government came to power 15 months ago the married man's allowance was only 30 per cent. higher than the single allowance against 60 per cent. 10 years earlier. This year's changes continue the process, which I started last year, of restoring a better balance between the two.

At a time when the economic situation compels me to raise more taxation, my main concern must be for those living on the smallest incomes, and for them raising the tax thresholds will more than offset any extra tax payable as a result of the increase in the basic rate.

I will deal with some of the problems raised by the hon. Member for St. Ives A single person earning £20 a week will find that he or she has a reduction in the weekly tax bill of about 17p a week after the changes come into effect. Not until his earnings are £28.85—rather over half average earnings—will a single person pay more tax.

Similarly, married couples without children will pay less income tax as a result of the Budget in all cases where earnings are below £47 a week, and the married worker on average earnings will pay only a few pence more a week in extra tax.

Mr. John Pardoe (cornwall, North)

Not in real terms.

Mr. Healey

I am talking about tax, which is Paid in money terms

Mr. pardoe

May I explain to the Chancellor that, with a rate of inflation of 20 pre cent., a person who had and income of £25 a week last year would have to add 20 per cent. to it in order to work out what tax he is paying this year? The tables given in the Red Book are totally phoney—they always have been—and the Chancellor should publish new tables setting out the allocation of money according to the rise in the cost of living.

Mr. Healey

With great respect, the hon. Gentleman has been carried away by his exuberance—not for the first time. There is no way in which tax figures can be given except in money terms at the time when Budget decisions are taken. The statements I am making are the literal, factual, arithmetical truth.

I will give the hon. Gentleman some more truths of that nature. Low-paid couples with children will benefit by similar amounts and those with two or more children are already getting the increased family allowance from April. That makes comparisons with 1974–75 tax less straightforward because the family allowance is taxable. But, leaving that to one side, a married man with two children under 11 will not be asked to pay extra tax as a result of the Budget unless his earnings and family allowance together come to more than £55 or so a week. If there are two children his wife will be drawing an extra 60p a week in family allowance from the Post Office so that the family will in that respect be better off than they were last year.

Next I come to the important change in the allowances affecting single-parent families.

Mr. Ian Lloyd (Havant and Waterloo)

rose—

Mr. Healey

With great respect, I cannot give way again. I have given way many times.

Mr. Ian Lloyd

It is on this point.

Mr. Healey

No doubt we could have a fascinating interchange—what the Greeks called a stichomythia—lasting until 10 o'clock, but, as is the rest of the House, I am passionately interested to hear what Opposition Front Bench spokesmen have to say about the Finance Bill in the light of the general position to which they committed themselves in the Budget debate. Although I undertake to give way from time to time during the rest of my remarks, I cannot be expected to do so every five seconds.

I want to discuss the change in the allowances affecting single-parent families. I doubt whether any other group in the community commands a greater measure of sympathy both inside and outside the House. The special problems facing parents bringing up children alone were brought into sharp relief by the report of the Committee on One-Parent Families under the chairmanship of the late Sir Morris Finer, which recommended parity of tax treatment with two-parent families. Last year, as a move in that direction, we increased the additional personal allowance for single-parent families by £50 from £130 to £180. This year we are going further and closing the gap completely between the single allowance and the married allowance, as the Finer Committee urged us to do, by an increase of £100 to £280 in the additional personal allowance. That means that a widow or divorced mother, or father, with one child under 11 will now be completely exempt from tax on income, including any widow's pension, up to £1,195 a year. That is nearly £23 a week. They will have the same total allowance and pay the same tax as a two-parent family. This change by itself, apart from the change in the single allowance, will mean that 10,000 more single-parent families will no longer pay tax, and another 280,000 will have less tax to pay. I believe that hon. Members on both sides of the House will welcome this long overdue measure of social justice.

Clauses 32 to 34 make certain benefits in kind liable to tax on broadly the same basis as if the employee receiving them had been paid in cash instead. The benefits in question are twofold. First, there is the benefit that an employee receives when he is provided by his employer with free insurance against the cost of private medical treatment. Secondly, there is the benefit that he receives from being given a voucher instead of money as part of his salary or wages, the voucher being exchangeable for goods, services or money. As I made clear in the Budget debate, this does not affect luncheon vouchers.

As regards free medical insurance, the new rule will be that any employee, irrespective of the level of his earnings, whose employer provides him with free private medical insurance will pay tax on it. This rule applies at present only to employees earning £5,000 a year or more and to company directors. If an employee receives free medical treatment under a private medical insurance scheme because his employer pays the cost of his insurance he receives a benefit. We think it right that he should pay tax on it. We cannot continue to permit employees, whatever the level of their earnings, who receive free private medical treatment to get it tax free as well. For administrative reasons these proposals will operate from 6th April 1976, the start of the next tax year.

I would not claim that these are major changes, but they are not insignificant. As I indicated in the Budget Statement, we have yet to bring our main proposals on fringe benefits before the House. The present rules on fringe benefits badly need an overhaul as they are increasingly used as a means of avoiding income tax. Of course, there are wide differences between the practice of various companies in this respect. However, I believe that action on fringe benefits should form part of a general revision of tax rates in the light of the new capital transfer tax, the forthcoming wealth tax and changes in the capital gains tax. I hope that it will be possible to take action on fringe benefits as part of a major reform of taxation in next year's Budget, by which time we hope to have the findings available of the Royal Commission on the Distribution of Income and Wealth.

Clause 35 deals with agency staff. Recently, a growing number of employment agencies have been encouring their temporary staff to adopt arrangements under which they were treated as self-employed for tax purposes and so avoided Pay-As-You-Earn. These temporaries are working under conditions which are virtually indistinguishable from those of the permanent employees whose wages are, of course, subject to PAYE. Clause 35 rectifies the position from 1976–77 onwards and brings the income of temporary agency workers under Schedule E so that PAYE can be applied.

I am sure that the House will welcome the ending of the unjustifiable tax advantage which some temporary workers have been enjoying. This is not a party matter.

Indeed, a clause with a similar objective was put forward by an Opposition Member last year. I note that the present proposal has been welcomed by the reputable employment agencies.

Mr. Ralph Howell (Norfolk, North)

Why has the right hon. Gentleman decided not to make all benefits taxable?

Mr. Healey

With great respect, I have just spent a few minutes saying exactly why not. The reason is that I do not believe it would be right to take action on fringe benefits other than the two that I have mentioned, except in the context of a wide-ranging form of taxation including some revision of tax rates and perhaps the reduction of some tax rates.

Mr. Ralph Howell

I was talking about unemployment benefit. Why is unemployment benefit still exempt from taxation?

Mr. Healey

Because I do not think it would be fair to tax it. That is the simple answer. I think that the hon. Gentleman probably knows that, although we may disagree about it. If he wants to discuss the matter further he can no doubt raise it in Committee.

Mr. J. Enoch Powell (Down, South)

Can he?

Mr. Healey

The right hon. and learned Member for Surrey, East (Sir G. Howe) was widely reported in Monday's newspapers as promising to fight, on behalf of the self-employed, the new provisions in Clauses 41 and 42. I must confess that I was a little baffled by some of the reports of the right hon. and learned Gentleman's speech which I read. With all due respect, I should have thought that Clause 41 was a rather harmless little clause to have attracted the right hon. and learned Gentleman's wrath. The present rules provide that, in certain circumstances, tax should be paid on dates ranging from one day to one month or 30 days following the date of the assessment. Clause 41 extends to all these cases a standard period of a full 30 days, beginning with the date of issue of the notice of assessment. This is of benefit to those concerned and not a punishment. I cannot understand how the right hon. and learned Gentleman can interpret this as an attack on the self-employed. No doubt he will explain the nature of his thinking when he addresses the House.

Clause 42 is more substantial. The clause deals with a taxpayer's liability to pay tax on account pending the determination of his appeal by the general or special commissioners. It has been prepared following detailed discussion with a wide range of representative bodies, in which it met with general support. I think that the House would like to know that the consultations have included, in particular, the CBI, the Associated British Chambers of Commerce, the joint accountancy bodies, the Law Society, the Senate of the Inns of Court and the Bar. The consultations were confidential, as they usually are in such circumstances.

The representative bodies made a number of points on the proposals for charging interest on unpaid tax which have been taken into account in framing the final proposals in the Bill. I can say that none of the bodies concerned expressed the objections which the right hon. and learned Gentleman apparently sees to the proposals in Clause 42 for payment of tax on account pending settlement of an appeal. Indeed, the main representative bodies agreed that the case for reform was unanswerable.

I think that possibly the bodies that were keenest on such reform were the law bodies to which I have referred—namely, the Law Society, the Senate of the Inns of Court and the Bar. The right hon. and learned Gentleman will be able to compose his differences with these professional bodies, of which I dare say he is a member, at a later stage in the summer.

The background to the clause can be easily explained. At present in each year the inspectors make about 2 million assessments of income tax or corporation tax on business and other profits. Of those assessments some 1¼ million, involving perhaps £2,000 million worth of tax, are appealed. In the great majority of cases the appeal is against an assessment which has been estimated because the taxpayer is late in submitting his account. The present legislation allows for payment on account, pending determination of an appeal, of any tax "not in dispute". The concept of "tax in dispute" is, in the last analysis, a voluntary one. A taxpayer can dispute as much or as little of his tax assessment as he thinks fit, and no effective action can be taken to secure payment on account of any tax which he disputes accordingly. The result is that in practice adequate payments of tax on account and the final liability are made in only about a quarter of the cases in which tax assessed exceeds £1,000, and in nearly half the cases no payment is made at all until liability is agreed, which can often be three or four years after the tax is due. The position in similar cases is that adequate payments on account are made in only about one sixth of the cases and no payments at all in nearly three quarters.

The fact that the Revenue gets any substantial payments on account under the present system says much for the co-operation which happily now exists between the Revenue and many important companies and other taxpayers. But experience has demonstrated that the system cannot be made to work in the great majority of cases and allows a significant minority virtually to opt out of the tax system for months or even years at a stretch. The object of the new rules is to introduce a workable and enforceable system which nevertheless safeguards the taxpayer's interests where he has genuine reason to believe that the assessment may be excessive.

As I have said, the impressive list of representative bodies which I have described has supported the Government's action after full and detail consideration.

Mr. Peter Rees (Dover and Deal)

Would the right hon. Gentleman clarify one point? If, on appeal, it is subsequently found that the taxpayer has been overcharged to tax and there is a repayment of tax by the Revenue to the taxpayer, will the Revenue repay the tax with interest?

Mr. Healey

I think that the hon. and learned Gentleman will know that a clause in the Bill introduces interest on repayment of tax. This is a novelty introduced by the present Government which I am sure he will welcome. I described it in introducing the Budget.

What I was saying brings me to the parallel provisions in Clause 43, which deal with the charge of interest on tax left unpaid after its proper date—the complement of the point which the hon. and learned Member has just raised. Under the present rules, this interest charge is subject to three conditions which make it largely ineffective in delayed cases. First, if the assessment is appealed, interest does not start to run until the appeal is determined. Second, if the liability under the assessment is less than £1,000, the present rules exempt the tax from any interest charge, which is thus rendered ineffective in some 80 per cent. of the cases in which payment of tax is now seriously delayed. Finally, if the tax is paid within two months of the date on which it is due—for example, following an appeal determination—the interest chargeable has to be remitted. This last rule is readily exploited by a number of important taxpayers, who delay payment of tax until the last possible moment of this two-months' grace period.

The new provisions are intended broadly to neutralise the advantage which a taxpayer may secure under the present system simply by delaying submission of his return and accounts, appealing against the estimated assessment which the inspector is forced to make accordingly, and holding up payment of tax until that appeal can be determined. I think it is reasonable that, if the law provides for tax for a particular year to be paid on a specified date, any tax which is paid after that date should be subject to an interest charge which will provide a reasonable commercial recompense to the Exchequer for the delay. In other words, the taxpayer who uses the appeal machinery to delay payment of tax should not profit thereby, compared with a man who settles his tax bill promptly and, above all, compared to the vast majority of British people whose tax is deducted at source under pay-as-you-earn.

However, this is too much of a departure from the present system to be taken at one stride. I referred in my Budget speech to representations that I had received about … the pressures under which many businesses and accountants are working at the present time and the problems that would arise if necessary changes attempted too much too quickly."—[Official Report,15th April 1975; Vol. 890, c. 314.] The present clause represents only a partial solution to the problem of interest on unpaid tax, and it is hoped that an opportunity will arise in due course to carry the solution forward. Further details of these new measures were explained in a Press notice which the Board of Inland Revenue issued on 30th April. The board has also informed me that it is arranging further consultations with the appropriate representative bodies about the administrative implications of the new procedures proposed in this part of the Bill.

I turn now to Clause 49 and its associated Schedule 9, which provide for relief where there has been an increase in the value of trading stock and work in progress. In my Budget last November I broke entirely new ground when I introduced a tax relief for companies struggling with a liquidity problem caused by the rapid increase in the cost of replacing their stocks. With this clause and schedule I have kept in full the promise I then gave that the relief would be continued this year, and that it would be extended to cover all businesses.

Last November's interim relief had to be restricted to the larger companies. This was because, for practical reasons, it was literally impossible for the Inland Revenue to re-open the millions of assessments of small companies and unincorporated businesses. But this time everyone is included, and those businesses which did not qualify for relief in November will now get relief covering two years to bring them into line with the larger companies. Because these smaller businesses have had to wait to get their relief, they are being provided with a generous bonus. I hope that will be noted by those on the other side of the House who constantly allege that the Government are unsympathetic towards small businesses.

The next eight clauses, 50 to 57, all deal with capital gains. In the main they fall into two groups—first, relieving provisions designed to help working farmers and those running other small and medium-sized businesses, and, second, measures to block avoidance. These were the only major changes which I considered deserved priority this year pending the review of the incidence of the tax which I promised in my Budget speech, and to which I referred earlier today.

I turn now to the action I am proposing to take against the "lump", the provisions for which are contained in Clauses 36 and 60 to 63 and in Schedules 10 and 11. This system of self-employment has been used in many parts of the construction industry as a means of evading tax, national insurance and other statutory responsibilities. A scheme to try to deal with it, introduced by the previous Government in 1971, has proved too feeble. Evasion has continued, and it has become, I think the House will agree, a national scandal.

I have decided to deal with these abuses, by a thorough re-organisation of the existing 1971 scheme. The TUC his been urging the Government to go further; it wishes to see the "lump" abolished. I understand its position entirely. That is something for the longer term on which my right hon. Friend the Minister for Planning and Local Government will be introducing further measures as soon as possible. But something needs to be done at once to stop the loss of tax and national insurance. It is intolerable that employees paying their proper PAYE should have working next to them, and often doing virtually the same work, persons who use self-employment as a means of avoiding their financial obligations to the community.

The measures which we are proposing to take are partly legislative and partly administrative. My aim is that, once the new measures come in, the only persons who will be excused deduction of tax at source will be those—whether they be individuals or companies—who can satisfy the Inland Revenue beyond reasonable doubt that they will meet their proper tax and national insurance bills in full at the end of the year. This is a privilege which in future will have to be clearly earned. A subcontractor will be required to provide evidence not only of a record of tax compliance in this country extending back for at least three years but also of a proper business organisation which includes such things as adequate records, a bank account and appropriate stock and premises.

The evaders and itinerants on the "lump" will not be able to meet these new tough conditions. They will then either have to choose to become employed, and pay PAYE, or, if they insist on remaining self-employed, they will have to suffer deduction of tax at source at 35 per cent. For anyone who tries fraudulently to obtain a subcontractor's tax certificate, or who misuses one, the maximum fines are increased tenfold to £5,000.

The new system will be fully in operation next year. In the meantime, the Inland Revenue will be re-testing all those who presently hold certificates, and anyone who defaulted in the past, or whose tax affairs are not in order, will not receive a new certificate. At the same time, the Revenue will continue to pursue and prosecute those who try to defraud the Exchequer.

Many of the measures embodied in this Finance Bill are ones which I would have preferred to avoid—above all at a time when unemployment is rising, though still below the level in many other countries. However, I think the country realises that I had no alternative. It just had to be done. So long as inflation in Britain looks like rising at nearly twice the rate of that in many other industrial countries, unemployment is bound to rise and the Government will be prevented by hard economic facts from taking action to reduce it.

In a democratic country the Government cannot determine by their own decisions alone how the economy will operate. If too many people insist on obtaining increases in money incomes far beyond the increase in the cost of living and far beyond what can be justified by increases in productivity, the Chancellor of the Exchequer, whoever he is and from whatever party, will be compelled to keep the economy in balance by raising taxes and cutting public expenditure. To the extent that people try to recover the increases in taxation by yet more excessive increases in incomes, the Government will be increasingly forced to make further cuts in public expenditure as the only way of keeping the ship of State afloat.

Worse still, the sacrifices are bound to fall in part upon those who have no responsibility for the situation that made them necessary; namely, on the majority of working people who settled within the voluntary guidelines laid down by the TUC, and upon those whom public expenditure is designed to help. As I said the other day, I know it is unfair that those who got the crumbs should have to pay the bill for those who grabbed the plums. I have done my best in this Finance Bill, and in the other measures I announced in the Budget speech, to protect those who are least able to protect themselves. I have done my best, too, to protect—indeed, to stimulate—that capacity for economic growth on which the long-term solutions of our problems must depend. But I frankly admit that in large part this Budget is simply a necessary and inevitable reaction to the inability of our society as a whole to match the needs of the moment.

I believe that the great majority of the British people are coming to realise that there is a better way. If this Budget does something to increase public understanding of the nature of the choice ahead, the prospects for the people and Government alike will be very different.

Mr. Peter Tapsell (Horncastle)

On a point of order, Mr. Deputy Speaker. It will be within the recollection of the House that the Leader of the House. When answering business questions, and in reply to a question from my hon. Friend the Member for Oswestry (Mr. Biffen), after consultation with the right hon. Gentleman the Chancellor, who was sitting next to him, gave a categorical assurance that the Chancellor would deal with the sterling exchange rates during his speech. That has not been done.

Mr. Deputy Speaker (Mr. George Thomas)

The content of the Chancellor's speech is no concern of the Chair.

Mr. Healey

Before I sit down I should like to refer to the hon. Gentleman's remarks. In the first place my right hon. Friend gave no assurance that I would deal with that matter in my speech. On the contrary, he pointed out that in answer to a Question last week by the hon. Member for Oswestry (Mr. Biffen) who raised the matter, I made a statement of the Government's position, and that statement still stands. But if the hon. Gentleman wishes me to repeat it I shall do so. I said: I do not want to see a further depreciation of sterling. As I indicated in my Budget speech, a continuing downward drift in our exchange rate would further increase pressure on both domestic costs and prices. Unless and until we bring down the rate of inflation in the United Kingdom to that of our main trading partners, there will obviously continue to be a risk of strongly adverse market pressure on the rate."—[Official Report, 1st May 1975; Vol. 891, c. 715.]

4.55 p.m.

Sir Geoffrey Howe (Surrey, East)

The Bill is designed to implement one half of the equation unveiled in the Chancellor's Budget Statement only three weeks ago. At that time I told the House that in my view the Chancellor's diagnosis of our problems was substantially correct, identifying—what should by now be common ground within the House—the extremely grave situation which called for action that, on any view of the matter, must be far-reaching, fundamental, urgent and sustained.

Since the time of the Chancellor's Budget Statement the value of the pound has continued to move downwards, as the right hon. Gentleman has just said. In the Budget debate nearly all speakers, on both sides of the House, expressed with striking unanimity their conviction that, for all the gravity of the Chancellor's diagnosis, he had not merely taken action that was misdirected but had not acted on the other side of the equation as firmly, swiftly and fundamentally as the situation required.

I shall say something about the taxation proposals in the Bill, but they will receive more detailed consideration during the three-day debate on the Floor of the House.

I pause for a moment on the elements of the problem which by now the House should be very familiar with; namely, the rate of domestic price inflation, soaring unemployment, our growing international indebtedness and, perhaps above all, the extent to which the public sector borrowing requirement is, in the view of many observers, far too large. Many people would say that it is grotesquely large. Each of those elements appears, if anything, to be worse than it appeared three weeks ago. It is universally expected that the Chancellor will have to take further action very swiftly.

Perhaps no Budget has been more rapidly overtaken by the progress of events than this one. Unemployment figures of almost 900,000 have been announced for Great Britain. If one analyses the underlying factors of infla- tion, one finds, taking into account the extent to which price control is holding down part of it at the expense of investment and the extent to which subsidies are concealing part of it, that it is probably already running at 25 per cent. Indeed, on the Chancellor's quarterly arithmetic it is probably as much as 40 per cent. per annum.

The most disturbing feature is the growth of the public sector borrowing requirement. The Chancellor will have seen Mr. Peter Jay's analysis on the day following the Budget showing how its growth from £2¾ billion at last year's Budget Statement to the present forecast of £9 billion contained two elements. These are that less than £l billion can be attributed to deliberate policy changes and something like £6 billion to that which Mr. Jay identified as "creep".

The Chancellor explained some of this in his Budget Statement. It is a consequence of the impact of inflation and the impact of the relative price effect on Government spending. None of us can fail to be aware of how far that showed the public sector borrowing requirement to be dangerously near to getting out of control. It shows what little faith one can place in the proposition, on which the Chancellor relies, that it will be down next year by about £1 billion because of the cuts designed to take effect in that year. On recent form, a figure of that kind is within the margin of forecasting error of the public sector borrowing requirement almost from quarter to quarter.

I do not share the Chancellor's confidence that we can look for a growth in the tax yield to help bridge that gap because of an export-led upturn in the economy. If anything, indicators from both the United States and Germany since the Budget Statement give less foundation for looking forward to that.

Mr. Healey

I do not think that the right hon. and learned Gentleman would wish to mislead the House. Possibly he misunderstood. The fall of £1 billion in the public sector borrowing requirement is envisaged for the current year as a result of the steps taken. We expect a fall of £3 billion next year, when we expect to see an upturn in world trade exercising a major effect on output, employment and the balance of payments.

Sir G. Howe

I did not wish to mislead the House or to misrepresent the position. I agree that the figure of £1 billion relates to this year, and that the Chancellor looks forward to a reduction next year of £3 billion, on a hitherto unstated, assumed figure. What I am questioning, in the light of the way in which conditions are developing, is how far we can look forward to the export-led pattern of events on which the right hon. Gentleman relies to a significant extent.

In those circumstances, more firm action is essential. I concede that it is far easier to state the nature of the action than to follow it through from month to month and from year to year. But action is necessary to take account not only of the adverse movement of the terms of trade in the past two years, and of the need to free resources for export and investment, but of the need for an overriding determination to eliminate inflation and its causes. I do not know that the Chancellor has ever yet made sufficiently explicit that this cannot be achieved in a way compatible with the maintenance of real living standards. It must be accompanied by a reduction of real living standards, distributed in one way or another throughout the community.

Let us be absolutely clear about the central element, on which it should be understood there is now widespread agreement in the House, from South Down to South Battersea.

Mr. Healey

That is not very wide

Sir G. Howe

In this context it is wide enough. Sometimes one gets to Battersea by way of Birkenhead.

Nobody wishes to see any increase in unemployment that can be sensibly avoided, least of all—and this should be understood, and not misrepresented afterwards—for its own sake. Nor does anyone see unemployment as a means of conquering inflation, but, as the Chancellor's policy recognises, a rise in unemployment is inevitable as a concomitant of getting inflation under control. The pattern depends on the factors to which the right hon. Gentleman referred. What is equally clear is that the worse the degree of inflation, the higher will be the eventual unemployment when it is tackled. The longer the attack on inflation is delayed, the higher the unemployment will eventually be.

Those are the facts underlying the Chancellor's position. It does not help the debate outside the House for anyone to seek to misrepresent them. They are the reasons why we criticise the Chancellor for the lack of urgency in his attack upon inflation, and still more for the extent to which he has presided over the growth of the factors which have contributed to inflation during the past 13 months.

The final and indispensable element in policy that must be followed is a far more decisive onslaught on the size of the public sector borrowing requirement and the elements in it that will, unless they are firmly checked, cause it to grow still further. Even if the Chancellor's forecast about that is correct, one must ask what it could mean for the money supply, the other key factor in attacking inflation. If that is to continue to grow only at a modest rate the authorities will have to sell massive quantities of Government stock. Particularly if the balance of payments improves, one must have doubts as to how far that will be possible if interest rates continue to rise. If that is how it should turn out, the Government will be able to finance their borrowing requirement only by imposing still higher taxes, which I believe are already intolerable, or printing a great deal more money, which would be the key to the next round of inflation.

That underlines the urgency of the need to press ahead with an onslaught on the present size of the borrowing requirement. It cannot be stated too clearly that a £9 billion planned deficit amounts to £3 per individual per week. A borrowing requirement on that scale cannot and must not be allowed to continue. To put it another way, the gap between expenditure and revenue could be bridged either by cutting expenditure by about a quarter or by raising taxes by about a third. That is a massive gap with which to face the future. That imbalance cannot go on. Either taxes go up, or public spending comes down.

As the Chancellor has not done anything like enough to prevent the growth of public spending, he has been obliged to take the first course. That is why in our responsible judgment of the present situation—because we recognise the equation with which the Chancellor is confronted—we did not vote against the Budget as a whole, and we shall not vote against the Bill, although we shall challenge the way in which the additional taxes have been levied.

I have no doubt that we are at about the limit of the nation's taxable capacity. The percentage of national income being taken in tax revenue and national insurance contributions is now higher than it was even at the end of the war. This restricts the Chancellor's room for manœuvre even more.

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

Will the right hon. and learned Gentleman say by how much he thinks we should cut the public sector borrowing requirement this year, and how?

Sir G. Howe

I shall come to that shortly. The Government keep asking us that question. A Government faced with a borrowing requirement of the present size should be asking themselves "Is there any area of public spending that we cannot afford to cut?" I could give plenty of illustrations from their own programme. They are not in a position to go on making challenges of that kind. They are entirely without thoughts themselves.

Against the background that I have described, I wish to say something about the taxation proposals. We welcome some of them, such as the extension of stock relief in Clause 49 and the age allowance proposals in Clause 29.

We are interested in the absence, still, of any explanation of Clauses 8 to 16, concerning the conversion of customs duty to excise duty. It appears that the only reason for the changes set out in these clauses, changes with which I do not quarrel, is to comply with the provisions of the Treaty of Accession to the European Economic Community. The Chancellor has said that he has never taken a bet in the House, save perhaps on only one occasion, but it looks as though the entire legitimacy and future of those nine clauses is being staked upon the outcome of the referendum. They contain nothing exceptionable, but conveniently comply with the provisions of the treaty that must he fulfilled by the end of next year.

There are some pettinesses in the Bill which we deplore. For example, in Clause 31 there is the attack on stock dividends, which characteristically stems from the Government's willingness to throw out the legitimate baby of allowing companies to increase their cash reserves in that way with the particular point that the Chancellor wishes to attack.

We deplore the discriminatory attack in Clause 32 on provisions for medical insurance. We contrast it with the proposal in Clause 48 to extend the tax relief for trade union provident activities. If saving for provident benefits is good, as it no doubt is, what is the justification for this selective attack this year, ahead of the general review of fringe benefits, upon people who are able to contribute in this way towards the cost of their own health insurance? It is a mean piece of discrimination, presumably included to satisfy the vindictiveness of the Secretary of State for Social Services. It is a Budget bone for the Chancellor's right hon. Friend.

More generally, one must regret the overall impact and nature of the tax increases. They are related to the social contract, about which I shall have something to say in a moment. Those increases, particularly the increases in direct taxation, bear unjustly not just on those who are industrially strong but on those who are individually weak, those who are in no unionised organisation, who have suffered and are suffering a great deal as a consequence of the inflation which is continuing, on the Chancellor's analysis, because of the extent to which the social contract is not being observed. This is an unjust and unattractive element in that part of the Budget proposal. There must be a realisation that this kind of passion for egalitarianism—by allowing the strong to grab a substantial share by unionisation and yet bearing down heavily by imposing taxes on the weak—is not something with which society can continue.

The Chancellor of the Duchy of Lancaster said in an article in the Evening Standardin June last year: The poor and disadvantaged can only be helped if we provide conditions under which the middle classes can themselves advance, albeit more modestly. We regard that factor as important.

The continuing inequity in the tax increases is not tolerable over any length of time. This is why we shall be pressing the Chancellor in later stages of our proceedings to make a substantial change and to improve the position of the self-employed. I refer to the proposal that they should be entitled to offset against income tax liability a substantial part of the national insurance contribution increase from 5 per cent. to 8 per cent. The proposal will commend itself to some hon. Members on the Government Benches. It is particularly hard that the self-employed should not be allowed to set any part of the increase against tax, although the employer is entitled to set his contributions against tax liability. We shall be tabling amendments to that effect and pressing them very strongly. It is time that that kind of change was made in the law, and, indeed, that other changes were made by the Government.

The Chancellor anticipated that we would criticise his decision to keep the multi-rate value added tax. He scarcely attempted to defend the frontier which he has chosen between lower and higher rates. The more one examines the matter, the more I believe that the concept is damaging and unnecessary. Equally I do not think the Chancellor was right to increase the vehicle excise duty at the present time. I understand why he chose that course rather than to increase the duty on petrol, but the case he made against raising petrol tax —namely, a substantial increase in transport costs and the burden imposed on the retired who do small mileages—is also a substantial case against raising the vehicle excise duty.

The point which we regard as important is that if the Chancellor had not twice changed the rate of VAT this year, if he had not reduced it from 10 to 8 per cent., he would at this stage in the proceedings not have found it necessary to impose either increase. To have kept the rate at 10 per cent. would have been more than sufficient to offset the cost of vehicle excise duty and the cost of introducing a two-tier rate. We shall be challenging the Government on the different aspects of the two-tier rate because we believe strongly in the over-whelming advantage of a simple single rate of VAT. We shall want to do everything possible to restore the simplicity of the tax system, although how far and fast we are able to move in that direction when we return to office depends on what the Labour Government do in the meantime.

Mr. Henley

It depends on when there is a General Election.

Sir G. Howe

I meant "when and if" there is an election. Such a change would do much to restore sanity to the system. It has become a deception on the part of the Chancellor to believe that he can distinguish between essential and nonessential expenditure. It is manifestly iniquitous to single out for particular treatment sports such as flying, or gliding, or sailing. Sailing is not a sport of a rich minority but is enjoyed by 3 million people, the majority of whom are wage-earners and who regard the sport as their principle recreation. How is it that the Government attack some sports and not others? What will be the impact of the proposal on the structure of the industry? The Chancellor must be warned that of the 30,000 employees in the industry, 20 per cent. may well face redundancy as a result of this change—often in places, as the hon. Member for Kingston upon Hull, Central (Mr. McNamara) pointed out, where unemployment is already high.

The Chancellor has acknowledged the impact of the tax on television rentals, and this becomes much more serious when the rate is shifted from a basic flat rate to a 25 per cent. rate.

There are many other nonsenses which are inescapable. How is it sensible to propose to tax repair services carried out on radios, electric fires or television sets and, in effect, to introduce a tax on safety? How much fraud is likely to be provoked by the temptation of those who come to undertake a domestic repair to bill the work not as a television repair but as a repair to a cooker? How much more concealed pseudo "lump" activities will be developed in that way?

What sense is it to exempt gas rings from the impact of the higher rate and yet to impose a tax on electric kettles? How is it intended to tax electrical components designed for radio sets if that equipment is intended for use not in radio sets but in quite different equipment perhaps designed for export? These are principal areas of the tax proposals which we shall wish to attack.

I turn to what we believe the Chancellor should have done to check more effectively the way in which inflation is storming ahead in our economy. He must set out—and will have to set out sooner rather than later—more immediate and effective action to control and reduce the size of the borrowing requirement. He can do that by bringing forward into this year at least a part of the cuts projected for next year—£1,100 million in next year's price terms. He can question every element of planned growth in the current year's spending in terms of the existing programme. I refer to the £1,400 million in total which is being spent on food subsidies and on increases in the council house rent subsidies.

The Chancellor is fond of asserting that the House has never been told what our proposals are. I wish to refer him to a passage in my speech on Wednesday 16th April, set out at column 454, where I set out the Government's responsibility for the huge prospective growth in indiscriminate housing subsidies and for the introduction of food subsidies—subsidies which, after further increases, will be phased out next year. To introduce further complication will only add to the problem. The Secretary of State for the Environment spoke on Tuesday of the necessity to reduce the subsidy element in council house rents. The extent to which the problem has been built up in one year is the extent to which the Government must cope with an increase in the following year.

There is also a huge expansion in the programme of nationalisation—for example, in the establishment of irrelevant agencies such as the National Enterprise Board. That is another area which the Chancellor should examine. He should also be looking more carefully at the cash control of public sector budgets. I do not imply abandonment of real resource planning, but it is vital that such planning should determine the scale of expenditure. It is interesting to find the Chancellor declining to give the percentage tax "take" by reference to real incomes.

Mr. Healey

I referred to these matters the other day. In regard to the reference to subsidies on council houses, does the right hon. and learned Gentleman endorse the views of his right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) who claimed that this year we have a borrowing requirement of £1,300 million? Does the right hon. and learned Gentleman believe that we should cut the PSBR by £4,000 million rather than by £1,000 million this year? Is he claiming that cuts in council house subsidies and food subsidies would bring about savings on that scale? Will he give some idea of how he would find in one year a sum of £4,000 million? Last night he and his colleagues voted against one of the cuts.

Sir G. Howe

The Chancellor must stop trying to get away with it by making statements of that kind. He said this afternoon that it was hypocritical for us to go on pressing this case. He said that we had put forward no suggestions in that direction. He knows that that is quite untrue. I made specific suggestions in the paragraph to which I referred. There is an increase of £1,400 million in food subsidies and council housing subsidies this year. There are the Chancellor's planned reductions of £1,100 million next year. With that borrowing requirement the Chancellor is very close to the foot of Chancery Lane, if not to the entrance to Carey Street, in international terms. He will be obliged to face this question for himself more swiftly than any of us would like, because of the pressure, unless he is prepared to do something now.

Mr. Nott

Wait for the referendum result. Wait for 6th June.

Sir G. Howe

My hon. Friend is interrupting with his characteristic enthusiasm. His forecast is more confident than mine. I fancy that on 6th June we shall count the votes in the referendum, but that soon after that the Chancellor will be back.

I ask the Chancellor to consider the programme which he is allowing his colleagues to bring before the House day by day. I wish to look at what happened from the end of the week before last. On Thursday of that week proposals were brought forward for expenditure of up to £700 million without sufficient strings in relation to the British Leyland enterprise. It was revealed to a committee at the beginning of last week that it is not fully taken into account in the public sector borrowing requirement or expenditure programmes.

On Monday of last week the Employment Protection Bill was introduced. That involves the employment of 700 more civil servants and will impose a cost of £100 million on industry. That is an area of expenditure which we could do without. On Tuesday last week the Community Land Bill was introduced. That involves the addition of 14,000 extra administrators, £60 million a year, and will cost, in its early stages, £600 million from the public purse once it comes into effect. We could do without that piece of legislation.

On Wednesday the Petroleum and Submarine Pipe-lines Bill was introduced. Apart from the necessary additional civil servants, that creates a borrowing requirement of up to £900 million, which could have been raised readily from private industry. That measure will divert up to £900 million per year into the oil revenue account from the Exchequer's account. We could have done without that legislation. On Thursday, contrary to the expectation of the country, the Secretary of State for Industry produced proposals for the nationalisation of the aircraft and shipbuilding industries costing, in relation to British Aerospace up to £250 million and in relation to shipbuilders un to £300 million. The chronicle continues.

The Chancellor had the effrontery to mention in his Budget speech the Rake's Progress of the past 12 months, over which he has been presiding. However, during the past fortnight there has been a rush of Gadarene Rakes, with the entire administration taking us steadily in the wrong direction.

Mr. McNamara

The right hon. and learned Gentleman has forgotten about the £60 million for Harland and Wolff. Could we do without that expenditure?

Sir G. Howe

In order to embarrass the Government it is not necessary to provide a horrendous list which rejects every item.

The Chancellor said that the Opposition had voted against the defence expenditure cuts being imposed by the Government. The Opposition believe that, although expenditure must be pruned, it still remains the first and foremost duty of the Government to see to the defence of the people of this country. That does not diminish the necessity for doing without the extraordinary items, the details of which I am still going through.

On Friday the Statutory Corporations (Financial Provisions) Bill was introduced. That is a curiously shy and modest measure. It is proposed to increase the borrowing requirement of the British Steel Corporation by an extra £750 million. The Secretary of State for Industry will soon see that Sir Monty Finniston works his way through that. It is proposed to raise the borrowing requirements of the nationalised bus company by £70 million and to provide, in relation to last year, £650 million for compensation for nationalised industry price increases. That figure is larger than that which was foreshadowed in the Budget Statement three weeks ago. It contains a blank cheque in relation to 1975–76.

The total for 1975–76 will depend, and I quote from the Explanatory Memorandum, on changes in the industries' costs, prices and revenues during the year. I add to that the irresolution of the Government and the activities of the Director of the International Monetary Fund.

Those are the areas in which the Chancellor should be looking for cuts. That is the immensely expensive diet of Socialism. Indeed, there was more this week. On Monday the Secretary of State for Social Services proposed to cast away £40 million per year by proceeding with the elimination of pay beds. Yesterday the Secretary of State for the Environment diffidently proposed to make additional sums available for the reintroduction of the municipalisation programme.

It is high time that the Chancellor stopped asking members of the Opposition where they would set about cutting expenditure. It is traditionally the role of the Chancellor of the Exchequer to look after the spending habits and proclivities of his Government colleagues. The items that I have quoted from the programme of the past two and a half weeks demonstrate how far the Chancellor has failed in that respect. What is more important is that if the executive fails to discharge the duty of controlling public expenditure, in the last resort that becomes an essential function of the House.

Recently the United States Congress reasserted control over its executive. If the Chancellor believes that this legislature is now in a mood for further increases in public expenditure, he will believe anything.

Mr. Healey

The United States Congress has been increasing public expenditure and cutting taxation.

Sir G. Howe

The United States Congress has the advantage of being able to do that because its administration took action more effectively and more quickly to get the underlying rate of inflation under control. Let the Chancellor content himself with facing this legislature. There is enough for him to cope with here.

The time has come for every Member of Parliament to reconsider his duty in respect of the control of public spending. On whatever side of the House he sits, he should be ready to exercise his vote as well as his voice and to restrain the habits of this spendthrift administration. It is important that we should inject a much more effective limitation on the growth of public sector pay settlements. My right hon. Friend the Member for Worcester (Mr. Walker) referred in his intervention to a number of public sector pay settlements going ahead in recent months. The situation has now been reached where pay settlements financed by the Chancellor of the Exchequer at the expense of the revenue are setting a norm of 30 per cent. and are setting aside the social contract. In those circumstances it is impossible for the private sector to pay less than the public sector.

If the private sector is to retain labour in the face of a voraciously expanding public sector, how is it to compete with the bids being made by the many State organisations to be set up? We know that a central London post office typist 18 years old, with 40 words a minute, is paid £2,043 a year. I was told by the Post Office some weeks ago that last December a 16-year-old typist was paid £1,960. It is no wonder that we have read reports of a meeting between representatives of all parties in local government and members of the Government which was attended by the Secretary of State for Employment, the Minister for Planning and Local Government and the Minister of State, Treasury at the end of March. It was pointed out that local government was gravely anxious at the action taken by the Government on its pay bills. Those representatives asked how they could be expected to hold the line when almost every other area of the public service had departed from it. That is the moment of truth. The Minister of State is reported as having told the meeting that the private sector must apply its own discipline in face of demands for higher pay. He is reported to have commented that the private sector needs to maintain export price competitiveness and profitability, but said that those considerations did not apply to the public sector. That is why we ask for much firmer action in that respect.

The Chancellor deserves some credit for the frequency with which he spells out the lesson that we cannot finance indefinite expansion. Even he could not do much more in that direction. However, his words need to have the support of action and determination by the entire Government. This is the area where theoretical and vital considerations about the limits of the money supply availability are not by themselves enough. If the Government go on conceding excessive pay increases, either the borrowing requirement will go up, and money will be printed, and control will cease altogether, or taxes will be raised yet again beyond the point of toleration to cripple the profitability of private industry. That is why, in present circumstances, the whole House must agree with my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) that no one can be absolute on any subject such as this.

Equally, everyone must agree with what the right hon. Member for Down, South (Mr. Powell) said about the importance of words as well as of action. Words now need to be spelt out and expounded which make clear to the country the determination of a united House of Commons not to tolerate any further growth in public spending and not to tolerate, in that way or in any other, any further addition to the money supply. The consequences of this reality—this discipline which will eventually be imposed from outside this country, if not by cataclysm—must be fully accepted and expounded by the entire Government.

The Chancellor of the Exchequer needs not only criticism but, where it is just, support from this House. Above all, he needs the unqualified and determined support of every one of his colleagues in Government, including the Secretary of State for Industry. If that is not forthcoming, either that Secretary of State or the entire Government will have to make way for another prepared to undertake that responsibility.

It is in this context that we must attach importance to the social contract. Leave aside the fact that the social contract is in substance the prospectus of Socialism on which this Government were elected and which the great majority of people reject. The social contract is also of fundamental importance as one of the main weapons in the debate on the economic policy of the Chancellor of the Exchequer. It is cited in support of almost every claim for higher pay, however much that may be in conflict with the right hon. Gentleman's central economic, fiscal and monetary strategy.

The social contract contains an argument in it which can be prayed in aid of almost every claim that is advanced. Moreover, the central thesis that it allows for pay increases in line with the cost of living is ambiguous and now in conflict with the declaration by the Chancellor of the Exchequer that rises in taxation should not be compensated for by higher pay. Even if the document is construed properly, the social contract offers wage bargainers the prospect of compensation beyond what the nation can afford.

Many Government supporters accept that the contract, for all practical purposes, is dead. The difficulty is that its memory lingers on. We find it being cited before the railway pay tribunal by Mr. Sidney Weighell in support of the proposition that his union does not accept that inability to pay is a valid reason for not having decent pay rates. He points out that union after union responsible for formulating the social contract has been responsible for fighting right the way through it.

The social contract not only does no good; it is now doing positive harm. It should not just be recognised as dead. It should be buried. The Chancellor of the Exchequer and the Government must set out to replace it with an understanding of the realities and the substance of the right hon. Gentleman's often very clear enunciation of the economic realities. There is and will be very little money available, come what may. That uncom- fortable truth has to be driven home by a clear exposition of the alternatives by the entire Government. Higher pay in commercial undertakings like the nationalised industries means higher prices. It also means fewer jobs. It means alternatively that higher pay is available only if social programmes are cut.

I am the last person to pretend that this is an easy prescription. No one who has held Cabinet office in the past 10 years would be so foolish as to suggest that. There is no easy prescription. It will be desperately hard to secure acceptance and understanding of the very uncomfortable remedies which are necessary. It will be even harder to do so in a way compatible with the continued authority of parliamentary government. I use the word "authority" not in any sense of domination—far from it. But it is here in Parliament that the nation has vested the necessary function of a civilised society, which is the reconcilation of order and freedom.

The House of Commons was described centuries ago as the grand inquest of the nation. That choice of the word "inquest" has an eerie and unhappy association at present. The author of the phrase did not have in mind what the word suggests today, which is the kind of inquest that coroners conduct. Pray Heaven that it does not come to that, though it is coming too close for comfort. The author had in mind the role of Parliament as the place in which representatives of the people hammer out policies which may not be agreed between every Member but which every Member is prepared to support.

That is the task to which this Parliament, for the sake of its successors and for the sake of our people, must now bend its energies. Unless that happens, we are very near the end of the line. In the face of the common mortal danger that now threatens us all, there are many policies and objectives which we as individuals and as parties must be prepared to forgo. Now is not the time for anyone in this House to be seeking to bring about "irreversible shifts of power" in any direction. Now is the time for devising a programme for the reconstruction of the nation.

If the Chancellor of the Exchequer is not, in the view of any single Members, of whatever party, working successfuly to that end, he is not entitled to be supported. If he is working to that end, he is entitled to the support of every Member of this House.

5.36 p.m.

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

Although my right hon. Friend the Chancellor of the Exchequer made a detailed presentation of his Bill, I am sure that he will acknowledge that a Second Reading debate on a Finance Bill is also used as the vehicle for a broad-ranging debate. It is also the occasion for second thoughts about my right hon. Friend's Budget Statement, and I think that he will also admit that there has rarely, if ever, been a time when those second thoughts have been more sombre than during the past two or three weeks.

On all the main policy objectives of growth, of employment levels, of our balance of payments and of prices, there has been a consensus of economic and business surveys and forecasts of a most depressing kind. British industry faces a year of declining employment and investment prospects, with little hope of any easing in the inflationary situation. This is the picture painted by the latest Financial Timessurvey of business opinion, whose index for expected changes in wages and prices over the next 12 months has risen to unprecedented levels. Although they welcome my right hon. Friend's relief for company liquidity, firms think that not enough was done to tackle the central problems of the rate of inflation and the level of Government spending.

Other economic forecasts say that inflation is likely to accelerate further as a result of the changes in the Budget. The general expectation—and here I have an impression of quite unrelieved gloom—is that inflation will reach a peak in about August or September, when retail prices will be between 25 per cent. and 27 per cent. higher than a year ago. The Economistsuggests that Britain's inflationary storm is now rising to gale force, with gusts up to 40 per cent. It says: This is a road clearly signposted to breakdown in Great Britain's normal way of life. What is equally disturbing is the fact that in recent months other countries have turned off this road. The world slump has sent inflation rates tumbling. In the United States, inflation has been halved. During the three months to March, prices in industrial countries as a whole rose at an annual rate of 9½ per cent., compared with 15 per cent. in the three months to October. The gap between our own inflation and, seemingly, everyone else's is widening at both ends.

This is not the only gap about which my right hon. Friend has to worry. The unemployment gap is widening at present at the rate of about 40,000 a month. The public spending gap, with State spending and lending outstripping tax revenue by £9,000 million a year, or more than 10 per cent. of our GNP, has produced forecasts that it will rise even further to £10,000 million or even £11,000 million. The trade gap, because the value of imports over the last three months has exceeded exports by an annual rate of £2½ billion, is perhaps the most disturbing. Each will have to be narrowed and, desirably, closed.

As I said, the trade gap is perhaps the most important feature. Fortunately, there is some evidence that it has recently narrowed. But Britain's trade cannot survive at one and the same time a world slump and excess domestic inflation.

I submit that two obvious reactions heard on all sides, including among some of my hon. Friends—devaluation or import controls—will make inflation worse. Import controls will mean substituting expensive British goods in many instances for cheaper foreign goods, while devaluation will make some of those foreign goods dearer, not to mention breaches of international agreements and the consequent risk of retaliation. Furthermore, both devices will leave our economy ill-equipped to take advantage of world economic recovery when it comes.

It is therefore supremely important to ensure that our goods are price competitive in the next upswing in world trade. Whether they are or not depends partly on holding down unit labour costs and partly on improving productivity. Neither will be achieved unless we get the facts of our economic situation over to the public and at the same time take account of the importance which working people and, interestingly enough in my experience over recent weeks, people who are no longer working, such as pensioners, attach to wage comparability and income differentials. That is why I am sorry that the Chancellor did not have time in his speech today to tell us about the meeting yesterday of the National Economic Development Council. Yet it is pointless to prepare for future export possibilities if we do not take full advantage of present opportunities.

I was interested in the reference by the right hon. and learned Member for Surrey, East (Sir G. Howe) to the possible effects of the 25 per cent. VAT imposition on the boat industry. I want to take this brief opportunity of endorsing what the right hon. and learned Gentleman said about boating not being the monopoly of the rich. I know not only from my own Navy days, but from the increasing interest of local authorities, especially in Yorkshire, in water recreation, that more and more people right across the community are involved in this industry as a form of recreation and inevitably as a form of employment. Therefore there is a real risk that VAT on boats will seriously damage a £41 million export industry, the total sales of which equal 45 per cent. of the British shipbuilding industry, as well as affecting a considerable highly skilled labour force. I repeat that this imposition will threaten the recreation and competitive sport of 3 million people of all social categories, because boats of all sizes are involved and a greater number of people than can fill the country's football stadiums on any Saturday afternoon.

I shall be writing to the Chancellor about this matter for no other reason than the two that I have given. That is not because I have any involvement in the industry, but because I know that it is an industry with "Morning Cloud" implications in the minds of some people, but which in reality is as broadly based now as most of our sports.

Hitherto, I have assumed the continued tolerance of Britain's foreign creditors. What will they have made of the scramble since the Budget for those other goods soon to be subject to 25 per cent. VAT? Will they not also be alarmed by Britain's present inflationary whirlwind? At its root, as the Chancellor recognised in his Budget Statement, is our uninterrupted post-war habit of paying ourselves more than we have earned in increased output. It was fed, of course, by the progressive overheating of the economy under the last administration and the explosion of world commodity prices, including the quadrupling in the price of oil.

Against that background the Chancellor has recognised his overriding obligation to make inflation the chief target of budgetary policy since he came to office. Essentially, he has employed four weapons: flexible exchange rates, price subsidy and control, pay restraint, and now a move towards budgetary balance.

The first can be discarded in the present conditions of Britain's balance of payments. The second—price subsidy and control—became counter-productive of the last budgetary balance, which may have come too late. The third—pay restraint—is a condition of budgetary balance in any event. Thus, pay restraint is crucial. Yet it is probably now more of a political than an economic issue.

The Prime Minister, as well as the Chancellor, will have to point out even more urgently that the country must start to live within its means instead of relying on an increasingly perilous overseas borrowing—5 per cent. last year; 10 per cent., who knows, this year—which can be turned off or made the object of conditions which will have to be confirmed in letters of intent and turned off or made the subject of conditions perhaps at a times of political danger and, thus, vulnerability. The Government must point out in unmistakeable terms that if anyone tries to recoup the 2¾ per cent., added to living costs by the Budget, for example, the crumbling of our economy, of employment and of living standards will be accelerated.

If the social contract is to survive, either in its wages aspect or in the social benefits which only a sane wages policy can make possible, its guidelines and their interpretation must be approached in an atmosphere of greater realism. The alternative is to price ourselves out of world markets, with obvious consequences. It is the minimum duty, therefore, of all supporters of the Labour Government, or indeed of any Government, to be honest enough to say so, to warn people of the grave dangers that confront them, to testify to the value of sensible and relevant economic policies, and to rally the people to support a Government who have already fulfilled, in an unprecedented fashion, their side of the electoral commitment—the social compact.

5.48 p.m.

Mr. Maurice Macmillan (Farnham)

As this is a Second Reading debate, I want to concentrate on what I believe could have been in the Bill had the Government not been so openly divided on the European issue and only a little less obviously divided on economic and industrial policy.

I want to ask a few questions and to put forward some ideas in the belief: first, that it is not too late for this House to come to its senses and insist on sensible policies in the national interest; second, that this is what most ordinary people, who seem to have a great deal more common sense collectively than we in this House tend to have, are beginning to demand; and, third, that the future of parliamentary democracy may depend on our willingness and ability to respond to the demands which I believe are beginning to be made upon us.

As the hon. Member for Sheffield, Attercliffe (Mr. Duffy) made very clear, the situation has worsened since the Budget, and we all know the problems. There is our great dependence on overseas borrowing, and there are massive loans to Government and local authorities not, alas, matched by a willingness by foreigners to invest long-term in British manufacturing industry. Sterling is the weakest currency in the Western world, sustained only because as yet no one else particularly wants the petrodollars which are being kept in London. This, as the Chancellor himself said, makes the rate very precarious.

We have a massive borrowing requirement which, if anything, is understated at £9,000 million this year with additions being made to public expenditure by the activities of the Secretary of State for Industry. Most of us, certainly on my side of the House, but including a lot of Labour Members, realise that what the Secretary of State for Industry is proposing will not really save jobs. That is a very unreal concept. All he may do is create unemployment in one area by preventing it in another. Anyway, the whole concept of saving jobs in this way is a nonsense.

The period between 1959 and 1973 saw well over 1 million jobs "destroyed", in the Secretary of State's language, but that did not lead to a rise in unemployment or a lack of work for the people concerned because in that same period more jobs were created and employment as a whole went up by 1.2 million. Nor will the social contract save jobs. It has certainly had no effect on wage inflation, and that is a pity. It was perhaps an imaginative concept which most of us would have liked to see succeed, but although commodity prices are now stable wages are beating prices by what in racing terms would be called a distance—10 per cent. or more.

The result of all this is, as the Chancellor said, that unemployment is rising and is likely to reach a level of more than 1 million by the end of the year. Perhaps worse still for our longer-term prospects, there is a great lack of confidence here and among our friends abroad. The gloomy diagnoses which one reads in different journals and publications are not made by our emenies or even, with smug satisfaction, by false friends who are succeeding better than we are. They are made with a deep sense of regret by the best friends of this country who want us to succeed and who feel that their own future is bound up with our longer-term success. There is a lack of confidence and uncertainty for the future and an understandable reluctance to invest in new machinery in manufacturing industry. Who will put money into new equipment to save labour costs if it means employing as many people as before because of insistence on overmanning? Overmanning and low productivity are the biggest threat of all both to full employment in the longer term and to stability of prices.

The United Kingdom has the worst inflation rate in Europe. It is more than 20 per cent. above that of the United States, and it is rising where in other countries it is falling. At one time we used the league table concept. We are sinking down pretty well every league table worth being in. To give one example from that concept, one can say that if Spain is about to be promoted from the Mediterranean division of the standard of living league into the North European division, the United Kingdom is facing relegation from the North European division, with its higher standards, into the lower standards of the Mediterranean division.

Anyone who is being honest with himself will have little doubt about the sort of policies which any Government should be following in these circumstances. The general line is obvious. What is difficult is to know how to reach it, to get acceptance for it and to put it into action. We must have more positive steps to halt inflation and a reconstitution of the currency. Of course, we have to have a balanced Budget and reductions in public expenditure.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) gave some examples of how that could be done. To reduce public expenditure quickly may mean stopping immediately desirable capital projects of investment for the future. That is not an uncommon situation in private industry, where current cash flow difficulties may force a company to forgo the prospect of future profit in order to stay in business. It is not agreeable, but it may be necessary. People will recognise the need when they face the unpleasantness of reductions in public expenditure, whether on capital account in investment for the future or on current account, and the rigours which may come from monetary policy. We have to have policies of this kind.

Hon. Members on all sides of the House must accept that if Govenment intervention is necessary in industry it must come through the market, using market forces rather than distorting them; and there must be, whether some Labour Members like it or not, a greater reliance on the market. That is very much accepted by the trade unions with their devotion to collective bargaining. But it is up to the Government to see that the market on which we rely is a true market and to provide measures against the abuses of monopoly power wherever it may occur.

Most of us would accept that to carry through policies of this type effectively requires greatly improved management of our industry, both nationalised and private, and greater consultation. I think it also requires a reform of company law and of the trade unions' methods of operation. so as to achieve a real and responsible industrial democracy. If we followed these policies and began to restore confidence, we should begin to get the necessary investment because we would be encouraging investors instead of discouraging them. We could once more turn our attention to the greatest problem of all, the creation of wealth, of new wealth, and see that its ownership and benefits were spread more widely throughout out society.

There is very little in the Government's policies or in the Bill which leads to these ends or is geared to meet our problems fully. In present circumstances it is hard to see how such provisions could be made in this Finance Bill. The Chancellor is forced to damage if not destroy entrepreneurs, on whom the whole future of the mixed economy depends, and so depress investment, in order to appease the Left-wing element in his party which has a majority in the Labour Party conference, in the National Executive of the Labour Party and in the General Council of the TUC. It is doubtful whether even half the people that these bodies represent voted for the Labour Party at all in the General Election. Certainly not all of them did.

The Chancellor's scope for action is narrowed further by the pressures on the trade unions from their militant minority. There cannot be anyone in this House who can honestly doubt that the influence of Communists, and those who take even more extreme views, on the trade unions is certainly greater than is warranted by the views of the majority of union members and that these extremist policies do not represent the ideals of most of the unions' membership.

There can be no doubt from the figures at the General Election, let alone any other later evidence, that the extreme Left is not representative of the great mass of opinion in this country. The reverse is very much the case. Yet it was the extreme Left that defeated a previous Labour Government over "In Place of Strife" and their incomes policy. The extreme Left led the opposition to the Industrial Relations Act brought forward by a Tory Government and finally narrowly defeated the Tory Government's income policy.

That policy was not such a failure as it is sometimes made out to be. It contained inflation during the first period of the Conservative Government of 1970 by the policy known as de-escalation. In the second period, when we were forced to move to a statutory policy, despite the fact that world prices and commodity costs were escalating to an unprecedented degree we contained inflation and prevented the hyper-inflation which would otherwise have happened. We obtained the consent of the great mass of work-people including the trade unions right up to the end when even, under the limits of stage 3, 70 per cent. of the union membership settled without trouble, within the limits.

It is the extreme Left which is now preventing effective government by this Labour Government. I contend that this fact, because it is a fact, puts a great responsibility not only on this or any other Government but on Parliament and especially on the House of Commons. It is our responsibility to assert the supremacy of Parliament over all outside powers and interests on behalf of those we represent, all of whom regardless of class, interest or party, it is our duty to serve. We can only fulfil that duty in this House by consent and with the understanding of both sides of the House and the country at large.

There are two points which should be clearly understood. The first is that "soft" Socialism is not working. We are left with the choice of what might be called "hard" Socialism on Marxist lines ending with full State ownership and control in what would be a siege economy. There is the choice between that and a mixed economy in which in normal times there could be constructive arguments between a Social Democrat Labour Party and a Radical Tory Conservative Party, as to how the mixture in the mixed economy should be made up.

The second thing we must understand is that times are not normal. We must at this time of crisis take action so that all who believe, as most in this House do, in a mixed economy in one form or another, in parliamentary democracy and in the law of law, can postpone their argument over details and distribution of wealth in the future and get together to seek agreement on policies for the present—for rescue, reform and the recreation of a prosperous economy. This is what most people want.

The path through life that most people follow in their own way of life is indeed the middle way. Most people are neither very rich nor very poor. Our society is not divided into the great capitalists on the one hand and the lumpen proletariat on the other, whatever some Members of the Labour Party may think. Most of us are wage and salary earners, some large, some small, some with property, some without. Half of us own our own houses. Some quite high earners own little else. There are the small and medium-sized businesses, unquoted companies, farmers, tenants, and owner-occupiers, the self-employed, the shopkeepers. We are a mixed people as well as a mixed economy. We are not divided into two. Most people are happily not so dependent on others as some Labour Members would have us believe. Nor are most people as dependent on the Government as some of them would like to see. Unfortunately most people are not quite so independent, through the spread of real wealth into the hands of individuals, as I would like to see.

The diagnosis and even the remedy may be clear. But can we get acceptance of the necessary harsh policies? To be effective at this stage, I fear that they will be harsh. I think we can indeed get acceptance by bringing in three additional lines of general policy to make harsh measures seen to be just. First, we have to accept some form of incomes policy—voluntary with collective bargaining if possible, perhaps with the norm negotiated by the unions and compliance controlled by the TUC. We could have a voluntary policy supported by what we are called legal back-up provisions. We nearly succeeded in achieving that in the summer of 1972. If necessary we could have a full-scale statutory policy. It is not ideal, I admit, but when one is hanging over a cliff by one's finger tips almost any toe-hold is better than none.

I think we can get the co-operation, if we are imaginative and skilful, of the workpeople whether organised in unions or not. We have to be imaginative. For example, there are in another place Law Lords who sit in the Appeal Committee. I would not mind seeing a bench of union barons to match the bench of bishops—a bench of trade union leaders sitting in the House of Lords during their period of office and perhaps eventually being con- stituted into a sort of industrial committee of the Privy Council.

We have at the same time to accept a reform of company law and industrial democracy. We have to consider whether we can make workers members of the company, not in exactly the same sense but in a parallel sense to the shareholder. We have to see that directors are legally responsible for the employees of a company on behalf of the shareholders in a way which their fiduciary duty to protect the shareholders' interests now sometimes prevents. We have to increase consultation and participation. If it is necessary to enact legal constraints or to make legal definitions, we can and should put similar constraints and conditions on capital and on labour through company law on the one hand and monopoly legislation on the other, since both will in some sense be members of the company. In this way no distinction is made and no special legislation is aimed at one section or another.

There would then be one set of rules binding on both those who, in Europe, are called the social partners in industry, namely those who provide the capital and those who provide the labour. These rules would limit, control and help the behaviour of the social partners in the enterprises in which they work and prevent them, either singly or together, using monopoly power against the interests of those outside. We can add to that an increase in consultation on policy nationally, as my right hon. Friend the Member for Sidcup (Mr. Heath) advocated, through the National Economic Development Corporation, perhaps leading to an idea first put forward by Sir Winston Churchill long ago to set up a Council for Industry.

Thirdly, in our effort to get the harsh policies that the present crisis needs fully acceptable, we need to spread the ownership of wealth more widely, not so much by confiscation but by putting effective ownership into the hands of individuals. New wealth is created by machines and we must see that its benefits go not only to those who look after the machines but to the rest of our society. For a long time I have been concerned with methods which should easily be possible, for helping earners to become owners and for securing a significant investment income for the majority of the people.

Is it too much to hope that some such approach is possible? I have only tried to hint tentatively at how to get this sort of agreement in the House and in the country on policies for the present. It will depend upon the co-operation of the unions, management and entrepreneurs. However, we have that co-operation on a wide scale in the Training Service Agency, in the Employment Service Agency and in the Commission for Safety and Health at Work. It is what one might call tripartite co-operation. Is it too much to extend it to an incomes policy, to consultation and participation and to the creation and spread of new wealth?

The initiative has to come from this House, for this is where the responsibility lies and where I believe there would be a majority in support of ideas on these lines. It is a concept based on the rule of law and on seeing that where there is power there is accountability and responsibility. It is, in a sense, the need for efficiency tempered by compassion.

These ideas are not new. I cannot even claim that they are original. They were not original when I put them forward in a speech about a year ago. They were not even original when they formed the basis of my 1945 election platform. I said then that I wanted to see strong trade unions, not dominated by narrow party political considerations, co-operating with management and with the Government of the day to produce an industrial society which was both fair and efficient. This is what I still want and what, I believe, most people are beginning to demand from this Government and from this House.

The Government's present policies and those contained in the Bill do not provide an answer and are not what people are demanding. However, I hope and believe that those of us who still put our trust in a mixed economy, in freedom under the law and in parliamentary democracy can, through this House, provide it for the people.

6.15 p.m.

Mr. John Pardoe (Cornwall, North)

The right hon. Member for Farnham (Mr. Macmillan) and the hon. Member for Sheffield, Attercliffe (Mr. Duffy) certainly brought to this debate a sense of urgency. It was noticeable that that sense of urgency was lacking from the speeches from the Government Front Bench and from the Opposition Front Bench. Frankly, I find it incredible that, faced as we are with the extremely perilous nature of our economic and political situation, as the right hon. Gentleman has indicated so well, and faced with a Bill which I would have thought the whole Opposition believed to be totally inadequate to the task, there is no reasoned amendment in the name of the Opposition and that the official Opposition will not be dividing against the Second Reading of the Bill.

I make it abundantly clear, for very much the same reasons as those advanced by the right hon. Gentleman, that I and my colleagues will be voting against the Second Reading of the Bill.

The Chancellor's speech certainly lacked urgency. It was a carefully calculated display of unflappability, which may well be necessary in present circumstances. Indeed, I sometimes wonder whether the Chancellor's bluff and cheery character may not be all that stands between us and the disappearance of the pound altogether.

However, the lack of urgency certainly seems to be contagious and is obvious on the Opposition Front Bench. I understand the reason. It is that there is no alternative strategy, although I exempt the right hon. Member for Farnham from that because he has put forward a strategy which is most honourable and which most right hon. and hon. Gentlemen would find perfectly possible to accept. Many of those ideas I and my colleague have advanced in the past, as I am sure the right hon. Gentleman will recognise. I do not claim originality for them either, as he did not.

An attempt was made in the debate on the Budget Statement by the right hon. Member for Leeds, North-East (Sir K. Joseph) to give the alternative strategy. However, we understand from that most respectable political correspondent David Watt, of the Financial Times, that when the right hon. Gentleman advanced similar views at a top-level Conservative meeting he was greeted by the right hon. Member for Chipping Barnet (Mr. Maudling) with the words that he had never heard such rubbish in all his life.

This lack of urgency is entirely misplaced. The economic situation is extremely perilous, as we have already heard from the Government back benches. Inflation is now over 20 per cent. and is gathering pace, although inflation elsewhere is falling. Wage demands have gone quite mad. The pound is sinking, business confidence is at its lowest ebb and Britain's reputation around the world is such that even our friends hardly know whether to laugh or cry. The general opinion, in centres where it matters, seems to be that we are virtually an ungovernable nation.

We have just completed a two-day debate on defence. Such a debate ought at least to recall to our minds the last and tragic occasion when this country failed to face reality. The argument about inflation is daily becoming more and more reminiscent of the argument about rearmament in the 1930s. It was in the debate on the Address on 12th November 1936 that Winston Churchill had this to say about the Government's policy: The Government simply cannot make up their mind, or they cannot get the Prime Minister to make up his mind. So they go on in strange paradox, decided only to be undecided, resolved to be irresolute, adamant for drift, solid for fluidity, all powerful to be impotent. So we go on preparing more months and years—precious, perhaps vital to the greatness of Britain—for the locusts to eat. In his reply to that speech the Prime Minister of the day, Mr. Stanley Baldwin, said this: My position as the leader of a great party was not altogether a comfortable one. I asked myself what chance was there … within the next year or two of that feeling being so changed that the country would give a mandate for rearmament? Supposing I had gone to the country and said that Germany was rearming and that we must rearm, does anybody think that this pacific democracy would have rallied to that cry at that moment?"—[Official Report,12th November 1936; Vol. 317, c. 1107, 1144.] I believe that we must consider the argument over inflation now in very similar terms, because we are urgently in need of economic and political rearmament in the face of the desperate peril of inflation today.

Before dealing with the detailed problem of inflation, however, I wish to deal with two other matters which were mentioned in our reasoned amendment, which appears on the Order Paper but which has not been selected for debate. The Chancellor of the Exchequer has made clear that the Bill proposes several tax changes. It does not propose any new taxes such as the capital transfer tax or the wealth tax, but the 25 per cent. VAT is so massive a change in its impact on selected industries as to be virtually a new tax. My recent experience, in the Standing Committee on the previous Finance Bill, of the introduction of capital transfer tax and in the Select Committee on a Wealth Tax leads me to be convinced that we cannot go on patching the system for ever, as we are now doing.

It is some 25 years since the last Royal Commission on Taxation. I do not hold the view that Royal Commissions are the answer to all difficult problems, but I see no hope of getting a sensible and rational tax policy which hon. Members in all quarters of the House can accept without an overall review of the sort that the Canadians had from the Carter Commission. That is why I urge the Government to set up a Royal Commission on taxation to cover the whole field. It would be wrong to introduce any further changes in the system—I include the wealth tax, although I accept the principle of the wealth tax—until such time as that Commission had reported.

The second point I want to make is also mentioned in our amendment—the indexation of the tax system. The Chancellor made much today and in his Budget speech of figures derived from the Red Book tables to claim that large groups of taxpayers will be paying less tax. He can claim that only if he believes in what is a gross distortion caused by the failure to take account of inflation. If any hon. Member looks at table 17 on page 34 of the Red Book, which deals with the tax liability of married couples with two children not over the age of 11 where the income is all earned, he will find that it is quite easy to do the calculations in his head. It is even easier to do them with the aid of a calculator.

Taking, for instance, the top line of that table, an income of £1,300, one finds that in 1974–75 a married couple with two children under 11 earning that income then would have paid £2.31 in tax. That was 0.2 per cent. of their income—virtually no tax. In 1975–76 we have a different situation, because although in theory and in the Chancellor's terms that couple will pay nothing, we have had 20 per cent. inflation. Therefore, we have to compare the £1,300 income in 1974–75 with £1,300 plus 20 per cent., which is £1,560. In 1975–76 the tax on £1,560 will be £61.95, or 4 per cent. of income. Therefore, the couple receiving £1,300 last year who have done no more than receive a cost-of-living increase will be paying £61.95 in 1975 instead of the £2.31 for last year.

On page 38 of the Red Book the figures are quoted in weekly amounts, perhaps making it slightly more popular. If we take as an example a couple with two children, getting £30 a week, we see that in 1974–75 they paid £88.11 in tax, or 5.6 per cent. of their income. Of course, they will be paying less if they have the same income. But they will not have the same income. They will not have stood still. They must surely have increased their income by 20 per cent. Many will have increased it, as we know from the wage settlements, by far more than that. If they have increased it by 20 per cent., they will now be receiving £36 a week. At £36 a week that couple will be paying not £88.11 but £171.15, not 5.6 per cent. of their income but 9 per cent. And so on.

It is perfectly possible to do these calculations, as others have done as well. It is perfectly possible to look at it in another way by asking what income a couple earning £30 a week in 1974–75 would have to earn in order to have maintained their purchasing power in 1975–76. Indeed, from that table again it is possible to calculate that a couple earning £30 a week in 1974–75 will need £37.92 per week this year to maintain their purchasing power. That is an increase of 26.4 per cent.

The Child Poverty Action Group, as the hon. Member for St. Ives (Mr. Nott) pointed out in an intervention in the Chancellor's speech, has submitted to the Chancellor a detailed memorandum on this matter. It is entitled—cryptically, I thought—"Reducing the Poor's Living Standards at a Stroke". The group has looked at two low-paid groups—two-parent families and one-parent families receiving £25 a week when Labour came to power in 1974. The group concludes that most of these families, irrespective of the number of children, have now had their family allowance increase which came into force in April wiped out by increased taxation. There is no need to go into detail or through those figures because the Chancellor has had them and the group has calculated them in great detail. However, it remains true from all the group's calculations that it is quite wrong for the Chancellor to believe that in his Budget he has helped the poor or, indeed, that he has even helped one-parent families by his change in the tax allowance. As the group has pointed out, the fact remains that almost all one-parent families, no matter how many children they have, will be worse off at an equivalent income level this year than they were last year.

I say to the Government that we have been here before. The last time a Labour Government were in power they were committed to helping the poor. In a book called "Labour and Inequality" produced by the Fabian Society, the editors had to conclude that the result of their analysis confirmed the inability of the Government to use their power on behalf of the weaker members of the community. That is also true of this Labour Government, and they have not been in power for very long yet.

In my view, therefore, indexation, which is at the root of this problem, is not only fair and would not only enable us better to protect the lower paid; it would virtually force the Chancellor to protect the lower paid. It would restore the power of this House over Government expenditure, too, because inflation has enabled successive Chancellors to levy taxes which this House has never voted.

The Chancellor asked about the plans of the Opposition to cut public expenditure. Indexation of the tax system would have a salutary effect on the spending Departments of the Government, because nothing so weakens a Chancellor's control over the spending Departments than the knowledge that his revenue will rise as if by magic by inflation and that he does not have to come to this House and ask for it.

I do not propose to answer in detail today the question of what cuts the Opposition suggest. I have pressed on successive Thursdays during business question time for a debate on the White Paper on Public Expenditure. When the Govern- ment are prepared to allow this House to debate the whole White Paper on Public Expenditure, I shall be happy to put forward to the House on behalf of the Liberal Party detailed proposals for cuts in public expenditure that would cut the Government's borrowing requirement.

Mr. Nott

The White Paper is hopelessly out of date.

Mr. Pardoe

The hon. Member for St. Ives says that the White Paper is hopelessly out of date, but when I started pressing for the debate it had been published only three weeks. I agree that it is somewhat out of date now, but that does not mean that we should not have a debate on public expenditure as a whole and consider the whole matter in its proper context. I would say to the hon. Member for St. Ives, who is to reply tonight for the Opposition, that we heard a lot from his right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) about his party's opposition to food subsidies, but if one looks at the record of votes on food subsidies one finds no evidence that the Opposition put its vote where its mouth now is.

Time and time again—I have it all here, so I hope that the hon. Gentleman will not bother to check—there are Divisions against not only the main principle of food subsidies but detailed provisions of food subsidies, tea and bread, and time and time again there are votes on these issues. No Members of the Conservative Front Bench have voted with the Liberals in Liberal Divisions, although I must admit that there are usually a handful of brave Conservatives who have done so, but no more than a handful. I hope, therefore, that we shall hear a little less about the Conservative Party's noted determination to cut food subsidies. They should have voted against them in this House.

And what about the Statutory Corporations (Financial Provisions) Bill which we are to have? Will the Opposition divide on that? We had to divide against them when they had to come to the House cap in hand to increase the Government's borrowing requirement in order to lend more and more money to the fatted calf of nationalised industry. The right hon. and learned Member for Surrey, East went through the Lobby then in order to support the Government. We opposed it at the time. And what about the promise of his right hon. Friend the former Leader of the Opposition during the election that they would increase the subsidies to owner-occupiers?

Mr. Nott

I know that the hon. Member for Cornwall, North (Mr. Pardoe) is free from error and always has been. I cannot say that totally for myself. We actually said in our manifesto, however: Our plans for these"— pensions, housing and food production— which are set out later, will cost money; and in order to prevent inflationary consequences, it may be necessary to make cuts in public spending or increases in taxation. That was in our manifesto.

Mr. Pardoe

I fail to see how cuts in public spending or increases in taxation will compensate for food subsidies, and we have yet to hear where they will be made.

I come finally to the crucial problem of inflation and what level of inflation we really are to expect. What does the Chancellor really expect will be the year on-year inflation? Let us forget about his three-month figures; we can all argue about these until Kingdom come. What does he expect the year-on-year inflation to be by August 1975? Does he know that price inflation then will be between 25½ per cent. and 27 per cent. on the basis of his own figures stated in the Budget debate? And what does he expect wage inflation to be if that is the case? Does he know that it is virtually certain that with the present social contract, even if the unions keep to the guidelines—and that is important too—the rate of price inflation of 25 per cent. and more will be matched by wage inflation of more than 35 per cent.? So what are the Government going to do about it?

Hyper-inflation, make no mistake about it, is now staring us in the face. I do not pretend to define it precisely, but I take it to mean a form of self-generating inflation which feeds on itself and which is largely independent of the whole question of supply and demand. I take it, too, that the Government believe still that the social contract will solve this problem. Well, I do not. I never have been very optimistic about it, and I am far less optimistic now.

There is no time now to go into the details of the path by which hyper-inflation is reached. It is probably nowhere better or more clearly set out than in Professor Meade's splendid recently-published book "The Intelligent Radical's Guide to Economic Policy". I fully understand that not many Members of the Government Front Bench would have read that. It is very recently published and, besides, they might prefer to read an unintelligent Radical's guide to economic policy.

But Meade's message is unmistakable. He says: Complete currency collapses are not unknown to the historian and there is no reason to believe that 'it cannot happen here'. Those who believe it cannot happen here should not make the mistake of looking at the causes of past inflations and assuming that we know how to avoid or overcome them, and so we may. Thus they look at Germany before the war and say "Of course, they printed money to finance public expenditure and we shall not make that mistake, shall we?"

Leaving aside the stark fact that we have been printing money over many years to finance public expenditure, this is a naïve error to fall into. I think it possible or even probable that the Government may be able to stop short of printing money simply to finance public expenditure. What I doubt very much is whether that in itself will have much effect on our present rate of inflation.

If the causes of inflation are not the same as the causes of other historic inflations, the pressures which force governments to print money are not the same pressures. And here again Professor Meade says: Fundamentally, an explosive inflationary pressure is generated when the slices which various independent competing groups of citizens attempt to take out of the national cake altogether add up to more than the whole cake. That is just the situation we have reached. Indeed, we have reached the stage now when they not only attempt to take out more than is in but actually succeed in doing so. Many who view politics from the same position as I take no pleasure in having to acknowledge that when Dr. Arnold greeted the appearance of trade union monopoly power with the words "I see no countervailing power", he may have been far too near the truth for comfort. Yet a countervailing power there must be or we are bound to succumb to explosive inflationary pressures and we are absolutely certain to end up with hyperinflation.

It is obvious from what I have said that I do not see the economic problems being solved by narrowly economic solutions. I believe in the proposals which my party has put forward. I believe, for instance, that we have to go for a statutory incomes policy. I believe that we have to go for full democracy in industry to raise up new centres of power to counterbalance those monopoly powers that have been created in the trade union movement. I believe that we have to go for full indexation and all the other policies which we put forward at the last election and which I and my right hon. Friend the Leader of the Liberal Party have put forward on many occasions. I believe that these would have a considerable chance of working.

But no policy, however good, can work unless implemented by a Government who are able to mobilise the consent of the great majority of the British people, whom the Chancellor spoke of as being in favour of a better way. And no such Government can come about in this country under our present electoral system.

The right hon. Lady the Leader of the Opposition told her workers this week that the splits in the Labour Party, and in particular the activities of the Secretary of State for Industry, would deliver power into her hands fairly shortly. Even if she is right, what sort of power will it be? Will it be the same sort of power that enabled her predecessor to carry out his policies and solve the fundamental problems of the British economy, as we know he did? Can the right hon. Lady say, even if she obtains, say, 45 per cent. of the votes, that she will be able to face those explosive inflationary pressures, create what Ralph Dahrendorf has called the "new kind of affected general public" or produce the countervailing power which Dr. Arnold noted was missing? She may yet have a brief moment of glory as Britain's first woman Prime Minister, but she would do well to take note of the argument put forward yesterday by someone who looks a good deal deeper beneath the surface of politics.

Yesterday the Secretary of State for Prices and Consumer Protection accepted an argument put forward by the Director General of NEDC that members of Opposition parties might usefully serve on NEDC. She did so, I believe, for the good reason that many of the investment difficulties in British industry are the result of endless changes of policy consequent upon the changes of Government within our adversarial two-party system. That argument is now accepted by a growing number of people in all political parties in the country if not yet in the House.

I believe that the solutions to our economic problems will not be found in narrow economic policies. They will be found in a fundamental political reform that does what the Chancellor urged, namely, enables the majority view of the British people, who know that there is a better way than the way we are pursuing, to be heard and acted upon.

6.42 p.m.

Mr. John Cronin (Loughborough)

The hon. Member for Cornwall, North (Mr. Pardoe) made an interesting tour of the political horizon which I hope he will not expect me to follow. His threat that all Liberal Members in the House will vote against the Bill will, I suppose, be regarded by the Whips philosophically as something which they have to accept.

I am sorry that the right hon. Member for Farnham (Mr. Macmillan) is about to go. He produced a most imaginative piece of political thought by suggesting that trade union leaders should be elevated to episcopal status in the House of Lords. That strikes me as a charming eccentricity. I cannot imagine Mr. McGahey sitting comfortably with the Archbishop of Canterbury.

The right hon. and learned Member for Surrey, East (Sir G. Howe) made a speech which contained every possible Conservative platitude. Again, we had this monotonous emphasis on cutting public expenditure and no statement of which public expenditure should be cut, except that I gather he took exception to the nationalised industries having increased borrowing powers and to the aircraft and shipbuilding industries being taken over by the Government. He knows perfectly well that every company in the private sector has to raise capital frequently, if not from its own resources, from the banks, the market or shareholders. How does he expect the nationalised industries to get their capital? Does he consider that they should not receive any additional capital? Does he insist, for instance, that the British Steel Corporation should carry on with its clapped-out equipment in the face of international competition? I cannot take seriously the right hon. and learned Gentleman's idea that the nationalised industries must not have any substantial capital increases.

Mr. Cyril Smith (Rochdale)

Does not the hon. Gentleman agree that, if nationalised industries are compelled to employ scores of thousands of people over and above the labour requirement, that will increase the cost, reduce the profit and, as a consequence, increase the amount of money the nationalised industries need to borrow?

Mr. Cronin

The amount of money spent on wages is not a question of capital expenditure; it is a question of current expenditure. That is a matter on which no decision has yet been reached, so I cannot see the relevance of the hon. Gentleman's intervention.

I hope that the hon. Member for St. Ives (Mr. Nott), for whom we all have great respect, will stand up at the Dispatch Box and tell us clearly what cuts in public expenditure the Opposition favour. The House would like that to be spelt out clearly.

Mr. Nott

I apologise to the House for jumping up so often. The one thing we know about public expenditure is that detailed information on it is available only in the Treasury. The Opposition are not the Government of the country. If, as the whole House agrees, it is urgently necessary for public expenditure to be reduced, we must rely upon the Labour Party to take the necessary measures.

Mr. Cronin

That is a helpful intervention. I understand now that the Opposition's policy is that there should be cuts in Government expenditure but they have not enough information about them to come to any practical conclusion.

The Bill shows political courage on the part of the Chancellor of the Exchequer and his able assistants. It has brought the Chancellor to some extent in opposition to the unions. He has put inflation very much at their door. He has increased indirect taxation and has accepted a certain amount of unemployment. Those policies will be unhelpful to his personal political position, and I do not suppose they will help the Labour Party to win by-elections in the next six months. This Finance Bill is an act of political courage and an indication that the Labour Party puts public good before political advantage.

The Bill has numerous excellent points on which I will not dilate because they speak for themselves. The Government's virtue shines out in some of the excellent reforms contained in the Bill. I propose to refer to some omissions and less satisfactory aspects of the Bill.

I am disturbed that there is no incentive to industry to increase investment. That is an unfortunate omission. According to the Red Book, in 1975–76 manufacturing industry will reduce by 10 per cent. the amount of money set aside for investment. That should be enough to cause alarm in the Treasury. With Germany and the United States to some extent reflating, and an expected upswing in world trade, if our investment is still in the same miserable state next year we shall be unable to take advantage of improved trading conditions.

On a perhaps less serious note, I take the Chief Secretary to task for the regressive nature of the increased duties on wine and beer. It is odd that there should be an increase of 24p on the price of a bottle of wine irrespective of the contents of that bottle. For instance, one of my constituents who has a humble bottle of Spanish wine with his Sunday roast pays an extra 24p and Mr. Harry Hyams who is drinking a Chateau Lafitte 1939 at £20 a bottle still nays only an extra 24p. This seems to be an odd situation, and I hope that the matter will be investigated in Committee.

I am also a little disturbed about the extra 2p that has been placed on the price of a pint of beer. Admittedly, beer is a form of self-indulgence, but it is also used by working men who do hard, muscular and sweaty work. I have in mind people such as the South Derbyshire miners and the Leicestershire miners in my constituency who regard beer as a form of fuel with which they have to replenish themselves in the evening. It is rather hard that these skilled and sturdy workers should be deprived of this refreshment unless they pay a substantial extra amount of money.

The next thing that concerns me is the decision to make free medical insurance no longer exempt from taxation. I appreciate that there is a good argument in equity for that decision, but it will only irritate the middle level executive in industry. There is no escape from it: this country now depends more than ever on the middle range executive. We rely on him to go to foreign countries to obtain export business. It is also the middle-ranking executive who ensures that goods are turned out of the factory door. It is unfortunate that at a time when we are particularly dependent on these people we should introduce a measure which will cause them such irritation.

I was a little worried to hear my right hon. Friend say that in the next Budget action will be taken on fringe benefits. I realise that there is a case in equity for taking some action on fringe benefits, but I suggest that this is the wrong time, given our present desperate economic situation, and our dependency on efficiency in industry and more exports, to harass and irritate executives in the middle salary range.

I have said that the Bill has many admirable points, but I think that it is accepted by both sides of the House that events have overtaken it. Since the Budget was introduced we have seen the pound sliding in the most ominous manner, increasing inflation and increasing wage claims. Quite a few major claims have been settled since Budget Day with increases being granted of more than 30 per cent. We know that there are wage claims in the pipeline of more than 40 per cent. and 50 per cent. Unemployment already stands at 900,000, and it is likely to pass the million mark in the near future. This is obviously not grounds for complacency on either side of the House.

The hon. Member for Cornwall, North and the right hon. Member for Farnham were right, however, in drawing attention to a certain complacency that prevails in this atmosphere in spite of the rather desperate economic situation. What worries me chiefly is that my right hon. Friend the Chancellor seems to regard increases in income tax, increases in VAT and increases in various duties as being substitutes for an effective incomes policy.

The Chancellor emphasised this afternoon that in his view excessive wage claims will lead to higher taxation. Inevitably they must produce higher taxation. What is the psychological pressure that is put on the trade unions by all of us paying higher taxes? I am now talking about the militant trade unionists. What pressure is there to induce them to relax their wage claims? How does increasing taxation for the whole population induce the more militant trade unions to reduce their demand for wage increases? If I were a militant trade unionist demanding more and more on behalf of my members, I would face the prospect of the whole of the country paying more tax with equanimity as long as I could get through my wage claim.

For example, if a worker receives £40 a week and his union submits a claim for a 30 per cent. increase he will receive an extra £12 a week, approximately, if the claim is successful. Of course, he would have to pay an additional 2p in the pound in extra taxation on that extra £12. In other words, he would pay an extra 24p. I cannot see how that will induce militant trade unionists to decrease their demands for increased wages.

What will happen next year? Perhaps my right hon. Friend the Chief Secretary will have something to say about that. What will happen in the next Budget, supposing that we continue to see wage increases in excess of 30 per cent.? Will we all pay another 2p in the pound in income tax? Will there be further increases in VAT and export duties? It seems that this is ultimately a self-defeating exercise. I do not think that increased taxation can ever be a substitute for an incomes policy. To adopt such a course is obviously unfair not only to the whole population, which has to pay the increased taxation, but unfair to the unions which are conforming to the social contract.

We must either have an effective incomes policy—it can be either voluntary or statutory but it must be effective, and we certainly do not have an effective one at the moment—or, as an alternative, we must accept the pre-Keynesian monetary policy which is popular amongst Conservatives. That policy would cause much higher unemployment and take us back to the conditions of the 1920s. A third policy which has been given some support by some of my hon. Friends is some form of import controls and in fact we live behind the ramparts of a siege economy. I fear that that would soon lead to misery both economically and socially. It would also quickly lead to the loss of the democratic institutions to which we are accustomed.

Mr. John Watkinson (Gloucestershire, West)

Does my hon. Friend agree that even if we had a siege economy the basic problem of wages would still remain, as would the basic problem of exporting our goods, and that we would still have the problem of dealing with our balance of payments?

Mr. Cronin

I am not quite with my hon. Friend. I am suggesting that an effective incomes policy would obviate the necessity of a siege economy. I suggest that the only effective policy will be some form of incomes policy. Although they do not say so I am sure that my right hon. Friend the Chief Secretary and my hon. Friend the Minister of State both know in their secret hearts that very soon they will have to introduce some form of incomes policy.

Mr. Michael McGuire (Ince)

My hon. Friend has mentioned import controls. When we have had our debates on the coal mining industry, in which my hon. Friend has always made interesting and valuable contributions, my hon. Friend, like me, has supported import control—this is a policy that was supported by a Conservative Government—to maintain the structure of the coal mining industry. In fact, we banned the importation of cheap coal. I know that that met with my hon. Friend's approval. As one who is asking for some import control as regards the textile industry, would my hon. Friend not agree —

Mr. Deputy Speaker (Mr. George Thomas)

Order. This is a very long interruption in a speech that has already lasted over 16 minutes. I must warn hon. Members that two speeches took 27 minutes each. It is getting harder and harder to call other hon. Members.

Mr. Cronin

I will certainly take the hint, Sir, and truncate my speech. However, I agree with my hon. Friend that in certain circumstances we must have import controls on things like coal and cheap textiles. I am simply talking about my being opposed to import controls as a general economic weapon.

I appreciate the immense difficulties with which the Chancellor and his assistants are faced. They have to ride more than one political horse. They have a difficult and rough time ahead. I am sure that, so long as they continue in their present path and continue to put the public interest first, they will have the support of all well-wishing Members of this House.

7.1 p.m.

Mr. John Cope (Gloucestershire, South)

We have had a sombre and serious debate today, at least until the light relief from Loughborough. The hon. Member for Loughborough (Mr. Cronin) came to some more solid stuff later in his speech, but at one point, criticising the Bill, he said that he was sorry that it contained nothing which would be an incentive for industry to invest. I do not believe that industry needs more incentives. What it needs is confidence and the assurance that it will get a return on the money invested. Even if one gave industrialists free plant they would still have to finance themselves for work in progress, stock, buildings, and so on, and they would still have to sell the goods. They do not believe that they can; that is why they are not investing to the extent we should like. It is not lack of incentive.

Mr. Cronin

I accept the hon. Gentleman's remarks to the extent that confidence is the first necessity in securing more investment. But it is also helpful to produce financial inducements to do so.

Mr. Cope

I believe that the financial inducements in the tax system now are very good—

Mr. Joel Barnett

indicated assent.

Mr. Cope

I am glad to see that the right hon. Gentleman, the Chief Secretary to the Treasury, agrees with me, since we share the same profession.

I also believe that one of the advantages of the Bill is the continuation of the stock relief arrangements and their extension to smaller businesses, which I welcome, and which, although not a direct incentive to investment, help people to finance their stock and get the money they require.

The Chancellor kicked off this debate in bland and benign mood, calmly—over-calmly, I thought—pointing out that our inflation rate was twice that of our competitors. He had some stern words at the end of his speech, but he did not propose the actions to match.

The Bill—unlike some hon. Members, I propose to speak mainly about the Bill—contains massive tax increases. On average, every family will pay £3 a week more in income tax this year than last and £1.50 a week more in other taxes like VAT. But most of that has nothing to do with the changes in tax but with the effects of inflation. To make it clearer, the Red Book shows that Budget changes in Inland Revenue duties will raise only another £200 million—out of the £3,000 million extra duties being raised this year over last. The actual tax changes are a drop in the bucket, particularly when considered net, by comparison with the total of extra tax. This is putting in another way the point made by the hon. Member for Cornwall, North (Mr. Pardoe).

In spite of these massive tax increases, this is still a little Bill compared with the problem facing the Chancellor and the country. We have heard a good deal about the borrowing requirement, and I hope that the Chief Secretary will be able to tell us what it now is. At the time of the Budget it was £9,000 million. Presumably it has risen a good deal since then. Perhaps it has gone up, even in that short period, by more than the amount of extra taxation raised by the Bill.

The fundamental problem for the country remains the quesion of how we can go on borrowing a shilling in every pound we spend. All the measures we have nowadays and all the things with which we occupy ourselves fudge and befuddle this main issue. The referendum is the most enormous distraction from the real problems of the economy—important though the result is to the country. All the discussion we have on industrial policy and nationalisation pretends to be about the preservation of jobs, but it is not. This sort of measure fudges the main issue.

But the crisis is not one of policies alone or even primarily—it is one of consent. There has been a good deal of talk about the control of public expenditure with which I agree. Labour Members have challenged us to say where we would save public expenditure. The answer is the same as for a family in a similar position—in every way possible, both large and small.

I can give the House two examples from my constituency. A large saving could be made by not nationalising BAC. The other is a small saving. Some road improvements to the A38 are being made which are controversial locally and which I, along with many residents, have opposed. Although we accept the Department of the Environment's argument that the road will be required in 15 or 20 years, now is not the time to build it—even if it is eventually built as the Department wants.

This small saving would amount only to £5½ million—not much by comparison with the borrowing requirement—but if £5½ million were saved in every constituency, we should save more than £3,000 million, which would go a long way towards helping to meet the borrowing requirement. That is the sort of way in which one works around to bringing down public expenditure and hence the borrowing requirement.

The unanswered question which has run through the debate is what the effect of the Bill will be on the social contract and on incomes. I still do not know—perhaps other hon. Members do—whether the increases in direct taxation are to be allowed to be taken into account in claiming increases under the social contract. If the railwaymen or any other group claim that they need increases to pay the extra tax, is that allowable? There is also the question of indirect taxes. If they say that they need rises to pay the extra tax on beer or wine or the extra VAT, will that be allowable under the social contract? If they are, they should not be, because it destroys the case both for indirect and for direct taxation. It destroys the end to which the social contract is or should be working—if working is the right word to apply, which I do not think it is.

However, I wish now to turn more directly to the measures in the Bill and to complain about the muddled nature of many of the tax changes over the past year or 15 months since the Labour Party came into power. In what now seem to be the good old days before 1964—when we were all concerned about the speed of growth instead of the possibility of collapse, which has us all enthralled now—the cry of "stop-go" was a very effective criticism of the then Conservative Government. No doubt the changes in the growth pattern were damaging to the plans and the confidence of industry. However, now it is not so much stop-go in the growth rate, but up-down for taxes. It was up with corporation tax a year ago, but it is down again now through the stock appreciation clauses. It was down with VAT in July, and now it is up with VAT. The Chancellor is beginning to look like a fiscal Duke of York.

It is true that the ways in which the taxes have been put up are not always the same as the ways in which they are brought down, or vice-versa. For the vast majority of people and businesses the effect is up in one way and down in another. Every time a different method is used it adds another layer of complexity. The higher rate of VAT shows this process at its worst.

Anyone can predict—some people did so before the Budget—that trouble will come at the borderline between the higher rate VAT and the standard rate. There is always trouble at the edges of taxes like this. We should have learned that from purchase tax. Certainly the Conservative Government learned it from purchase tax, which is why VAT was introduced in the way that it was.

It now seems that the Labour Government have forgotten the lessons to be learned from purchase tax, and there will be trouble. I shall not do my best to minimise that trouble in Committee. But I shall do my best to improve the Bill and thus minimise trouble for the future.

Apart from the higher rate VAT, the Bill is modest in terms of tax reform, and that I welcome. Nevertheless, we can see a few more steps which are damaging to tax morality, which very much concerns me and other hon. Members on both sides of the House. As the Chief Secretary knows, in this country we have a large tax advice industry. Members of the profession which we share belong to it, although by no means all of us do. Many people dislike the existence of the tax advice industry, but it is the reaction to high and complex taxes. The higher the taxes, the more it is worth paying somebody to try to mitigate them.

The complexity arises in two ways: first, by the effort to try to keep fairness as taxes rise and, secondly, by the effort to deal with the problems caused by the tax advice industry. The process becomes self-generating, and it is assisted by the Revenue's and the Treasury's obsession with the possibility of tax avoidance. Massive rates of tax—the increases in VAT are an example—mean an increase in the tax advice industry. There is no getting away from that. Massive increases also mean a decrease in tax morality and lead to an increase in complexity, which becomes self-defeating.

The decrease in tax morality worries me the most. We already have an example from the higher rate of VAT. I was told the other day about a nationalised industry in my constituency which, because the higher rate of VAT did not begin until 1st May, was invoicing in the period before 1st May goods which it did not have, in return for deposits. I understand that the industry will not take delivery of those items for some months, but because they were invoiced before 1st May and a small deposit was paid, it hopes to get away with the lower, old rate of VAT. I hope that the Chief Secretary will tell us whether measures will be taken to prevent nationalised industries or other suppliers getting away with that, especially on what are commonly called "white goods". That is a good example of the way in which a big increase in tax is damaging the tax morality of the country. Once people have done that sort of thing they are less bothered about doing it again.

I should like to make a small point about the draftsmanship of the Bill. I have every sympathy with parliamentary draftsmen in the task that they have to face. I have even greater sympathy with the people whose job it is to read and understand Bills, and to try to advise other people about them as well as apply them in practice. I do not understand why there are two succeeding clauses dealing with much the same thing. Clause 44 deals with matters concerning individuals and the succeeding clause deals with the same matters concerning companies. There are equivalent provisions in Clause 44 for individuals and in Clause 45 for companies, yet they are worded slightly differently.

Clause 44(7) says: Without prejudice to subsection (2) above, the Treasury may by order from time to time increase or decrease the rate of interest …". Yet Clause 45(6), which is the equivalent subsection, says: Without prejudice to subsection (3) above, the Treasury may, by order in a statutory instrument subject to annulment…". The effect is very similar. There is yet another example. Clause 44(9) says: A repayment supplement paid to any person under this section shall not be income of that person for any tax purposes. Clause 45(8), which is the equivalent subsection, says: A repayment supplement paid under this section shall be disregarded for all the purposes of corporation tax and income tax. I do not understand what difference the wording makes, but it certainly makes it a little more complicated and difficult for the expert, let alone the layman, to understand.

However, in total the Bill brings in massive tax increases which already seem to be irrelevant. In terms of the problem which we face, this is a small and petty Bill. It is not to be opposed on those grounds, but it is to be regretted.

7.19 p.m.

Mr. John P. Mackintosh (Berwick and East Lothian)

I agree with the hon. Member for Gloucestershire, South (Mr. Cope) that the Bill has been overtaken by events. But I was one of those who welcomed the Budget just a few weeks ago, because I thought it right to increase taxation. My reason was that for the vast bulk of the people the fact that we were living 5 per cent. beyond our means had not got home. The extent and seriousness of the economic crisis facing the country had not come though to the bulk of our people, simply because their real income had risen month by month and year by year. There had to be a method to bring home directly to people that we were living beyond our means.

It seemed to me that the shock tactics of increasing taxation had that effect, and from a tactical point of view I thought it the best approach the Budget could have had rather than to try cuts in public expenditure or some other methods open to the Government. Now, however, looking back over the massive time of three weeks since the Budget, I think that the impact has been swallowed up in the general horror of increasing prices in all directions. The general rate of inflation is beginning to get through to people and really alarm them, and in a sense the Budget has slipped into the past. People are already asking what new measures my right hon. Friend the Chancellor will take to meet the situation as it now is.

Having looked at the tactics of the Budget and seen that they have been rather swallowed up by time, let us look at the strategy. That is where I am much more deeply worried. My right hon. Friend the Chancellor spelt out his strategy in great detail and with great care. He accepted that inflation was the main problem facing the country when in his previous half-dozen Budgets he had other things in mind. He was still claiming credit at one time for having bumped up the amount of money in the economy and kept employment higher than in other countries by spending so much. That has receded into the past. We now have it clear that inflation is the main danger.

Secondly, it was made absolutely clear in the Budget that the main source of the inflation was cost-push from wages. World commodity prices are dropping. It is clear that wage settlements are the source of inflationary pressure. I know that my right hon. Friend may not have looked very far ahead. If trade booms, as he hopes in 1976, commodity prices may rise again and we may get another inflationary push out of that. At present, however, the problems facing the economy are so great that I do not care to look ahead to 1976. I want to look at the immediate situation, in which my right hon. Friend accepted that there was wage-push going on.

The next point in the strategy was that my right hon. Friend set himself a target. It was interesting that he should do so. He said that it was his objective to bring down the rate of inflation from its going rate of 25 per cent. over the last six months to between 12 per cent. and 16 per cent. by the end of the year. That is a phenomenal target. It means bringing down the rate of inflation by 10 per cent. over seven months. I fear that my right hon. Friend will be judged by how close he gets to that target, not only by us here and by the voters but by the people who hold the £10.5 billion on short call in London when we have reserves of only £2.9 billion. They will be looking at his degree of success when they decide whether to lend more to this country or to withdraw the funds that they already have here.

How does my right hon. Friend propose to knock 10 per cent. off the level of inflation within seven months? To judge from his Budget speech and the subsequent debate, his strategy falls into two parts. As far as I can see, he intends to let unemployment continue to rise and he hopes that this will reduce inflation in the private sector. He has also told the heads of the public sector that they must not grant inflationary increases.

With respect to the hon. Member for Gloucestershire, South I think that the question of whether this or that tax increase is in or out of the social contract is now outdated. My right hon. Friend the Chancellor himself said that prices were running 8 per cent. to 9 per cent. ahead of wages, so it does not matter whether the taxes are put in or out of the contract—the matter has gone far beyond.

Will my right hon. Friend's strategy of letting unemployment cut down the private sector demands and of insisting on tougher controls in the public sector have the effect he wants? We do not need to look at cuts in public expenditure, because they are not in the equation; we are told that they are not coming until next year. It may be arguable that one should not increase public expenditure and so contribute to inflation, but no positive cuts are proposed now. All must come from the diminution in the wage rate pressure to the level which my right hon. Friend wants.

The problem is that I have never thought that one could get unemploy- ment to have that effect nowadays, because the monopoly position of unions in their own sector is too strong. We saw only a slight abatement of wage claims when unemployment was at 1 million in 1971. There was no major abatement. Any abatement was due to other aspects of the incomes policy then adopted by the Conservative Government, a policy with which the right hon. Member for Farnham (Mr. Macmillan) was associated. I am glad he said that it had not been such a failure as many people thought. It had a valuable effect then.

Will unemployment do the job demanded of it? I do not think that it will. We have the evidence in the public sector and in the private sector. In a powerful speech in the Budget debate, the right hon. Member for Worcester (Mr. Walker) listed 14 wage claims for settlement in the week before the Budget. I followed his line of argument, and I have collected a list of claims and settlements since the Budget, between 17th April and 7th May. I hope that the House will permit me to go through the list quickly because it shows the enormity of the problem and the lack of evidence of any diminution in wage-push inflation.

On 18th April the engineering and shipbuilding workers accepted a 31 per cent. increase. [An HON. MEMBER: "On the basic rate?"]—Yes—extra money in workers' pockets. That is what matters in terms of inflationary demand.

Also on 18th April, Hull dockers accepted an 11 per cent. cost of living agreement. On 21st April doctors and dentists were offered 35 per cent. The next day rubber workers accepted 25 per cent., and the day after that the police asked for 49 per cent. On 25th April Cowley car workers, I am glad to say, accepted 15.8 per cent. They were the first in the list within the guidelines. The next day ICI workers asked for 55 per cent. and rejected 20 per cent. On 30th April a weak group, the stable lads, about whom we have read in the Press, asked for only 15 per cent. The water workers asked for 25 per cent., which, with other additions, meant in effect 32 per cent. for the lowest grades. Pottery workers took 27 per cent.

On 1st May—this partly answers the hon. Member for Gloucestershire, South —teachers raised their 20 per cent. claim to 26 per cent. in the light of the increased taxes in the Budget and the increase to the Civil Service of that level. On 2nd May wool workers accepted 30 per cent. The following day local authority electricians accepted 27 per cent. as an interim payment, but asked for 66 per cent. I have three or four more similar examples, but I shall not weary the House by reading them all out.

The going rate of demands before the Budget was 30 per cent. It has now gone up. In the three weeks since the Budget there have been 19 major claims or settlements, only three of which came within the guidelines of the social contract.

Mr. Lawson

The hon. Gentleman is deluding himself if he thinks that there is any instant cure. The Budget is only three weeks away. Is he aware that all studies show that the effect of deflationary policies is first on output and employment? Only after a time lag of several months—possibly nine months to a year—do they affect wages and prices. The hon. Gentleman must be patient.

Mr. Mackintosh

I am grateful to the hon. Gentleman, because he has made a point that I want to make strongly, which is that the Budget is unlikely to have the desired effect within nine months or a year. I do not think that the economy or our creditors will take the present level of inflation for nine months or a year. We cannot wait that long to grapple with inflation. If we have another nine months of pay settlements of the kind I have described, hyper-inflation will stare us in the face. It is not satisfactory to say that we can wait that long. We can no longer do so.

In addition there is the effect of cutting public expenditure, a matter that I know will appeal more to the hon. Gentleman. That was to come as part of next year's package to help bring down the rate of inflation. I have no objection to public expenditure, because I often feel that it supports the weaker elements in the community. As my hon. Friend the Member for Loughborough (Mr. Cronin) said, it may provide investment where it is badly needed. But if the major objective is to cut the level of demand in the community, to cut down on inflation, can we afford to increase public expenditure in the way in which it is soaring now?

What would have been the result if all the public expenditure entered into in the three weeks since the Budget had been included in the overall borrowing requirement when the Government were attempting to hold it at £9 billion? Let us run through all the events of the past three weeks. The right hon. and learned Member for Surrey, East (Sir G. Howe) mentioned some but he also missed out some. In the past three weeks British Leyand has been offered £700 million. The Community Land Bill will cost £50 million a year for administration and £400 million in the first year for land purchase. Later it will produce some revenue. I am not opposing those policies. I am merely going through what they cost and adding it up.

The Aircraft and Shipbuilding Industries Bill will add £125 million to £250 million as to aircraft, depending on the decision of the House, and in shipbuilding the figure will be £200 million to £300 million. The child benefit scheme, which I welcome in many ways, will mean interim benefits of £22.5 million. The Welsh Development Agency will involve a figure of £100 million to £150 million, and the Scottish Development Agency a figure of between £200 million and £300 million. The Petroleum and Submarine Pipe-lines Bill will involve £600 million under Clause 42 at a maximum and £350 million under Clause 43. The decision on pay beds will involve a sum of £40 million.

If we add up the figures we see that they amount to an increase in public expenditure of £3,000 million in the last three weeks. How much of this was allowed for in the £9,000 million in terms of borrowing requirement? Has not the borrowing requirement in the last three weeks risen by more than the amount of taxation imposed in a severe Budget?

I do not object to these policies—indeed, I supported them in the Lobby, as I supported them ideologically—but do they fit in with a priority aimed at reducing inflation? This is what faces the country and stares us all in the face.

People ask "What can be done to reduce the rate of inflation?" I was distressed to hear the right hon. Member for Leeds, North-East (Sir K. Joseph) in the Budget debate suggest that we did not need any increase in taxation but that the whole of the operation of bringing down the level of inflation, an operation to which he gave tremendous priority, could be done by cuts in public expenditure. His view was that this would obviate the need for an incomes policy because he did not agree with the social contract or with increases in taxation.

It was fair and proper for the Chancellor to turn on the right hon. Gentleman and say "How far would we have to cut public expenditure to produce this effect?" I do not expect Members on the Tory Front Bench to produce detailed items, but surely they have some idea of the global figure which, if we cut public expenditure, would have the effect which they seek of reducing the rate of inflation. They might also give us some information about the time lag and the incidental unemployment.

We have to ask the Conservatives whether their nerve would carry them through at that time when we remember how their nerve failed them in 1971 when they were faced with 1 million unemployed. I doubt whether it would be politically feasible to cut public expenditure by a sufficient level to have an impact on demand or reduce the immediate level of inflation to the extent Conservative Members say they want.

Mr. Gorst

Is not the hon. Gentleman putting forward an argument for a coalition Government?

Mr. Mackintosh

I shall come to that later, because it is difficult to contemplate how one could have a coalition—if anybody wants it—when such a large portion of the Conservative Party takes the view that public expenditure cuts are the total solution to the problem and when that view is not taken on this side of the House. This is a major obstacle.

I believe that there could be a coming together. I do not talk of a coalition but of a meeting of minds and political wills. If we are to tackle the rate of inflation in the right way and get anywhere quickly towards reducing it to the rate in other major competing countries to enable us to keep confidence abroad in our funds, I believe that the only solution is an incomes policy. This has major support in the country, as is shown by opinion polls. Indeed, there is a strong body of opinion on these lines in the House.

I do not think we need to break up our party system which has important roots in our community and in our attitudes, but it is regrettable that Government after Government have set up bodies to try to monitor pay and to keep an incomes policy in being. But as soon as the other party achieves office, it has abolished the existing machinery. This has been a great source of weakness. In 1964 the Labour Government wiped out the Conservative Government's National Incomes Commission, and then, in 1970, the Conservative Government wiped out Labour's National Board for Prices and Incomes and our manpower and productivity organisation. The Labour Government in 1974 then wiped out the machinery which had been set up by the Conservatives. No doubt in due course a Conservative Government will get rid of the Advisory, Conciliation and Arbitration Service set up by the Labour Government.

If we go on failing to agree on an element of incomes policy in our situation—a situation which approaches hyperinflation—we shall reach the position where we are unable to operate on the level of wages. This is a major source of inflation and of political uncertainty and, indeed, of economic uncertainty and damage.

Many Members on both Front Benches have talked themselves on various platforms—whether anybody listens to them is another matter—but they listen to themselves into the view that an incomes policy cannot possibly work and, indeed, will not work. I am glad that the right hon. Member for Farnham pointed out that, whatever the weaknesses of the Conservative Government's incomes policy, for three years it worked and 6 million workers accepted settlements under it. If we could now hold down the rate of increase by such a device it would be a great service to the nation.

We must call for a statutory incomes policy. I believe we could bring in a better policy than any previous attempts have achieved. We must have a body to monitor what is going on. We should collect together wages settlements—particularly public sector wages—at one time of the year so that we do not have leapfrogging. We can then, by adding the figures, see what will be the total bill for the nation. If that total is such as to amount to inflation, the Government would not have to fight the battle with one group or another but could say to the claimants collectively "You are taking too much. This must be reduced. We will impose a norm, and you can argue among yourselves how to share it." I should have no objection to the leaders of the trade union movement being in the House of Lords. It used to consist of the barons. Why should not the modern barons do the job now? We need their support. We want to see their speeches in Hansardtelling the country what they will or will not accept. The hope would be that when one of the parties asked for too much, it would be clear that others as a result would receive less.

It is ridiculous that the Government take on one union after another. The losers are not the Government or the unions, but the people who have accepted low settlements and large transfers of income from the weak to the strong. It makes sense to get the weak on one's side and tell them the situation. In this way we could devise an incomes policy which lasted from one Government to another. It is our consistently higher level of inflation compared with our competitors which has done so much to weaken the position of the British Government. Unless we tackle that situation we shall be in danger of social and economic disaster. This is not a matter of expertise or administration. It is a matter of political will.

What worries me most is that we have not the leadership or the political will. I sense that we are sitting here waiting for disaster. Once the disaster has happened, the Government will say "Look, we have a disaster on our hands. We must now have an incomes policy." They do not believe that the situation is yet serious enough to come along and say "We must go back on what we have said." We are in danger of disaster lurking round the corner. Such a disaster will do tremendous damage not only to our social and democratic fabric but to our nation. If we know what is to be done, let us get on and do it.

7.40 p.m.

Mr. Julian Amery (Brighton, Pavilion)

My right hon. Friend the Member for Farnham (Mr. Macmillan), in a remarkably penetrating analysis of our economic problems, painted a broad economic strategy and policy, with which I agree. I support what he said about participation, a council of industry and the broad structure of the direction in which we should move. However, I should like to narrow the perspective and shorten the horizon.

We meet to debate the Second Reading of the Finance Bill on a fine afternoon. My real worry, however, is whether, by the time we get to the Third Reading, we shall be swept away by a hurricane. I think that the time is short. Unemployment is mounting, and production and investment are falling. Commodity prices are stable for the moment. However, as countries like America and Germany begin to restock, those prices may rise. Meanwhile, the decrease in the value of the pound has the same effect as a rise in commodity prices. The slipping of the pound could well become a run and lead to a collapse.

What do we mean by "collapse"? Today as we sit here we still have it in our power in this House to determine the economic policy of the country. If there is a run on the pound we shall have to turn to the International Monetary Fund or the European bankers. They will impose conditions. Neither the Government Front Bench nor the Opposition Front Bench, nor any combination of them, will then determine the policy of the country. That will be done by people outside this country.

Meanwhile inflation is galloping along. The hon. Member for Berwick and East Lothian (Mr. Mackintosh) gave us a telling list of the wage claims that have been coming in. The Chancellor's options are becoming more and more limited. He cannot spend his way out of the crisis as the Labour Government of 1931 might have done. That Government had something to spend. There is nothing left to spend now. The Labour Party reflated the economy last year. Perhaps they won the General Election because of that. However, now there is nothing left with which to reflate the economy. The borrowing limits have been pushed beyond what can reasonably be sustained. Taxation has hit the ceiling. Any further increases would be almost directly inflationary.

I have always been in two minds about the social contract. When the idea was first floated, and when inflation, at the end of the Conservative Government period in office, was still running at under 10 per cent., it was just conceivable that the trade unions would accept a policy of voluntary restraint. However, with inflation running at 20 per cent. plus, which is the situation today, the pressure on each person's income is such that we cannot expect a voluntary policy to succeed.

What is to be done? This afternoon the Chancellor seemed to be almost relapsing into the attitude which Philip Snowden took in 1930–31. He said that if the unions did not moderate their ciaims there would have to be massive unemployment and bankruptcies and cuts in public expenditure. But what level of massive unemployment would be acceptable? How many closures and what cuts in public expenditure could be made? All of us who have sat on Cabinet Committees to try to reduce public expenditure know that there are only two actions which can be taken quickly. We can postpone some capital expenditure. Most of that has already been done. The only other action we can take is to allow inflation to erode the pensions and benefits of those who are not working and to hold back the wages of the weaker elements such as the university teachers and others who are not organised sufficiently to impose their will. Our society will not endure either massive unemployment or the penalising of the weaker elements in the community to that extent.

Therefore, we come back to the question which was put today and also the other day in the Budget debate by my right hon. Friend the Member for Worcester (Mr. Walker). Is there any alternative except an incomes policy? Exactly what form it should take I do not seek to prescribe. Should it be a freeze? Should it be a temporary freeze, followed by indexation? Should it apply to the public sector and the private sector, or only to the public sector? I am not an expert. I do not have the information with which to lay down a detailed programme.

But either the Government must take a decision on this issue or our creditors will be moving in within weeks or months —I am not sure which—and will impose it for us.

I agree with the hon. Member for Berwick and East Lothian that this is not a problem of economic policy. It is a problem of political will.

But the responsibility as to what is to be done rests not just with the Government. It rests with all Members of Parliament. Looking back, I think that both sides have made mistakes. The Labour Party made a mistake when it strongly opposed the Conservative incomes policy of phases 1, 2 and 3, because, as the hon. Gentleman generously admitted, phases 1 and 2 worked well, and even phase 3 commanded a great deal of support.

But I do not blame only the Labour Party. Looking back, I think that we made a great mistake when we opposed "In Place of Strife." I do not know whether it would have made a difference if we had not opposed that plan. Of course, we had the right to criticise the details. However, I think that we should have realised the essentially good intention behind "In Place of Strife." If we had done so, perhaps we could have avoided the situation in which the Labour Government of the day found themselves in a crossfire between the militants in the trade unions and the Opposition. I job backwards since the object of recrimination, as I believe Sir Winston Churchill once said, is to prevent the repetition of error. We are all in this together. There is no point in analysing how far the Conservative Party was responsible, or how far the present Government are responsible, for the crisis we now face. We shall get out of the crisis only if we work together.

I do not seek to prescribe a remedy, although I do not see how we can avoid an incomes policy of some kind. The Opposition must reserve the right to criticise. We cannot promise not to oppose proposals which we do not yet know. But speaking for myself—and I suspect that a number of my right hon. and hon. Friends agree—I submit that if the Government come forward with realistic, even drastic proposals for getting us out of this crisis, and if they show courage and determination, they can count on a wide measure of understanding from the Opposition and, indeed, a great deal more support than perhaps they may sometimes expect.

7.48 p.m.

Mr. Douglas Crawford (Perth and East Perthshire)

Last night in the defence debate my hon. Friend the Member for Clackmannan and East Stirlingshire (Mr. Reid) talked about how a self-governing Scotland would defend herself. He was met by giggles from hon. Members on both sides. However, if there is nothing strange about Norway, Sweden or Austria defending themselves there is nothing strange in Scotland doing likewise.

This House must come to a firm and serious realisation that Scotland will, sooner rather than later, again become self-governing. The House will also have to take on board as part of its mental equipment the fact that Scotland is a sovereign self-governing country, that it will soon have its own budget and Finance Bill, and presumably the hon. Member for Aylesbury (Mr. Raison) will be happy that we shall not be here.

Yesterday the hon. Member for Aylesbury complained. He said: Is not it a gross abuse of Question Time and thoroughly unfair to the English Members that so much time should have to be spent on Scottish Questions which have nothing to do with the Department of the Environment?" —[Official Report,7th May 1975; Vol. 891, c. 1428.] The deflationary Budget may be suitable for many parts of England. However, it is not suitable for Scotland. I do not propose to examine the economic machinery or to use economic jargon. I said in the Budget debate that Scotland should not have to take economic medicine for an economic illness from which she does not suffer.

The right hon. and learned Member for Surrey, East (Sir G. Howe) said that this country was near its mortal fate. I do not believe that Scotland is near her mortal fate. If the people of Scotland obtain self-government, Scotland can sustain economic expansion without overheating. We in the Scottish National Party are concerned with the Scottish dimension. The right hon. Member for Farnham (Mr. Macmillan) said that there was a need for a mixed approach comprising Social Democrats, the Labour Party and the radicals in the Tory Party. This is precisely what the Scottish National Party is. It is a middle of the road, centrist, commonsense party, and any Scottish financial debate will not be subject to outmoded dogmas of right and left.

A Scottish central bank, after self-government, exercising the powers hitherto exercised in the United Kingdom by the Bank of England as defined in the 1945 Bank Act and earlier relevant Acts, would never dream, given Scotland's economic potential, of holding back, deflating and sitting back while unemployment in Scotland was likely to rise to 150,000 or 170,000 by the end of the year. I shall not enter into any debate about whether the Scottish pound would be revalued vis-à-vis the English pound. But there is a masochistic feeling in some parts of the United Kingdom that we should all tighten our belts, and the unanimity on both sides of the House about the need for unity has been quite remarkable in the last two or three speeches to which we have listened. However, we in Scotland have had to tighten our belts for too long, and we should not be forced to tighten them further.

The right hon. Member for Farnham said that the United Kingdom was moving out of the North European and into the Mediterranean league. Scotland is in danger of falling into the Puerto Rican league, when she has the potential to get into the Texan league. Economic expansion is a consummation to be wished for devoutly.

The right hon. and learned Member for Surrey, East said that the Tories would not press this matter to a vote. The Scottish National Party will certainly wish to press it to a vote. The difference between the two main parties in this House would appear to be simply a matter of discussion about the extent of the unemployment that each of them favours. The Government appear to favour medium to high unemployment. The Opposition favour shockingly high unemployment. I am glad that the Liberals, who did not support my party when we divided the House on the Budget, have now seen the light and intend to join us in the Division Lobby tonight. That is an attitude morally justified by what the hon. Member for Keighley (Mr. Cryer) said a week or two ago about the only opposition to this Government coming from the Scottish National Party.

What does Scotland get in the Finance Bill? It is a Bill which will cripple the whisky industry, which employs 23,000 people. It imposes additional value added tax on petrol, which will penalise those living in the rural areas of Scotland. There is to be additional VAT on caravans, which will harm Scotland's tourist industry. It imposes additional VAT on aircraft used for pilot training, which is a constituency matter close to my heart. In addition, the changes in VAT rates will impose huge administrative burdens on small businesses, though, of course, not just in Scotland.

Already we have an intolerably high unemployment level in Scotland. We cannot accept it any longer. We do not see why Scotland should pay for the profligacy of South-East England. The hon. Member for Sheffield, Attercliffe (Mr. Duffy) said that the nation should live within its means. I ask the hon. Gentleman what nation? Scotland is living and has lived within her means.

I ask the Minister who is to reply to the debate whether he is happy about the high levels of unemployement which will hit Scotland as a result of this Bill, about what will happen to small businesses, and about hitting the whisky industry. I remind him that, of all parts of the United Kingdom, Scotland is the one place with the most deprived areas. A self-governing Scotland is not only capable of sustaining economic expansion. She must have it.

7.54 p.m.

Mr. Ian Wrigglesworth (Thornaby)

I do not intend to take up the topic of the tightening or slackening of Scottish belts, and I do not intend to go too far in the debate about the social contract. However, I reaffirm one point which I made in the course of our debate on the Budget. Although I do not agree with my hon. Friend the Member for Berwick and East Lothian (Mr. Mackintosh) in his faith in the efficacy of a statutory incomes policy, I go along with him about the urgency of the situation and the need for political will.

In my view, the time has now come—indeed, it is overdue—when the Government must approach the leaders of the TUC to discuss with them the tightening up of the guidelines or the introduction of an incomes policy. It seems to me that we must have the voluntary agreement of the trade unions to any policy designed to supersede, to strengthen and to replace the existing one. But that can be achieved only if we maintain good will. It will not be done by making statements in this House and speeches throughout the country directed at trade union leaders. It can be done only by speaking to them eyeball to eyeball and asking for a redrawing of the guidelines or a new policy. It is vitally necessary at the moment to retain the good will of trade union leaders, and I hope that my right hon. and hon. Friends on the Treasury Bench will very soon get down to discussing these matters with the leaders of the trade unions and of industry with a view to drawing up new guidelines as a matter of urgency.

I want to say a quick word about investment before going on to discuss two or three items in the Finance Bill which worry me a little.

I welcome the steps that the Chancellor of the Exchequer has taken to encourage investment. But I am coming more and more to the view, which has been expounded on a number of occasions by my hon. Friend the Member for Norwich, South (Mr. Garrett), that the problem of investment is one of demand rather than of supply. In my view, over the past few years there has been no great shortage of cash. Certainly there was no shortage of cash in the last four years of the Conservative Government. I do not believe that there is really a shortage of cash for industry today. What is in short supply is the will to use and invest that cash—in other words, the demand for the money, There is not the demand from industry, and my right hon. Friend's action in his Budget will go some way towards providing the atmosphere in which industry will be encouraged to invest.

We are taking steps in the Industry Bill which Government supporters believe to be vitally necessary to direct investment more clearly and more strictly into the manufacturing industries which need it so badly. However, the concentration that we have seen in recent years on the supply of investment rather than on the demand for it has deflected us from looking at the real causes of the investment problem.

I come now to three points with regard to the Bill about which I am a little concerned. The first concerns the child income limit. This is an omission from the Bill which I should like to have seen remedied. I am disappointed that it has not been possible to increase the child income limit above the £115 at which it has stood for almost a decade. It used to match the allowance for children under 11 years of age. That now stands at about £240, and I was hoping that my right hon. Friend would take steps in his Budget to increase the allowance possibly to that level or, if not, on the way towards it.

The situation has become so bad that, as one correspondent put it to me, the ordinary children's paper rounds and weekend jobs are being sacrificed on the altar of fiscal drag. It is a serious matter for some families. It is a long time since I did a paper round, and I certainly did not earn anything like £115 a year. In this day and age, however, Saturday jobs and work like paper rounds, especially when performed by older children, mean that the limit is very quickly exceeded.

I have been approached by a Mr. Atkinson of Hampden Way, Thornaby, who tells me that his daughter, by going out to work for two months in the tax year, has wiped away his allowance. A Miss Stones of Middlesbrough, the daughter of one of my constituents, thought it wrong that her parents should be penalised because she was earning more than £115 in the year. There is widespread feeling that this allowance should be increased. I hope that the Chancellor will consider introducing an amendment this time. If not, knowing the circumstances in which the Budget has been introduced, I hope that he will make it a high priority in his next Budget.

On the other side of the balance sheet, I should like to refer to the aggregation of children's investment income. I was disappointed that the Government had not brought this back and restored the 1968 situation. I need not dwell on the principle of treating the family as a unit, on the principle of fairness or on the need to stop tax evasion which is taking place because of the aggregation of children's investment income into their parents' income. I accept that this has been agreed by the Government.

In 1971, the Chief Secretary, who I think is to reply to the debate tonight, said: My conclusion is that clearly the clause "— the clause bringing in the aggregation— is a movement away from equity, not just to a passive tax system but to a system of positive encouragement of the avoidance of taxation. The clause is a tax avoider's charter, and I hope that we shall all vote against it tonight."—[Official Report,12th May 1971; Vol. 817, c. 459.] In "Labour's Programme for 1973" the clause was mentioned in a list of Conservative tax measures which it was claimed a Labour Government would reverse. The Chancellor gave a commitment in the March 1974 Budget to restore the 1968 position. However, on Monday, in a Written Answer, the Paymaster-General reaffirmed that it had been postponed to reduce the load in this year's Finance Bill.

I am surprised at that argument. I should have thought that all that was necessary to carry this measure through was to repeal Section 6 of the Finance Act 1971 and restore the provisions of the 1968 Act. I should be grateful if, in reply, my right hon. Friend would reaffirm our commitment to restore the 1968 position and explain why this simple repeal of Section 6 could not be included this time.

My final point is on Clauses 41 to 43 on the collection of taxes. These are new provisions tightening up on the interest paid on overdue tax and on tax that has been overpaid. I find those clauses excessively complex. They are not easy to understand. They will not, therefore, be as effective in what they are trying to achieve as they possibly should be.

I like the system that is used in the United States where there are compulsory dates for filing returns. I think that a period of three and a half months is allowed. The tax is due from the time the tax return has to be filed. Any tax not paid by the due date is charged at a fairly substantial 6 per cent. rate of interest. The same rate is given on any tax that is overpaid. I should like to see something like that in this country. There is no need for the balance not to be exactly the same. In my understanding—it may not be complete, because this is a complex matter—the balance is rather in favour of the Revenue. There is no equal balance, because both are not treated the same. The United States system is fairer, more effective and understandable.

At the beginning of the debate my right hon. Friend said that such a system would have to be introduced gradually. I am not so sure about that. When we hear so much about people taking money out of public funds by "fiddling" on social security—the old hoary one about which we hear so frequently—I believe that a strong argument can be made for ensuring that people make their tax returns arid tax payments on time. Therefore, I should like to see a substantial interest rate introduced and a clear system, as in the United States, so that the avoidance of tax payments can be stopped. I should like Treasury Ministers to consider whether there is any possibility of introducing a system, if not exactly the same, at least somewhat similar to it and simpler than the proposal in Clauses 41 to 43 of the Bill.

Mr. Deputy Speaker (Sir Myer Galpern)

Order. It seems to be my lot recently to occupy the Chair in the period just prior to the commencement of the winding-up speeches. If these are to start at nine o'clock, I find myself left with many more hon. Members anxious to catch my eye than I can possibly accommodate. I have made a rough calculation. I find that six hon. Members still wish to take part in the debate. If they were to confine their remarks to 10 minutes each, they could all be accommodated.

8.7 p.m.

Mr. Ralph Howell (Norfolk, North)

The economic situation, after 14 months of the Labour Government, can be summed up as "steady as we go" on the road to catastrophe and chaos.

The Chancellor has made the most monumental miscalculations of all times and deserves to be in the "Guinness Book of Records". A year ago he said that our borrowing requirement would be £2,700 million. In actual fact it turned out to be nearly £5,000 million more. He is now talking of a borrowing requirement of £9,000 million. If his margin of error is as great as ever, Heaven knows what the actual will be. Only six months ago the Chancellor was talking of his great achievement of the inflation rate being down to 8.4 per cent., whereas the actual is over 21 per cent.

I find it difficult to decide whether the Chancellor is the worst democratic Chancellor that this country has had or the most successful Chancellor for promoting the cause of Communism. There is no doubt in my mind that inflation is a Communist weapon and that it is being stoked by the anarchists, who are deliberately trying to destroy our economy.

Before following that line further, I should like to draw attention to the effect that the Budget has already had in my constituency. I wish to mention particularly the effect of the 25 per cent. VAT. An announcement has been made today in my constituency that two factories, which manufacture television components, will close as a direct result of the 25 per cent. VAT.

Although I am not altogether against indirect taxation and prefer it to direct taxation, I do not believe that there is any sense in increasing VAT on some goods to 25 per cent. while the Chancellor persists with 8 per cent. on goods generally. Why did he reduce VAT from 10 per cent. to 8 per cent.? When he realised that he had made a mistake in this respect, why did he not revert to the 10 per cent., which was so much easier to administer, for shopkeepers to calculate, and so on? There would have been no need to have gone in for this 25 per cent. increase on certain articles had he reverted to the 10 per cent. VAT.

There are four fundamental things which this Government, the next Conservative Government or a coalition Government, must do before they can get the economy right. First, they must repeal the National Insurance Act 1966. It is absurd to give social security as of right to strikers' families immediately the strikers lay down their tools. No other country in the world does it, and no other country has a worse record than ours. Perhaps I may relate the strike record of this country with that of Western Germany. One of this country's worst years for strikes was 1972. We lost 2,000 man days per 1,000 workers. In Germany the loss was less than five man days per 1,000 workers. In 1973, the last year for which figures are available, our record—and it was a very good year for strikes for this country—was 14 times worse than Germany. This year the strike record has worsened, and it is that which is bringing firms like British Leyland to their knees, causing further investment to be necessary. It is absolutely essential that we repeal that 1966 Act.

The second necessary action concerns the petty reform of PAYE proposed in the Budget. I agree that cash vouchers should be taxed, but so should unemployment benefit. It is absurd to try to run a system in which it is more profitable to work for only part of the year than regularly all the year. I was given figures in a parliamentary answer on 15th May last year, and I hope that the Chief Secretary will take the trouble to look it up. They prove that a married man, with or without children, is better off being unemployed for up to 12 weeks a year than working the whole year. Take a man who earns £40 a week and has a wife and two children. Assume he pays rent at £5 a week and rates of £1.75p. When he is regularly in work, his spending power, taking account of rent and rate rebates and family allowance, with taxation and national insurance contribution paid, is £26.77. For the first 15 or 16 weeks of unemployment that same person would have a spending power of £32.90. This absurd situation should be corrected.

I hope that the Minister will take note of this and that the Chancellor will fulfil the promise he gave me earlier today of providing an opportunity to discuss this matter on Report. The worst example I can quote demonstrates that people can be as much as £8.75 better off out of work than in. This increased payment can be drawn for up to three months in a year. Until all income from any source, whether wages from the employer or benefits from the State, is made taxable this absurd situation will continue. It must be halted if we are ever to correct our present situation.

I should like to be helpful to the Government on the question of employment. It is worth pointing out that there are not 1 million unemployed in reality if by "unemployed" we mean people who want to work. I said this in 1972 when my Government panicked when the figure reached 1 million. I pointed out then that there were fewer than 250,000 people who wanted to work, and I suggested that this situation arose because of the PAYE system, because many retired people drew unemployment benefit and because a large number of those classified as unemployed should be classified as virtually unemployable. With the figures presented in this false manner we delude ourselves into thinking that we have a vast unemployment problem when we have not, and we take action designed to counteract it. I hope that the Government will not fall into the same trap as the Conservative Government in 1972.

The third course of action concerns public sector expenditure. An awful lot has been said by all Governments since I entered the House about cutting public expenditure and keeping it under control. Perhaps I may give a few figures to demonstrate what is happening in local government. A million more people are being employed there than were employed in 1960—

Mr. Wrigglesworth

Does the hon. Member accept that it was not this Government that put through local government reorganisation which resulted in this increase?

Mr. Howell

I do not want to get diverted on to that track, although I would be happy to deal with it if necessary. In 1960 local government was employing 1.7 million people. In 1973 the figure was 2.6 million. These are the pre-reorganisation levels, and I guess that in recent years the figure was rising by more than 100,000 a year, but nearer double that rate since reorganisation. We must do something positive about public sector expenditure. The most positive course is to stop recruiting into the Civil Service or local government until, through normal wastage, the staff levels are reduced to their correct levels.

In addition to the increase in staff, there has been vast investment in computerisation and mechanisation in local government which should have resulted in a reduction of the labour force rather than an increase. Until the Government have the courage to do this we shall never stop public sector expenditure from rising.

I believe that the serious speech by my right hon. Friend the Member for Farnham (Mr. Macmillan) was very much in the right vein, although I did not agree with his suggestion about an incomes policy. This has never worked anywhere, and I do not believe that it will work here. I share his view that we are facing an extremely serious and critical situation. Whether it is intentional or not, the Government are being manipulated by Communists, by people who are deliberately trying to destroy the country. The great majority of us in this House firmly believe in democracy. The great majority of people in the country believe firmly in democracy. But we are being pushed around and destroyed by a handful of people. It is time we all recognised that we should do something more positive than we have done recently to stop this process. In a way we are aiding and abetting what is going on and should be acting in unison to stop the advance of Communism in this country.

8.20 p.m.

Mr. John Gorst (Hendon, North)

We are facing yet another Finance Bill, the seventh in the five years that I have been in this House, the fourth in the last 24 months, and the third in the past 12 months. It is now almost a Budget for each season. How can a nation's economy be run on the basis of major changes once every three or four months? I intend to confine myself to making a strong plea, by no means an original one but one which deserves serious consideration, for moving away from monthly or annual Budgets.

How can commerce and industry from year to year be expected to go through an almost liturgical ceremony in which the Chancellor monopolises the time of this House for about two-and-a-half hours, at the end of which commerce and industry have to face violent shifts in policy coupled with startling innovations in taxation? At one moment the exhortations from the Treasury Benches are "Inflate, invest, consume". Next moment the message is "Deflate, stop spending and tighten your belt".

No mechanical contrivance could operate under such erratic and wayward instruction. Why should commerce and industry be expected to do so? No small business, let alone a private individual, can possibly survive that sort of unpredictable pattern, especially when it is mixed with punitive State-operated grabs into the bargain. There has been in the last three Budgets nothing but a mixture of these various elements. Every growing and active business has a recognisable three- to five-year cycle. It goes through identifiable stages of research and development, pre-production planning, tooling-up, investment, test marketing and so on. How can this process hope to run smoothly unless the main parameters remain not only constant but consistent? Consider the impositions business people have had to endure. There have been fluctuations in the rate of VAT, advance payments of corporation tax, confiscatory capital transfer tax, unstable rates of interest, escalating inflation and additional Customs and Excise duties on this, that and the other.

That leads me to my central point. We have to get away from this constant tinkering and tampering with the economy. We need a strategy. The suggestion I put before the House is a once-for-all Finance Bill at the start of every Parliament—or, if not at the start and for the life of a Parliament, certainly not more frequently than once in every three or five years. There will have to be flexibility for tactical reasons and for fine tuning of the economy. But the major strategy must be laid down for a longer term than is the case at present.

Thereafter Governments should guarantee that they will fine-tune within severely restricted limits. What is wanted, what has always been wanted and what is needed now, is a Finance Bill that has relevance for years ahead not just for weeks or months. Coupled with that will go an increasing confidence that will enable businesses to start planning, investing and creating new resources. The strategy into which the Government should be entering must involve cuts in Government expenditure. It must include a healthier balance between public and private sectors and incentives for private capital so that those who take the risks may retain the fruits of such risks—and, my goodness, those risks are increasing daily as we get deeper into difficulty.

There should be a simplification of the tax structure so that armies of tax con sultants, tax lawyers and tax accountants are redeployed on the positive sides of productivity, thus increasing the profitability of the economy rather than spending their time dealing with tax avoidance matters and interpreting the almost meaningless directions of the Treasury mandarins.

So many of our national problems can be traced to intensive innovation in the tax sphere, to the ham-fisted meddling of the Treasury—in short, to over-government. There should be one Finance Bill per Parliament. With the spectre of unemployment on a massive scale facing us, coupled with inflation at the 20 per cent. to 30 per cent. rate, I suggest to the Treasury Ministers that the most appropriate thing they could do would be to withdraw the Bill in its entirety, because it is not only tardy and timid but also totally ill-conceived. It is in the wrong spirit and is unsuited for dealing with a situation that has grossly changed.

If Ministers tell me that this is impossible, let me remind them of the words of Sir Winston Churchill on some other different occasion. He said "Pray do not argue the difficulties, for they will argue for themselves." There have been seven Budgets since I came into this House. One way or another they have multiplied the nation's problems at least sevenfold. I very much hope that the Chief Secretary will give some forlorn consideration to my suggestion that he withdraws the Bill.

Several Hon. Members

rose—

Mr. Deputy Speaker

Order. I sent a message through the Whip to the hon. Member for Hendon, North (Mr. Gorst) telling him that he was not to take more than 10 minutes and that if he exceeded that time he would probably never be called to speak in this House again. I am glad to say that he has responded to my message and has taken only seven minutes. I hope that other hon. Members will follow suit.

8.26 p.m.

Mr. John Watkinson (Gloucestershire, West)

I have listened with interest to the speech of the hon. Member for Hendon, North (Mr. Gorst). He has put forward an interesting idea. It seems, however, that we can all set out a broad strategy which we want to follow in an economic and financial sense. The difficulty is that events occur which make it necessary to respond in a basic way through budgetary measures. I should like to know how the hon. Gentleman would have coped with the oil situation without a series of such measures.

The hon. Member for Norfolk, North (Mr. Howell) said that we had no unemployment problem. Perhaps if he visited some of the depressed areas in the North he would change his mind.

I want to address myself to a matter which is of crucial importance to the country, namely, the problem of wages. It is now conceded by all sides that wage increases are the fundamental problem facing us in dealing with our inflationary situation. Even the TUC in its review acknowledges that wage increases are of major importance in producing the inflation with which we have to deal. We know from our study of the manner in which inflation rates abroad have gone down that the increases in this country cannot be blamed upon the increase in commodity prices any longer. However, we must accept that wage increases have caused and are causing an increase in inflation in Britain at a rate, according to a review I read in the Financial Times, three, four and fives times that of our international competitors. This cannot be long tolerated in Britain and it must be faced.

My hon. Friend the Member for Berwick and East Lothian (Mr. Mackintosh) mentioned that both Front Benches were waiting for disaster before they acted. Sooner or later the inflationary situation must be reflected in our balance of payments performance. It will begin to make us uncompetitive and, indeed, there is evidence to show that the advantages we won under the Smithsonian Agreement have already been disssipated and lost.

The problem of the balance of payments situation is such that sooner or later we shall have to go, cap in hand, possibly to the IMF to ask for more money. The IMF may well attach strings to that borrowing, in the way it did in the middle-1960s, and we shall be confronted once again with a situation in which our policies will be dictated by people outside Britain.

At present we are allowing the rate of exchange to float down so that we can maintain our exports. If we allow that to happen, we must accept as a consequence that further inflationary forces will be built into the economy, which at the same time will discourage those countries lending to us which have done so in the past.

We know that our public sector borrowing requirement has been largely financed by borrowing from abroad. Quite obviously this cannot and will not continue with a depreciating currency. The Chancellor has almost been guilty of too much success in winning for Britain loans from abroad, because this has/ meant that Britain has not faced the basic problem which has arisen from the imposition of the oil price increases.

I said that wages—I think, in the view of all hon. Members—are a basic problem. The House cannot fudge this issue any longer. I listened with great interest to the right hon. and learned Member for Surrey, East (Sir G. Howe), but when he dealt with the problem of wage inflation he became very fuzzy. He was very precise in his attack upon us, but when it came to proposing measures for dealing with inflation, especially the problem of wages, he became imprecise and unclear. Basically he put forward a broadly monetarist view of how to control inflation in Britain. If a monetarist view is being pursued by the Opposition, we are entitled to ask how that policy is to be operated and how it would operate in terms of unemployment. If we rigidly control the money supply and link it to the level of output in this country, what will happen to firms which overpay? Shall we allow massive bankruptcies? Will there be massive unemployment? Are these the diciplinary forces which the right hon. Member for Down, South (Mr. Powell) wants the country to face?

These are problems which have to be dealt with. The Labour Government have pursued a deflationary policy through their Budget and it is represented in this Finance Bill. We are increasing taxes and attempting to cut public spending. That also has the effect of increasing unemployment, and no Labour Member can watch the level of unemployment increase with anything other than the greatest shame. It is something which Labour Members have fought against for generations. It is the bedrock of what the Labour Party stands for. That is why, as a party, we must be opposed to allowing unemployment to rise to totally unacceptable levels, which would be inherent in the monetarist policies as put forward by Conservative Members.

I am worried about the policies which have been put forward by the Government, but they are a realistic response to the economic problems which we face. The whole of the Chancellor's strategy is based on a gamble—he admits this gamble—that there will be an upturn in world trade in the next year. It appears that the future of our economy depends upon the expansion of the United States economy and the German economy. There is an alternative—namely, the line which has been pursued in the past—and that is through the operation of an incomes policy.

We have attempted to impose a voluntary policy through the social contract. It is an eminently sensible policy in so far as wages are only a part of the total unit costs. If wages increase and this is reflected in prices, in the next round it should, because of the operation of the percentage of wage increases in the unit cost, bring the next wage increase down.

There are those who have decided as a matter of policy that they will oppose the social contract. As a Socialist, I do not understand why supporters in the Labour Party should wish to oppose the social contract. Why should it be anti-Socialist to have planning in one's incomes policy? To take the view that one can have planning in every other sphere except wages is not Socialist at all.

It seems to me that a planned economy must involve some form of planning of wages. Without that we are faced with the inevitable situation of wages spiral-ling up and up, and we are reduced to a situation in which the law of the jungle prevails and only the fittest survive. I do not find that a particularly Socialist solution to our problems. There are views on the Government side of the House that we ought to adopt some form of siege economy. That is no solution in the long run. We should still be faced with the fundamental problem of inflation and what to do about it, and we should still have the problem of having to import goods.

My right hon. Friend the Chancellor has heroically tried to defend the operation of the social contract. But if this policy is to continue and to operate, more teeth must be put into it. If we as politicians are to reassert our control over Britain—we have seen the articles in the newspapers today—we must be prepared to face the problem of wages. My hon. Friend the Member for Berwick and East Lothian said that we were facing the possibility of a statutory wages and incomes policy. We do face that possibility. It is not one which I wish to espouse, because it seems so much better that we should seek to solve our problem through the operation of a voluntary policy. However, in relation to the policies which have been put before us, the monetarist policy and the deflationary policy, it seems to me that it would be much better to find some form of voluntary incomes policy. We must do so if we are to come through the present economic crisis, which is becoming worse by the minute.

8.37 p.m.

Mr. Tony Newton (Braintree)

It has become unfashionable in this debate to discuss the Bill in any detail. Indeed I, too, want to discuss the more general issues shortly, but first I shall delight the Chief Secretary by referring to some of the details in the Bill—very briefly, in view of your injunction about time, Mr. Deputy Speaker.

I should like first to support what was said by an hon. Member on the Government side of the House about the child income limit. If I remember rightly, my hon. Friend the Member for Norfolk, South (Mr. MacGregor) and I moved an amendment on this very point in last summer's Finance Bill. We were told then that it would be considered for the next Finance Bill. We now have the second such Bill, but nothing has been done about the limit. Therefore, I support the plea that this allowance should be reconsidered.

I very much welcome the extent to which the Chancellor has implemented the amendments which I and other Opposition Members put forward at roughly this time last year. It is perhaps ironic that the blind persons' allowance has risen by exactly the figures we had in our amendment, which the Chief Secretary then resisted on the ground that it was administratively impossible then to implement it.

For me there is a double irony in this because in the heat of the moment I commented, during the Report stage of that Bill, that some people felt that the Inland Revenue had put quite enough burdens on us and that we should put some on the Inland Revenue in return. The editor of the journal of the Inland Revenue Staff Federation apparently noticed this and put it in the journal. It was read by some of my constituents in the Witham Inland Revenue office. / upset many of my friends. Perhaps I should take this opportunity not only to apologise to them but to say that I regard taxpayers and the ordinary workers of the Inland Revenue as the joint victims of the mandarins of Somerset House and Great George Street, and never more than of the present mandarins of Great George Street.

I welcome the increase in the blind allowance and the Section 14 relief for single people with children. I should like to ask—I hope that we shall discuss this matter further in Committee—why nothing has been done about Section 16 relief for people who are supporting dependent relatives, and particularly single women who are supporting dependent relatives? Furthermore, why is nothing being done about the situation of widows, particularly widows who go out to work to supplement their income—not necessarily widows with children—and who quite rightly feel much aggrieved by the treatment they receive under the present tax system? This is something we should now be trying to do something about, and both these points should have been taken into account in the context of what has been done about one-parent families in this Budget.

My next point concerns something which is not in the Finance Bill and about which I have been in correspondence over some months, mainly with the Department of the Environment but more recently with the Treasury—that is, the scandalous situation which has been allowed to arise in relation to local authority mortgage interest rates, in which the least-well-off borrowers in our society—and it is acknowledged in a letter from the Department of the Environment that we are talking about many of the least-well-off home owners—are now expected to pay interest rates significantly above those charged by building societies. This applies to many local authorities throughout the country, including one in my own constituency.

I find it impossible to defend a situation in which the Government deliberately and, in my judgment, rightly took action to help building societies to keep down interest rates last year and have now refused to take any kind of comparable action to help those who borrow from local authorities—that is, the least-well-off borrowers.

I shall not elaborate on this, in view of the pressure of time, but simply say that I accept that it would involve a subsidy from public funds, that it could not be done in the same way as building society help was given last year. But I regard this as a debt of honour which the Government should discharge, and I would accept that subsidy. If asked where I would find the money, I can think of a number of places. Why not look at the cheese subsidy, or any of these indiscriminate, foolish food subsidies, which we could get rid of to help a specific, needy group of people who are suffering a clear-cut injustice?

Finally, I have some comments on the central issues of the Budget, our country's situation and this debate. It is already clear that the Budget which was presented only a few weeks ago is the Budget that never was. Nobody on either side of the House regards it has having made a significant contribution to the solution of the country's problems. There are many hon. Members on both sides of the House who regard it as having made the situation worse, not better. Its one memorial in British economic affairs is that it will be remembered as causing the greatest and most farcical spending spree in the electrical departments of our major stores, and that is not anything of which the Chancellor should be proud.

It would be unfair to criticise the Budget for not having tackled some other major problems. One is the lack of confidence and the will to invest in industry, and the Chancellor alone cannot solve that problem. It is due partly to fear of the referendum and partly to fear of the Secretary of State for Industry. Neither problem can be dealt with for the moment. I can only hope that the referendum will go the right way—in favour of staying in Europe—and that the Prime Minister will then take his courage in his hands and deal with the Secretary of State for Industry. Until he does, we shall not get the psychology, the confidence or anything else in Britain right.

But what the Chancellor could have done was something more effective about inflation. I took the precaution before coming here this afternoon to look up what I said on Second Reading of the last Finance Bill a few months ago. I then said that we must return to a statutorily-backed incomes policy, and I went on to say that: …the risk we run is of another six or eight months' delay while inflation steadily escalates, undermining employment now or in the future and the whole cohesion of our society."—[Official Report,17th December 1974; Vol. 883, c. 1460.] I say to the Chief Secretary and the Chancellor that the risk I commented on then is now the reality. That is what has happened in the months since December: unemployment has risen, the cohesion of our society has diminished. That delay has occurred and is still occurring, and the Chancellor has failed in his Budget to face up to it.

When I made that speech in December I was accused by a Labour Left-winger of knocking the social contract and asked how the social contract could work if I kept on knocking it. It is striking that today we have heard from nobody who even pretends that it is working. There is perhaps one hon. Member present who belongs to the Labour Left. I am not surprised that the Left-wingers do not have the courage to stand up to an economic debate. They, more than any other group, as my right hon. Friend the Member for Farnham (Mr. Macmillan) said, are responsible for the situation in which we find ourselves.

The debate has been striking in the unanimity of view expressed by the moderates on both sides of the House. No hon. Member on either side believes that the answer to our problems can be found in any ordinary mechanical devices. No one believes that the whole weight can be borne by a reduction in public expenditure, because the cuts that would be required would provoke a social revolution. No one believes that a solution can be found entirely by increasing taxation, because we could not stand the weight of that taxation. Even if we could solve problems by cutting public expenditure or increasing taxation, nobody believes that we could tackle inflation at the cost of the rise in unemployment that it would entail.

There appears to be no solution except to tackle the central problem of what is acknowledged to be the cause of inflation, namely, the rate of increase in wages. That is what has led almost all hon. Members who have spoken from either side to come to the conclusion that we must have a sensible incomes policy. I would accept a statutory policy, though of course I would prefer not to have one if it could be avoided. But if the Chancellor, the Chief Secretary and other Treasury spokesmen go on running away from this problem for another six months, as they have been running away from it for the best part of 18 months, the country will be not far short of a major economic disaster, and the Chancellor of the Exchequer will be back with another Budget and another Finance Bill in crisis circumstances before the summer is out.

8.48 p.m.

Mr. James Lamond (Oldham, East)

I am happy to defend the social contract and my right hon. Friend the Secretary of State for Industry. It is revealing and surprising that Opposition Members, who continually refer to the Cabinet being split on membership of the EEC, do not accept that the Secretary of State for Industry when he stands at the Dispatch Box and put forward his policy for industry is speaking with the full backing of the Cabinet. Opposition Members cannot have it both ways. If they want Cabinet responsibility they must stop trivialising and personalising the issue. Instead of attacking the Secretary of State for Industry they should attack the policies of the Government which I am proud to support.

A Bill of this magnitude is bound to contain many elements. There are some with which I disagree and many with which I agree. I am delighted by Clause 40 which is entitled: Oil: restriction on carrying forward of losses incurred before the end of 1972. That is an important clause which fulfils a promise made by Lord Barber when he was Chancellor of the Exchequer. He accepted a report from the Public Accounts Committee which he promised to do something about, but he did nothing. We have had to wait for a proper Government, a Labour Government, to tackle the matter.

Of course, we understand the background against which the Budget was drafted. The Chancellor was seeking to correct the difficulties in which the British economy found itself. I also expect him to use it as an instrument to do other things. Specifically, I expect it to be used to alleviate unemployment in certain areas, such as the one I represent in the North-West of England. I am happy to see that all my right hon. and hon. Friends on the Treasury Bench represent constituencies very close to mine. I know that I am having an attentive and sympathetic hearing when I mention the effect of the present economic crisis in Oldham, East, an urban working-class community. It is an area where there are no high wages and where there can be no claim that high wages are the real cause of the unemployment.

In Oldham, East we had to face a situation in which Courtaulds closed its Oldham mills for one week beginning 3rd March. I realise that this is a matter that is now out of date. Some 725 local workers will be laid off. The Briar, Fox, Lilac, Maple and Royd mills and the Harwood Cash Doubling plant in Chadderton have been affected. The mills are employing people on wages which we would regard here as very low. The workers are earning £30 to £40 a week. There is no question of high wages being the cause of difficulties in the textile industry.

I expected my right hon. Friend to do something about controlling imports. In his Budget Statement my right hon. Friend outlined the position from which his strategy was drawn. He said that imports entering this country and causing a balance of payments deficit were one of the real causes of our difficulties. He said that that situation represented 3 per cent. of the gross national product after discounting the oil deficit. It would have been reasonable for my right hon. Friend to have examined the goods which were being imported and which have been adding to our difficulties.

If my right hon. Friend had examined the situation closely he would have found immediately that the import of textiles into Great Britain has increased sharply. I know that people have seen my right hon. Friend from all the different sectors of the textile industry—namely, trades unions, the employers and the organisations which combine both the trades unions and the employers. They have all spoken with the same voice and have asked the Government to make a cut across the board in the imports of textiles. There are 150,000 people on short time in the textile industry. I am disappointed that something was not done in the Budget.

8.53 p.m.

Mr. Stephen Hastings (Mid-Bedfordshire)

I hope that the hon. Member for Oldham, East (Mr. Lamond) will forgive me if I do not take up the matters that he has raised. I am conscious that there is little time left as I know that my hon. Friend the Member for St. Ives (Mr. Nott) wants to get up at 9 o'clock or very soon afterwards.

The standard of the speeches in this debate has been distinguished. It has been particularly impressive in that they have demonstrated a degree of unity of thinking and common ground as to both incomes policy and other aspects of our problems. If the background to the debate is sombre we can perhaps draw some sense of satisfaction in the House about the degree of unity which has been demonstrated. I hope that the debate is read and studied by the Government. It will read very much better than some of the polemics which we read of in the Press, in reports about Government committees and what has been happening at the NEDC.

In particular, I was attracted by the possibilities raised by the hon. Member for Berwick and East Lothian (Mr. Mackintosh) of an incomes policy agreed across the Floor of the House and of a system by which wages are settled once annually rather than in the present chaotic manner.

Because of the high standard of speeches, I am more than diffident about my contribution, which will be short and narrow in content. I am concerned principally with one aspect of VAT. I am most disturbed by three examples in particular of how the increase to 25 per cent. will operate.

The first relates to the boating industry. I cannot understand why it should have been decided to choose these apparently random targets when a 1 per cent. increase in VAT across the board would have raised £300 million and a 2 per cent. increase £600 million. The increase on boats alone will raise only £10 million and on caravans £2 million. If this boating provision goes through, it could reduce activity in the industry by as much as 50 to 60 per cent. It has a very good export position in Europe. The Dutch suffered so much from domestic taxation on boat building that they had to give up their export markets and they have never recovered. The same could happen to us.

Another aspect which worries me is the effect of the tax on aircraft and radio repairs and spare parts. There is a real risk that air safety could be threatened as a result.

My third example—I know that all these matters will be debated in Committee—is caravans. There is an example in my constituency. Production in this industry was already down by 40 per cent. on the 1974 figure before this increase in VAT was proposed. A very serious situation could arise in this industry as well.

I understand the objections of my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) to this piecemeal approach to VAT, yet in the present economic climate formerly profitable, viable and desirable activities are now suffering so grievously at the hands of the Revenue that they face extinction. There are cases which should qualify for zero-rating, or at least for some additional consideration from the Chancellor. However, the terms of the Ways and Means Resolution mean that no opportunity will arise to discuss these cases except in this debate.

I want to concentrate my remarks on one such example. I hope that it will not be felt to be trivial in the general context of this debate, but to very many people concerned it is not. I am alluding to the racing and bloodstock industry. It is time that the problems of this industry were ventilated in the House. Mercifully this is not a controversial subject, unless it is a crime to enjoy oneself, to take physical risks and to admire the beauty and courage of horses. I have never known any hon. Member object to a good tip from the other side of the House—at least, not before the race takes place.

It is doubtful whether many of us appreciate how many people are engaged in racing, how many enjoy it, what the industry earns for us in revenue and exports and just how the British Government treat it compared with other countries which also have a racing industry.

Racing employs 100,000 people. The betting turnover based on it is £1,270 million, £100 million of which goes to the Exchequer as betting duty. Just under 1,000 days of racing take place every year at 63 courses and over 5 million people go through the turnstiles. That is not to mention the many millions who enjoy it on television. No racing can succeed without a successful breeding industry. In 1973, bloodstock exports were worth £28 million.

Yet all that racing gets from this enormous betting turnover of over £1,000 million is a miserable £9 million. It is important for anyone who wants to understand the problems of racing to realise how little the industry gets compared with other countries. I have taken from each of five countries the ratio of what the Government take from the betting turnover to that which racing receives. In Japan the Government take 60p for every £1 that the industry gets. In the United States the Government take £1.40 for every £1 that the industry gets, in Italy the figure is 50p and in France it is just under £2, but in this country the figure is over £11.

As for VAT, bloodstock and racing generally are international activities, very sensitive to fiscal arrangements. The two countries whose fiscal policy affects us most in this regard are Ireland and France. In neither is VAT paid on sales of bloodstock. Here, the rate is 8 per cent. On imports, Ireland pays nothing and France pays only a small percentage on the first few hundred pounds. We of course pay considerably more. Let us take the example of a £10,000 yearling. If it is imported into Ireland, the Irish pay nothing. If it is imported into France the amount is £19.74. In the United Kingdom it is £800. In addition there is a 10.8 per cent. duty on all breeding stock imported into the United Kingdom, compared with no duty in Ireland or France.

What is the effect of all this? The whole pattern of trade in bloodstock and training is being distorted in favour of foreign countries. More and more owners are sending their horses abroad to be trained or to breed. Fewer and fewer import good horses to race and subsequently to go to stud here. There are 20 per cent. fewer horses in training than last year and a 10 per cent. reduction in employment in racing stables.

The most graphic figures are probably for sales of yearlings. Take, for instance. the largest bloodstock agency at New-market for this period: 1972 to 1974. Home purchases are down from 295,100 guineas to 39,000 guineas. Export purchases, involving valuable horses going out of this country, are up from 107,400 guineas to 261,000 guineas. Our test blood lines are simply being drained away, and nothing is being imported to strengthen or replace them.

With inflation, the price of yearlings sold by auction all over the world has gone down, but comparisons between the United Kingdom and other countries again speak for themselves. In the United States the prices of yearlings sold last year are down by an average of 7 per cent. In Ireland they are down by 16 per cent., in France by 27 per cent. and in the United Kingdom by 40 per cent.

The provisions which the Chancellor could make if he would consider the matter—and I know that representations have been made to him—are very simple. Why does he not provide for racing to enjoy the same provisions for us as the Irish enjoy. Second, value added tax on the sale of racehorses could perhaps be zero-rated or at least reduced. Third, the 10.8 per cent. import duty could be removed or again applied only to geldings. Surely there could be an arrangement similar to the deal which has been worked out for the antiques trade.

The contribution of the British thoroughbred racehorse has been without parallel in the world. Nor is it limited to racing. More people than ever before take their pleasure out of doors from horses. In a predominantly urban society such as ours, this is surely a priceless advantage. Should the thoroughbred decline in this country the whole horse world, with its many and varied sports, will decline as well.

Well, bloodstock and racing are declining very fast indeed. I ask the Chancellor to look again at this matter and to do so urgently if he is to avert a deterioration from which it could take many generations to recover.

9.3 p.m.

Mr. John Nott (St. Ives)

In winding up the debate I shall deal first quite briefly with a number of taxation measures and then come to the wider economic issues of which they are a part. I hope that my hon. Friend the Member for Mid-Bedfordshire (Mr. Hastings) will forgive me if I do not refer to the blood-stock industry, on which I am not an expert. I am sure that we shall have an opportunity of debating this matter during the Committee stage.

Mr. Hastings

We shall not.

Mr. Nott

No opportunity at all? I assure my hon. Friend that we shall find some opportunity to bring the matter into the debate if he will provide us with the necessary information and briefs.

I regret that the Chancellor chose to grind his way through a long descriptive draft prepared for him by the Inland Revenue about the clauses of the Bill. Quite frankly, we should have found it more exciting if he had read out the Bill line by line. For one moment I thought that he was going to read out the schedules, and I brightened up a bit, but, no, he reverted to his long descriptive speech. I must say that the Chancellor's speeches get longer and longer as we go along.

First, on taxation, let me comment briefly on the 25 per cent. rate of VAT. The Labour Party has always proclaimed its faith in a luxury rate of indirect taxation. We have often heard Labour Members give the reasons in the House. We were ready for a luxury rate, but the Government have presented us with an imposition on so-called non-essential items which has no justification and which is grossly unfair to many sections of the community.

The Chancellor now taxes at a penal rate sports such as dinghy racing, yet other major sports and less popular pastimes have been left at the lower rate. The hon. Member for Sheffield, Attercliffe (Mr. Duffy) said that dinghy racing was not a monopoly of the rich, and he was right. It may be a non-essential item, but it seems a strange sport to single out for a penal rate of VAT.

The 25 per cent. rate taxes, again in a penal way, the repair and maintenance of a whole range of essential household appliances used in every home. I do not understand how such repair and maintenance can be described as non-essential. It also taxes the rentals of existing television contracts but leaves hire-purchase agreements free. We note—we can do no more than that until we debate the relevant clause and schedules—that television rented by an elderly pensioner is classified for this purpose as a nonessential item in the Government's eyes.

The tax will cause intolerable complications for the component manufacturers, no less severe than a multi-rate VAT caused for retailers. It would he easy to list a whole range of anomalies which have arisen through the introduction of the multi-rate VAT. I shall not do so tonight, because we shall have an opportunity to discuss it on the Floor of the House.

As someone who cut his ministerial teeth on the VAT fish and chip debate, I can tell the Chief Secretary that I am well aware that VAT is not totally free of anomalies, but never in my worst nightmares could I have imagined that a Labour Government could invent the sort of proposal they have put before us in the Bill. As many of my hon. Friends have asked, why did the Chancellor reduce the rate from 10 per cent. to 8 per cent? It would have been more sensible to leave it where it was.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) mentioned several other taxation clauses. I shall not go through them now. I have time to mention only the question of taxation and personal allowances. When high rates of inflation take off, the hardest hit will be those who are around the tax threshold and those paying the higher rates of tax. In an intervention, I mentioned what the Child Poverty Action Group had said.

About 1 million more people are in tax now than were in tax when the Chancellor introduced his first Budget just over a year ago. But, although it is those around the threshold and those on the higher rates of tax who bear the greatest brunt when inflation takes off, as it has done, as people move into higher and higher levels of money income there is a geometric progression which brings more and more people into increasing difficulty. That will happen this year, and it will undoubtedly lead to increasing unrest.

The point which has not quite come out in the debate, except to some extent in the speech of the hon. Member for Cornwall, North (Mr. Pardoe), is that it is the difference between the average rate of tax and the marginal rate on any additional income which is the crucial factor. The Red Book tells us nothing about the impact of taxation in this respect. For an example let us take a railwayman, though it could equally well be someone working in another industry, earning about £27 a week. He will need a 30 per cent. wage increase to maintain his real disposable income this year with a 20 per cent. inflation rate. Let me quote an example. If a man has £100 in spending power and that spending power drops to £80 in real terms because of 20 per cent. inflation and the tax is £10, it is clear that he will need a 30 per cent. gross rise to compensate for a 20 per cent. rate of inflation. That is mathematically correct.

It must be most annoying for a whole section of the community to be constantly told that all that is needed is for wages to rise in line with prices. If one is around the tax threshold or on higher rates of tax, that statement is not true. It is nearly true if one talks of a wide range of taxpayers in the middle, but for the lower-paid worker a 35 per cent. rate of tax means that for every additional £1 earned he will have to have a 30 per cent. increase to stand still on a 20 per cent. rate of inflation. There must be many people who feel that they are being told something that they themselves know is not true.

That brings me to indexation of tax allowances. What the Chancellor is doing by dishing out subsidies is in no way removing the ugliness of inflation but hiding the symptoms while the patient's condition get constantly worse. It would have been simpler from a counter-inflation point of view to raise the personal allowances in line with inflation and to spend less money on subsidies. The Chancellor would then have been tackling the real root causes of inflation instead of its symptoms—which he is attempting to do with subsidies.

The Liberal amendment suggests a mandatory fixing or indexing of tax allowances. I am aware that this is becoming a popular view. I have read some of the pamphlets on it. Milton Friedman has written one, and I know that he has many followers among our senior and most important economic commentators, not least Mr. Samuel Brittan. I do not want to come down on one side or the other, but if indexation is to be meaningful and not grossly unfair, it needs to cover all forms of unearned, earned and investment income, contractual debts and tax scales. Milton Friedman would admit that if one goes in for partial indexation, one will protect those to whom it is applied, but can only do so at the expense of those who are not so protected. Just as inflation does not increase resources but merely redistributes them among the community, indexation cannot remove the pain of ending inflation but only redistributes the pain. If all parts of the economy are indexed, the burden is spread more evenly.

Mr. Lawson

Does my hon. Friend agree that there is a basic distinction between the Government's transactions with citizens, such as those relating to taxation and Government debt, where indexation should apply across the board, and private transactions between citizens, such as wage agreements, where it is up to the private individual to choose what to do?

Mr. Nott

I hope that we shall have the opportunity to debate these matters at a later stage.

On the subject of savings, if one indexes a bond, either the bond is attractive, in which case everybody wants to buy it, or it is not attractive and nobody wants to purchase it. It is the attractive bond which people will want to buy, and nobody will want to hold the old bond.

But one cannot neglect old debt and look at only new debt. There is fixed interest debt in the market amounting to £10,000 million. Those who hold insurance policies and existing savings must be protected as well.

Therefore, I agree with my hon. Friend the Member for Blaby (Mr. Lawson) that this is an important topic, but I shall not dwell upon it now. I shall be delighted to debate the matter at greater length on a later occasion. I am not suggesting that the answer is all one way. It may be that to reduce the pain of inflation we should attempt indexing right across the board. Whether the administrative machine in Whitehall could ever implement such a policy, in view of its complexities and ramifications, I do not know. I must be allowed to hesitate on that point.

Mr. Healey

I do not know whether the hon. Gentleman has read what the current ambassador of Brazil, Senhor Roberto Campos, who introduced indexation into Brazil, said about it. He made it clear that the system could not have worked in a parliamentary democracy as we know it.

Mr. Nott

I should not like to comment on that. I have looked at the situation in Brazil. Immediately after indexation was introduced in Brazil, wages fell and Government revenue rose. I think that is probably the reverse of what would happen here.

Both my right hon. and learned Friend the Member for Surrey East and I spent some time dealing with the social contract in our Budget speeches. I shall not repeat that. However, in these discussions of incomes policies and the social contract, I am sometimes reminded of a comment of Bertrand Russell. who said that the trouble with the world was that the stupid were cocksure while the intelligent were full of doubt.

The question of an incomes policy is largely one of semantics. I do not disagree with many of my hon. Friends on this matter. Nor do I believe that the Chancellor disagrees with many of his hon. Friends. However, in this area of semantics there is much misunderstanding about what each Member of Parliament means. The social wage rose by 33 per cent. last year. Wages are now rising at 30 per cent. I propose that both wages should be treated together. As the right hon. Member for Battersea, North (Mr. Jay) said, Socialism works best when it is in harmony with the laws of arithmetic.

Nothing is in harmony with the laws of arithmetic in the situation now facing the country. We urgently need a new accommodation with the trade unions, but nothing seems to be happening. I am reminded of the story of the mother who said to her child "Little Jimmy, if you behave well, would you like a little brother or sister?" Little Jimmy thought a moment and said "I should like a little brother, but if you have room I should like a Shetland pony as well." Sometimes I think that the Chancellor is in the position of a mother asking the trade unions to behave well. Not only do they want what the Chancellor is offering them, but they want a Shetland pony in addition. There must be another accommodation with the unions. That is a matter of great urgency.

My right hon. Friend the Member for Farnham (Mr. Macmillan) raised a number of interesting points. He said that he wanted to turn earners into owners. I agree with him. He made an excellent speech. He will recall the time, care and energy which he and I, when in the Treasury, put into creating the workers' share-incentive scheme. The limit was £1,500. The Labour Government stopped that scheme. I can quote a host of small examples of small efforts to turn some of our earners into owners. However, they did not meet with a consensus across the Floor of the House. I regret that.

My right hon. Friend also said that he was greatly in favour of the reform of company law. I agree. I also think that the bankruptcy laws are too fierce and go much too far. He thought that there should also be more consultation and information between employer and employee. He went on to speak about the Government's industrial strategy. I find this very difficult to comprehend.

It is now suggested by the NEDC, by the TUC and apparently by the CBI as well that there is a need to channel more institutional investment into industry. Well, every sector of the economy could do with more money in absolute terms. But what we should be debating is the relative distribution of what is available. If the institutions are not placing enough of their investable funds in industrial debentures and in British industry, it is the Government's fault. It is the Government who have to finance a £9,000 million borrowing requirement which is making it impossible for industry to raise the funds.

Interest rates have to be at a level which makes borrowing by British industry totally uneconomic. So it is in the Government's own hands to deal with this matter. It can be dealt with only by reducing the size of the Government's borrowing requirement and leaving more of the funds for British industry.

I come then to the argument of the Secretary of State for Industry, who says that too much investment is going into less urgent sectors such as commerce, services and overseas investment. I say to those Government supporters who agree with that statement that there is a genuine misconception about overseas investment. Virtually none of it is financed across the exchanges. If the money that we borrow from bankers overseas was not invested in our industry overseas, it would not be invested here. I cannot understand why anyone should object to borrowing money overseas to invest it in our industry overseas. There is a misconception here.

What is more, the export of services in gross terms now represents nearly half the value of the export of goods. If we also take the receipts of interest, profits and dividends from overseas, the two added together, as was set out clearly in a Treasury publication the other day, represent in gross terms nearly two thirds of the value of the export of goods. This is not properly understood, because the invisibles are always presented in net terms. The actual size of those gross figures is not appreciated.

What has happened is that services and receipts of interest, dividends and profits have grown 10 times since 1964. What has happened to visible trade—depending always on the base year—is that it has declined basically 15 times. So we have one sector of the economy enormously increasing in profitability to the benefit of the country, and another declining. Yet for some strange reason people are trying to divert funds from where we are startingly successful to where we are startingly bad. It makes no sense.

Government intervention should come through the markets to help the markets in the way that they are naturally working. I think that the pension fund managers have got it right and that the politicians have got it wrong.

It is remarkable what the figures show. Take, for example, the present situation of sterling—and I assure the Chancellor of the Exchequer that I shall say nothing to embarrass him in this respect. Much of the inflow into this country last year did everything to help the right hon. Gentleman finance his borrowing requirement in a non-inflationary way. Since sterling was depreciating at an average of 15 per cent. a year, we were paying a negative rate of interest of about 5 per cent. to receive this money. But, although this might be called sharp and profitable banking practice, I suggest that not even the most speculative fringe bank would wish to be dependent on call deposits on this scale and then boast about it, especially when its advances were primarily in non-income producing assets in the public sector.

The lifeboat committee, under its coxswain the Chancellor of the Exchequer, charged with the responsibility of baling out the fringe banks, has been running the biggest bucket-shop of all time. I am afraid that the next six months will show that the coxswain of the lifeboat has been concerned with only one objective—that of getting the Socialist crew ashore. All the women and children are left abandoned on the sinking ship.

Looking at the present situation in international markets—and I give but one example—it is frightening to go through the list and find that medium-sized cat food manufacturers in the United States are yielding 1½ per cent. less in international markets than the bonds of British Steel guaranteed by the British Treasury. Has anybody ever heard of Ralston Purina, which makes pigswill and cat food? That bond is yielding 9 per cent. on the international dollar bond markets, and British Steel, guaranteed by the British Treasury, is now yielding 10½per cent. This is a direct comparison of the way in which British credit is rated abroad. What British Steel will yield by the time Lord Stansgate has finished with it, God alone knows. Our credit has deteriorated very sharply indeed. In this situation the Chancellor now has to finance a borrowing requirement of a vastly greater amount.

That brings me to the right hon. Gentleman's statement, which we all believe, because we know him to be a sincere and truthful man, that he does not wish—[Interruption] If the House does not agree that Chancellor is a sincere man, I cannot take any responsibility for its views.

I think that it would be more enlightening to look at the facts. Either the exchange rate can held by intervention, which eventually means more overseas borrowing at a time when our credit has declined—possibly with strings attached—and that would mean rising interest rates which will unsettle the gilt-edged market and make the chancellor's domestic borrowing extremely difficult, or the answer is to let the rate slide and preserve easier domestic monetary conditions and lower interest rates than would otherwise be the case. That will provide a more favourable climate for the chancellor to favourable climate for the Chancellor to finance his huge requirement for debt and do something to restore our declining price competitiveness.

The chancellor is a truthful man, but I leave the House to judge which course that treasury has chosen. I remark only that if it were to be the latter course—the chancellor says that it is not—he has embarked on a more delicate operation of enormous danger because, given that leads and lags alone can run into several hundred million pounds a week, I hope that, if this ever were to be the chosen course, it will be handled with all the skill of which I know the Bank of England is capable

I conclude by making a few political observation, if I may call then such. Lord Watkinson and The times evidently regard the Chancellor as strong man. I think that we are going to see further evidence of this assertion. The fact is that in the past year, despite many brave words, we have suffered from a unique weakness of prescription. It may be that the chancellor and the chief Secretary are all the time winning great internal battles with their colleagues in Cabinet committees—I am sure that they emerge triumphant from the cabinet office day after day—but their monument will be the Public expenditure White Paper and Red book, Only those, not their biographies, will be able to save them form the facts which stare us in the face.

After all, Prime Ministers are not normally favourably disposed towards Treasury Ministers, charitable as he is, will admit that any of the problems facing us are due to his mistakes. Therefore, the situation deteriorates. The country looks for firm action, but none is forthcoming.

We know that a Chancellor can only be as strong as him Prime minister—and there by hangs many a tale, [Interruption] The House is full of right hon. and hon. Members who can, I am sure, agree with me on that. It is clear that at the moment the Chancellor does not have the support of the Prime Minister, nor that of the Foreign Secretary, or apparently the Home Secretary, until at least 6th June, son we are left with two essential questions. First, can the Chancellor hold the situation together for four more weeks without the whole edifice coming down around his neck during the middle of the campaign? Secondly, assuming that the answer in the referendum is "Yes"—may we, as patriotic citizens with a growing concern for the future of our country, hope that the Prime Minister and the Chancellor between them can get around to taking some difficult decisions? We have lived in this eternal, if not futile, hope of the present incumbent of the Prime Minister's office taking difficult decisions for six years or more, but so far these have nor been forthcoming. If that final difficult decision is not taken within the next few weeks, the consequence for this country is very grim. If the decision is not taken following the referendum, we have to ask what lies in the conscience of the Social Democrats in the Labour Party, because I have not yet totally abandoned complete faith in them.

9.30 p m.

The chief Secretary to the treasury (Mr. Joel Barnett)

I always find the hon. Member fort St. Ives (Mr. Nott) very entertaining, but on this occasion he was even more so because he gave us a sort of potted biography of how Conservative Treasury Ministers get on with their Prime Ministers. Knowing as I do what happened to him after the last General Election I can now begin to understand.

We have had today serious and thoughtful speeches about the economy and, in particular, about the very serious situation on the borrowing requirement, from the right hon. Member for Farnham (Mr. Macmillan), who occupied my office in the last Conservative Government, by my hon. Friend the Member for Sheffield, Attercliffe (Mr. Duffy), by the right hon. Member for Brighton, Pavilion (Mr. Amery), and by my hon. Friend the Member for Gloucestershire, West (Mr. Watkinson). Most of them have the humility to recognise that it is easier to understand the problem than to state the solutions. That description goes for most hon. Members except, perhaps, for the hon. Member for Cornwall, North (Mr. Pardoe).

Mr. Pardoe

I have the solutions.

Mr. Barnett

The hon. Member would have us believe that he is the only man in this country—perhaps he would include his hon. Friends, although he did not tell us that—with a sense of urgency about the matter. I say to him in the nicest possible way that I am fond of his arrogance in these matters, but I do not always agree with his prescriptions.

I want to take up the hon. Member's main point about indexation. At one point I thought that the hon. Member for St. Ives intended following him along that path. That he did not could have been because of his reflections about the indexation of wages throughout the period that his Government were in office. As he pointed out quite rightly, indexation solves nothing; it distributes the pain.

Indexation is a very important issue. I do not want to deal with the general question although one could go along the whole path and start to index everything. But for many hon. Members indexation is simply a means of reducing the level of taxation and not much else. I am not accusing the hon. Member for Cornwall, North or even the hon. Member for Blaby (Mr. Lawson) of that, because I know of their long and distinguished record on this subject.

Although for many this is an issue of principle, for others it is simply a method of reducing the level of tax. If they were to do that in the situation we face today —and many have pointed out its seriousness—that is to say, if we indexed the threshold of personal rates and personal allowances, there would be an addition to the borrowing requirement of some £1,200 million.

Mr. Lawson

The Chief Secretary is repeating something which the Chancellor said and which is very serious. They are saying that the Government are relying on inflation to secure their revenue.

Mr. Barnett

Neither my right hon. Friend the Chancellor nor I has ever denied that we are taking more out of direct taxation by not indexing. Those hon. Gentleman who tell us that indexation is some kind of panacea—

Mr. Lawson

No, not a panacea.

Mr. Barnett

I am glad that the hon. Gentleman does not think that it is a panacea. In our current difficulties, to replace that £1,200 million we would have to add approximately 3½p on the basic rate of tax. That would make it a 38½ per cent. basic rate of tax. The hon. Member for Cornwall, North complained, rightly, that many workers faced an appalling situation in that when they came into the tax bracket they found that the lowest level was 35 per cent. With indexation, the lowest level would be 38½ per cent.

The hon. Member for Cornwall, North has other solutions to our problems. Although he did not take us into his confidence today, he has done so on other occasions. We know the solution that he puts forward. I will come to the statutory incomes policy in a moment. Indexation of tax rates, tax allowances and tax thresholds would create enormous rigidity in the tax system. It would tie the hands of any Chancellor. What the advocates of indexation have not taken into account is the related technical problems. The hon. Member for St. Ives touched upon them, drawing from his experience in the Treasury. Much would depend on the base date which was chosen, what period of movement was measured.

For example, if we took March 1974 it would be necessary to index the allowances to £758 for a single person and £1,046 for a married couple. If we go back three years to April 1972 the figures would be £870 and £1,135 respectively. On the other hand, if we took it from 1971 it would be even lower than it is now in this Bill.

There are enormous problems. Those who see indexation as an answer to our problems should bear in mind that it is nothing of the sort but would introduce unnecessary inflexibility.

Mr. Amery

I can follow what the right hon. Gentleman says about indexation in relation to tax. Surely he does not claim that indexation of wages in the public sector would be more expensive than what is going on now.

Mr. Barnett

It depends on all kinds of things. I will come to the central issue a little later. I want to deal with one or two matters in the Finance Bill, which is what we are debating today. I hope that hon. Gentlemen opposite do not mind. We have shown that, despite the extremely tough measures my right hon. Friend had to take by increasing taxation on individuals, the Government have been prepared to give substantial relief to the company sector. It is no small matter that my right hon. Friend has been able to do so much with stock relief. The cost over two years, including the previous Finance Act and this Bill, of Clause 49 and Schedule 9 will be a total of £3,795 million. Not all of it is in last year or this. Only £1,300 million is in 1975–76. Some will not be used and will be carried forward.

That is an enormous figure to give—or perhaps I should say, give back—to the company sector when we are obliged to be comparatively fierce on the personal sector. I know that the system we have at the moment until Sandilands is unsophisticated. I hope the House will accept that it is better to stick with this one until we have the Sandilands Report and have had an opportunity to consider and consult. I know that some people are worried about the situation that would apply because under this system relief would be automatically clawed hack if nothing were done to continue some form of stock relief. I give the assurance that it is extremely unlikely, now that the basis of stock valuation for tax purposes has been altered, that it will ever be possible to go back to cost or market value. To this extent some form of stock relief is permanent as long as inflation persists. However, the form of relief cannot fully be determined by Ministers until we have had the Sandilands Report.

I know that many hon. Members are concerned about small companies. We have done everything we promised to do in November. We have ensured that there will be 5 per cent. of stock relief extra for small companies, professional people and traders. That will not be a deferral of tax; it will be a full relief. I know that there are many who would have wanted more help for small companies. So would I. However, given the present situation and the imputation system, it becomes very difficult to help small companies. The imputation system is not very helpful for small trading companies.

Another point raised in connection with companies and individual businesses was on Clauses 41 to 43—the prompter payment of tax. I was surprised at the comments made by the right hon. and learned Member for Surrey, East (Sir G. Howe) on these clauses. I should not have thought that it was unreasonable to ask companies and traders, who in any event are not paying their tax until between nine and 20 months after the tax year ends, to pay it within six months of the date when it falls due. Many of my hon. Friends think that we should have gone further.

As I am sure Conservative Members will be aware, some very large companies and some individuals have exploited the present situation—perfectly legitimately —to delay payments. This works to the considerable detriment of those who actually pay their tax on time, namely, the vast majority of ordinary business men, and also ordinary workers, who have the tax taken out of their wage packets every week. I cannot believe that what we are doing causes serious difficulty for business men, traders and professional people.

Last Tuesday an article was published in The Times by Oliver Stanley, a well-known tax correspondent. I think he was under some misapprehension, because he made the point that an inspector of taxes could simply delay the agreement of an assessment and this in itself could cause the taxpayer to have to pay interest on the assessment and more tax. Clause 42 inserts into the Taxes Management Act a new section, Section 55. Section 55(6) indicates that the appeal commissioners, to whom any taxpayer can appeal if he is dissatisfied with what the inspector has done, have to be satisfied simply that there are reasonable grounds for believing that there is an overcharge on the assessment. They would have to take into account past profit trends, business conditions and any other special factors which would be necessary to determine whether the inspector was seeking to be unfair to the taxpayer.

Mr. Powell

Has the Treasury made any assessment of the financial year or years in which the corresponding loss of revenue, as a result of this anticipation, will occur?

Mr. Barnett

The fact is that we do not quite know what has been happening in the past. What we do know is that starting from six months after the first assessment is issued—about July—there should be a speeding up of the receipts. Therefore, to that extent, there should be an improvement in the borrowing requirement.

Mr. Powell

There will be a deterioration at some point.

Mr. Barnett

It would not be a deterioration. It would be a once-for-all improvement. I am surprised at the right hon. Gentleman. It is a once-for-all major addition. It would not come in one year but in the next year.

Mr. Powell

It diminishes.

Mr. Barnett

It would not diminish. The right hon. Gentleman is being unnaturally illogical and I am very surprised at his not understanding the situation. No doubt when he has had an opportunity to think about it, and when he gets away from the problems of his own constituency and Northern Ireland, he will realise that he has also misunderstood the situation.

Mr. Stanley said in his article that the Opposition would be right to challenge us on what we are doing here, but he went on to say something which is worth repeating. He said In practice the excesses "— he was talking about any possible excesses of the inspectors of taxes— will be modified by the traditionally temper ate attitude of inspectors of taxes. Anyone who knows anything about inspectors of taxes and their work will know that that is true.

As one would expect, there have been a number of references during the debate to the multi-rate VAT. Anomalies have been referred to, as have a number of detailed points. I hope that the House will forgive me—especially the hon Member for Mid-Bedfordshire (Mr. Hastings)—if I say that we shall be having discussions on this point in Committee on the schedule and we shall give serious consideration to all that has been said in this debate and all the representations we have received.

I want to make one general comment. It is very easy to have fun with the anomalies that arise with the 25 per cent. VAT. However, as the hon. Member for St. Ives fairly recognised, we all had a lot of fun when he and other Treasury Ministers of the time introduced a single rate of VAT. At that time they started off by calling it a broad-based comprehensive tax, free from anomalies. Of course it is nothing of the sort.

A single rate of VAT has in-built serious anomalies and grave unfairnesses. Some of the anomalies have been referred to in the debate. With a single rate of VAT one has the ridiculous anomaly that a mink coat and a pensioner's cloth coat are at the same 8 per cent. rate, or one has an expensive diamond ring and a cheap cup and saucer at the 8 per cent. rate. Those are rather worse anomalies than those which have been mentioned in the debate. At least, on any reasonable test they are both anomalies and unfaimesses. [Interruption.] If hon-Members do not understand that, I fear for them.

However, on any reasonable test the 25 per cent. rate is on less essential goods. Before anyone tells me that some items are essential goods, I should like to say that we shall have an opportunity of discussing that matter as well in Committee. I look forward to hearing the arguments which will no doubt be advanced.

During today's debate, as quite often happens when we debate Finance Bills, we have heard a lot about high levels of personal taxation. In fairness, however, many Opposition Members and hon.

Members on the Government side of the House have today made it clear that, in their view at least, this is not a time to talk of reducing the levels of tax. That does not apply to everyone. It certainly does not appear to apply to an Opposition who voted against the 35 per cent. basic rate to retain it at 33 per cent., and I doubt whether it will stop them voting against increased personal allowances in Committee and adding once more to the borrowing requirement.

However, the disincentive effect of personal taxation has not been proved. There is no respectable evidence that there is any disincentive effect, despite the very high levels of taxation. I include what the hon. Member for St. Ives mentioned today—the high marginal rates of tax at the very highest level.

There was a very interesting piece of research recently by Professor Brown of Stirling University, which was reported in the Economic Journal of December 1974. He concluded that to a marginal extent direct taxation was an incentive to a man, though not, strangely enough, to a woman. It was an incentive particularly to a married man with children, to do more overtime. These results were obtained from interviews with some 2,000 men and women. He might have found it more interesting if he had interviewed 2,000 women.

I want to comment on the level of taxation. We have a constant plea in the House that levels of taxation generally should be reduced, and particularly those of direct taxation. To suggest cuts in levels of taxation at a time when we have a borrowing requirement of £9,000 million would be an appalling irresponsibility. I respect the views of my hon. Friend the Member for Berwick and East Lothian (Mr. Mackintosh), although not all of them. He asked me for a list of the items that might or might not have been included in the forecast of £9,000 million. The answer is that in his list which he put to the House many of the items were not intended for 1975–76 at all. No doubt he will have an opportunity to think about it again when he looks at his list, but I am sure he would agree with me that it really would be irresponsible to propose that we reduce levels of taxation at the present time.

Mr. Mackintosh

My right hon. Friend was kind enough to refer to my question. I simply asked him how many of the items I listed as due this year or next were included in the borrowing requirement. Could my right hon. Friend give an answer to this question?

Mr. Barnett

No, because some come in 1976.

Mr. Mackintosh

That was my question. How many?

Mr. Barnett

I will send my hon. Friend a letter.

The fact is that what the Opposition are suggesting is that we should cut taxation and offset it by compensating cuts in public expenditure. This is their constant plea. They voted to reduce the level of direct taxation and they voted to reduce the basic level of taxation, which would have reduced the basic rate and would have cost £771 million.

What the Opposition would need to do if their policies were at all serious would be to cut the public sector borrowing requirement by £4,000 million or more, because the guru of the Opposition the right hon. Member for Leeds, North-East (Sir K. Joseph), suggested recently that the level of £9,000 million was not likely to be a correct one and that it was more likely to be £13,000 million. Presumably, therefore, the Opposition, if they agree with him, would want to cut it by more than that, because the right hon. and learned Member for Surrey, East has said constantly that £9,000 million is far too high. I do not agree with that. The forecast we have for 1975–76 is £9,000 million.

Mr. Pardoe

I bet that the right hon. Gentleman will come back in 12 months' time.

Mr. Barnett

I am interested to hear hon. Members being so certain in their forecasts. I should never like to be so certain about these matters.

Perhaps Opposition Members will tell us whom they agree with. Is it the right hon. Member for Leeds, North-East—that is, £13.000 million—or is it the right hon. and learned Member for Surrey, East and whatever figure he wants to cut from public expenditure?

Sir Geoffrey Howe

It is time the Chief Secretary learned, after 13 wasted months, that the error is his, shared with the Chancellor of the Exchequer. [Laughter.] It is the height of irresponsibility for the Chancellor, even at this time of night, to burst into laughter. A Government who came before this House 12 months ago predicting a borrowing requirement of £2¾ billion are emerging 10 months later with one of £9,000 million. That is no cause for laughter. The situation is far too serious.

Mr. Barnett

I can understand my right hon. Friend laughing at the right hon. and learned Gentleman, because when he comes to the Dispatch Box he tells us nothing whatever about what his policies are or what he would do in place of what we are suggesting.

On the other hand, we had serious speeches from the right hon. Member for Brighton, Pavilion and the right hon. Member for Farnham who, unlike the right hon. and learned Member for Surrey, East at least put forward a proposal, as did my hon. Friend the Member for Berwick and East Lothian, for a statutory incomes policy. That is a serious proposition. and it is more than we have had from the Opposition Front Bench.

Mr. Lawson

Does the right hon. Gentleman agree with that proposition?

Mr. Barnett

No, I am not agreeing with a statutory incomes policy, but we are entitled to a serious debate and to serious arguments from Opposition Front Bench spokesmen who are arguing that the public sector borrowing requirement is too high. The right hon. and learned Member for Surrey, East made a few unrealistic remarks about how he would cut public expenditure. He mentioned several ways, and he seemed to be arguing that he could do it now. Anyone with experience in the Treasury—for example, the right hon. Member for Farnham, one of my predecessors—will be able to tell him about the difficulty of cutting public expenditure now, particularly on current account. It would be appallingly disruptive. It would not only disrupt but destroy the public sector if the right hon. and learned Gentleman's proposal were adopted.

Sir Geoffrey Howe

rose—

Mr. Barnett

I cannot give way.

Mr. Nicholas Winterton (Macclesfield)

The Chief Secretary throws the challenge, but he does not want to hear the answer.

Mr. Barnett

I have never yet heard the right hon. and learned Gentleman answer a question.

Sir Geoffrey Howe

Will not the Chief Secretary acknowledge what the House suspects to be close to the truth, that at this very moment his officials are working on the emergency package of expenditure cuts that the Government will be obliged by events to introduce before long? The Chief Secretary will then see just how it can be done.

Mr. Barnett

I will not acknowledge that at all, because it is not true. Once again the right hon. and learned Gentleman has dodged every question. He still will not answer. The Opposition's proposals are a sham. In talking of cuts in public expenditure, the Opposition either do not know what that means or do not look for serious propositions. The Leader of the Opposition would not cut what we are proposing to do for British Leyland in 1975–76. She wants to help British Leyland this year.

Despite all the limitations of resources, despite the great difficulties, the Bill helps those who are most in need of help —the single-parent families, those at the lowest end of the income scale, the blind, pensioners and the lowest paid generally, as my right hon. Friend the Chancellor said. At the same time, we are making certain that those with the largest incomes and the largest capital carry the greatest burden. That is the way the Government propose to continue, and, as no suitable alternative has been suggested, I have no hesitation in advising my hon. and right hon. Friends that the Bill provides a way to solve our problems.

The solutions proposed by the Liberal Party are simply a figment of the vivid and arrogant imagination of the hon. Member for Cornwall, North. Opposition Members have no alternatives to the solutions which we put before the House. The official Opposition are even more dishonest than usual in the way they have presented their case, and I advise my hon. and right hon. Friends that the Bill offers the right way forward. I commend it to the House.

Question put, That the Bill be now read a Second time:—

The House divided: Ayes 182, Noes 22.

Division No. 201]	AYES	[10.00 p.m.
Anderson, Donald	Grant, George (Morpeth)	Newens, Stanley
Armstrong, Ernest	Grant, John (Islington C)	Noble, Mike
Atkins, Ronald (Preston N)	Hamilton, W. W. (Central Fife)	Oakes, Gordon
Atkinson, Norman	Hardy, Peter	Ogden, Eric
Barnett, Guy (Greenwich)	Harper, Joseph	Orme, Rt Hon Stanley
Barnett, Rt Hon Joel (Heywood)	Harrison, Walter (Wakefield)	Ovenden, John
Bates, Alf	Hart, Rt Hon Judith	Owen, Dr David
Bean, R. E.	Hayman, Mrs Helene	Paisley, Rev Ian
Bidwell, Sydney	Healey, Rt Hon Denis	Palmer, Arthur
Blenkinsop, Arthur	Heffer, Eric S.	Parker, John
Booth, Albert	Hooley, Frank	Parry, Robert
Boyden, James (Bish Auck)	Horam, John	Pavitt, Laurie
Bradford, Rev Robert	Hughes, Rt Hon C. (Anglesey)	Peart, Rt Hon Fred
Brown, Hugh D. (Provan)	Hughes, Mark (Durham)	Pendry, Tom
Brown, Ronald (Hackney S)	Hunter, Adam	Perry, Ernest
Canavan, Dennis	Irvine, Rt Hon Sir A. (Edge Hill)	Powell, Rt Hon J. Enoch
Carmichael, Neil	Jackson, Colin (Brighouse)	Prescott, John
Carson, John	Janner, Greville	Rees, Rt Hon Merlyn (Leeds S)
Carter-Jones, Lewis	Jay, Rt Hon Douglas	Richardson, Miss Jo
Cartwright, John	Jeger, Mrs Lena	Roberts, Gwilym (Cannock)
Castle, Rt Hon Barbara	Jenkins, Hugh (Putney)	Rooker, J. W.
Clemitson, Ivor	Jenkins, Rt Hon Roy (Stechford)	Roper, John
Cocks, Michael (Bristol S)	John, Brynmor	Rose, Paul B.
Coleman, Donald	Johnson, James (Hull West)	Ross, William (Londonderry)
Conlan, Bernard	Jones, Alec (Rhondda)	Ryman, John
Cook, Robin F. (Edin C)	Judd, Frank	Sandelson, Neville
Cox, Thomas (Tooting)	Kaufman, Gerald	Sedgemore, Brian
Craig, Rt Hon W. (Belfast E)	Kelley, Richard	Sheldon, Robert (Ashton-u-Lyne)
Cralgen, J. M. (Maryhill)	Kinnock, Neil	Shore, Rt Hon Peter
Crawshaw, Richard	Lamborn, Harry	Short, Rt Hon E. (Newcastle C)
Cronin, John	Lamond, James	Silkin, Rt Hon John (Deptford)
Cryer, Bob	Leadbitter, Ted	Silverman, Julius
Dalyell, Tam	Lee, John	Skinner, Dennis
Davidson, Arthur	Lever, Rt Hon Harold	Smith, John (N Lanarkshire)
Davies, Denzil (Llanelli)	Luard, Evan	Snape, Peter
Davies, Ifor (Gower)	Lyon, Alexander (York)	Spearing, Nigel
Davis, Clinton (Hackney C)	Lyons, Edward (Bradford W)	Stallard, A. W.
Deakins, Eric	Mabon, Dr J. Dickson	Stewart, Rt Hon M. (Fulham)
Dean, Joseph (Leeds West)	McCusker, H.	Stoddart, David
de Freitas, Rt Hon Sir Geoffrey	MacFarquhar, Roderick	Strang, Gavin
Delargy, Hugh	McGuire, Michael (Ince)	Taylor, Mrs Ann (Bolton W)
Dormand, J. D.	Mackenzie, Gregor	Thomas, Jeffrey (Abertillery)
Douglas-Mann, Bruce	Mackintosh, John P.	Thomas, Mike (Newcastle E)
Dunlop, John	Maclennan, Robert	Thomas, Ron (Bristol NW)
Dunn, James A.	McMillan, Tom (Glasgow C)	Torney, Tom
Dunnett, Jack	McNamara, Kevin	Urwin, T. W.
Dunwoody, Mrs Gwyneth	Madden, Max	Varley, RI Hon Eric G.
Eadie, Alex	Magee, Bryan	Walden, Brian (B'ham, L'dyw'd)
Edge, Geoff	Mahon, Simon	Walker, Harold (Doncaster)
Ellis, John (Brigg & Scun)	Marquand, David	Walker, Terry (Kingswood)
Ellis, Tom (Wrexham)	Marshall, Dr Edmund (Goole)	Ward, Michael
English, Michael	Maynard, Miss Joan	Watkinson, John
Ennals, David	Mellish, Rt Hon Robert	Wellbeloved, James
Evans, Fred (Caerphilly)	Millan, Bruce	Williams, Alan (Swansea W)
Evans, John (Newton)	Miller, Dr M. S. (E Kilbride)	Williams, Alan Lee (Hornch'ch)
Ewing, Harry (Stirling)	Miller, Mrs Millie (Ilford N)	Wise, Mrs Audrey
Fletcher, Raymond (Ilkeston)	Mitchell, R. C. (Soton, Itchen)	Woodall, Alec
Ford, Ben	Molyneaux, James	Wrigglesworth, Ian
Fowler, Gerald (The Wrekin)	Moonman, Eric
Fraser, John (Lambeth, N'w'd)	Moyle, Roland	TELLERS FOR THE AYES:
Garrett, W. E. (Wallsend)	Mulley, Rt Hon Frederick	Mr. James Hamilton and
Gilbert, Dr. John	Murray, Rt Hon Ronald King	Miss Betty Boothroyd.

NOES
Bain, Mrs Margaret	Johnston, Russell (Inverness)	Watt, Hamish
Beith, A. J.	MacCormick, Iain	Welsh, Andrew
Biggs-Davison, John	Pardoe, John	Wilson, Gordon (Dundee E)
Crawford, Douglas	Penhaligon, David	Winterton, Nicholas
Freud, Clement	Reid, George
Grimond, Rt Hon J.	Ross, Stephen (Isle of Wight)	TELLERS FOR THE NOES:
Henderson, Douglas	Stewart, Donald (Western Isles)	Mr. Cyril Smith and
Hooson, Emlyn	Stewart, Ian (Hitchin)	Mr. David Steel.
Howells, Qeraint (Cardigan)	Thorpe, Rt Hon Jeremy (N Devon)
Question accordingly agreed to.
Bill read a Second time.