HC Deb 20 May 1975 vol 892 cc1222-318

3.48 p.m.

Mr. Nigel Lawson (Blaby)

I beg to move Amendment No. 30 in page 17, line 26, leave out £4,500' and insert £5,400'.

The Chairman

With it we may also discuss the following Amendments:

No. 35, in page 18, line 2, leave out £4,500' and insert £5,400'.

No. 36 in line 3, leave out '£500' and insert £600'.

No. 37 in line 4, leave out £1,000' and insert £1,200'.

No. 38 in line 5, leave out £1,000' and insert £1,200'.

No. 39 in line 6, leave out '£1,000' and insert £1,200'.

No. 40 in line 7, leave out £2,000 and insert £2,400'.

No. 41 in line 8, leave out £2,000' and insert £2,400'.

No. 42 in line 9, leave out £3,000' and insert £3,600'.

No. 43 in line 10, leave out '£5,000' and insert '£6,000'.

Mr. Lawson

The amendment is also tied to a further group of amendments which were not selected and which relate to Clause 28. The amendments seek to increase all the figures in the personal income tax structure by 20 per cent.—that is to say, the personal and married allowances are raised by 20 per cent. and all the figures to do with the investment income surcharge, the figures concerned with the rate at which a taxpayer begins to pay the higher rates and so on will go up by 20 per cent.

I do not intend to force this amendment to a vote. The purpose of proposing to increase all these figures is to have a worthwhile debate on the vital question of indexation of the personal tax system and indexation in its widest sense. We have to keep in order, but some will say that it is improper to index the personal tax system without making other indexations as well.

Give or take a little, 20 per cent. is the amount by which prices have risen since a year ago. Figures which were right, which represented a particular level of earnings and income in real terms, a year ago would have to be increased by 20 per cent. to achieve the equivalent level of income today. Not to do this is to change the burden of taxation without any discussion by Parliament.

This point about indexation has been made several times in our debates. A year ago, in the small hours of the morning of 17th May, my hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont) and I first debated an indexation amendment to the Finance Bill. Since then there has been increasing talk of indexation, and with good reason. It has almost become fashionable. That is the only thing which gives me pause, because I become very suspicious when any idea starts to be fashionable. But one cannot rule out a step forward simply because it is attracting some fashionable attention.

The attention is not all fashionable. I am glad to be able to report that it had the substantial and weighty support of my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) in a speech he made earlier this year at Ainley Top, a place of which I had not previously heard, in which he said Is there nothing which can be done in the meantime to ameliorate the effects of inflation and to remove some of its most glaring injustices? It is my personal belief that there is another policy which now deserves consideration. I have in mind the policy which is variously described as indexating or monetary correction. He went on: Take, for example, the basic income tax. Because the tax is progressive, individuals are moved to a higher and higher tax bracket as a result of inflation even though their real income may remain unchanged. Why should not all basic tax allowances plus the tax brackets of PAYE now be revalued annually to take account of inflation? He concluded: This would ensure greater equity. And it would remove an incentive to allow inflation to carry on at current rates. That is the burden of my argument on these amendments.

But there are other aspects, too, which need to be stressed. First, the present system detracts from honesty in politics. It leads to dishonest statements being made which no one can wish to have made. I will quote just one such. In his Budget night broadcast to the nation on television, the Chancellor said: I have taken 400,000 people out of tax altogether and over 9 million people will be paying less income tax now than they were before. That is a lie. There is no other word for it. There are not 9 million people who will be paying less income tax this year than they were last year.

Indeed, the increase in the yield of income tax, a yield which is scheduled to rise dramatically this year, works out at about £4,000 million, give or take a little, so it is impossible that 9 million people will be paying less income tax. Pretty well everyone will be paying more.

What the Chancellor meant, of course, was that someone on the equivalent monetary salary may well be paying less tax, but if his monetary salary is equivalent to what it was a year ago, his real standard of living has probably declined by at least 15 per cent. There are not 9 million people in the situation which the Chancellor described. If there were, the Chancellor's concern at the breaking of the social contract would not be as acute and as shrill as it has been.

I hope that we shall learn tonight—the Government will not doubt be keen to tell us—the cost of this amendment if it were to be pressed to a vote and carried. As I have made clear, I shall not be pressing it to a vote. A whole series of amendments, raising every allowance by 20 per cent., would have cost about £1,200 million, according to the Chief Secretary in an earlier debate. This batch of amendments will probably cost about £500 million, but no doubt we shall hear.

The figure of £1,200 million means that the public has had to bear, through inflation, that amount in additional taxation. There are no two ways about that. The question is not whether taxation of £1,200 million extra needs to be raised this year—although that is an important question—but whether it should be raised entirely through the income tax and with no proper parliamentary scrutiny.

Both the Chief Secretary and the Chancellor addressed themselves to this point on Second Reading. The Chief Secretary said that raising that £1,200 million would mean an extra 3½p on the basic rate. But that of course is not necessarily true. There are all sorts of other ways of raising the money. It could be done by the Chancellor of the day explicitly saying, "We will change the tax allowances and the tax bands and not let inflation do our dirty work for us." Or it could be done by other means of taxation. Of, if it is the borrowing requirement about which he is concerned—that is what Ministers are rightly concerned about—it could be done by cutting public expenditure by an equivalent amount.

I and many of my hon. Friends think that it is wholly wrong for income tax to be used, through the mechanism of inflation, automatically to recoup this vast sum, when what should happen is that the Chancellor should decide the maximum level of borrowing requirement that he feels the country can afford—what it is right to carry, how much borrowing he can count on being able to do—and then decide how he will finance it, and, if it is to be reduced, whether that should be done by cuts in public expenditure or increases in taxation—and, if the latter, by what sort of increases and in what taxation. Then the House and the nation should be told explicitly what is being proposed and the House should have the opportunity to vote on the proposals.

At present, there is an inexorable slide in which the burden goes more and more heavily on the personal income tax. Although, of the £1,200 million of increased taxation that the Chancellor announced in his Budget, only £200 million was ostensibly on the income tax and the other £1,000 million was on indirect taxation, the Budget Red Book shows that the proportion of total tax revenue accounted for by personal income tax, which last year was 47 per cent., this year is to be 52½ per cent. That is the first time that it has ever been over 50 per cent. of total tax revenue.

Inexorably, on an unindexed system, in which no adjustment is made for inflation, the burden is being shifted on to income tax and away from the indirect taxes, some of which, of course, are expressed in specific terms—the Excise duties, in particular—and have no buoyancy at all.

4.0 p.m.

Many people considered this to be undesirable. I consider it undesirable. It has been pointed out by Mr. Samuel Brittan in a recent article that, as a result of the lack of indexation, the marginal rate of tax, which is crucial where incentives are concerned, has moved dramatically. In 1972, when the unified tax scale was introduced by the then Conservative Chancellor of the Exchequer the marginal rate reached the 50 per cent. level at £8,000 on earned income. It is now reached at £7,000, which is the equivalent of only £4,600 at 1972 prices. So marginal tax rates, as a result of the non-indexation of the system, have become higher and higher at a given level, or, alternatively, the really disincentive rates start coming into operation lower and lower down the income tax scale.

Some may think this is a good thing, and that a redistribution of income of this kind is highly desirable. They are entitled to advocate and argue this, but it should be proposed to this House explicitly and carried through this House explicitly, and not presented, as it is to this Committee now, as somehow an inevitable effect of inflation.

The people who want to have a redistribution of incomes in this country should not rely on the combination of rapid inflation and a progressive income tax system to do their work for them. They should have the courage to make the proposals explicitly and openly to this House.

There has been much talk about what effect there would be on inflation as a result of the lack of indexation. The Chancellor of the Exchequer suggested in the House that inflation might be worse as a result of indexation, because more revenue would have to be raised through indirect taxes, and this in turn would raise the retail price index, which would have an inflationary impact. That is not a very sustainable argument when there is available the alternative of public expenditure tax; and in any case raising indirect taxes is something that the Chancellor of the Exchequer has himself rightly undertaken in this Budget. What he was wrong in doing was to pretend last July that he was curing inflation by cutting rates of indirect taxation, by cutting VAT from 10 to 8 per cent.

More serious objections to indexation have been put by the Chief Secretary to the Treasury. On Second Reading he pointed out that the money would have to be found in some other way, as indeed it would. There is no dispute over that. His complaint was that: 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."—[Official Report, 8th May, 1975: Vol. 891, c. 1746.] With great respect, that is absolute nonsense. I believe that there should be an automatic system of indexation like the one working very successfuly in Canada since 1st January 1974. In Canada there is an indexation of taxation by an automatic formula which adjusts to the rate of inflation and the rise in the cost of living. But the yield can always be changed by the Chancellor of the Exchequer coming to the House of Commons and saying that he will increase the rates from 30 per cent. to 35 per cent., 38 per cent. or 40 per cent., and change various bands of taxation. There is no problem for the Chancellor of the Exchequer of the day in carrying out whatever fiscal policy he considers to be appropriate. The difference is that under an indexation system such as the Canadians now have it is done honestly and openly, whereas under a dishonest system, which is what we have, it is done surreptitiously. But the Chancellor of the Exchequer, with an indexed system, has complete freedom. During the year the indexation will not change things, because the proposed indexation will only operate at annual intervals, but when the time comes the Chancellor of the Exchequer will take this into account and if necessary alter the tax rates accordingly. There is no rigidity and no hampering of the system. The Canadian Government have found no difficulty in carrying it out.

Although it is the civil servants of the Treasury who have great qualms, apparently, about indexation, when it comes to something close to their hearts, such as public service pensions, they make quite sure that these are fully indexed and fully inflation-proofed, which no private scheme could possibly afford to do.

Other objections to the indexation of taxation, and to indexation generally, were voiced in the Second Reading debate by my hon. Friend the Member for St. Ives (Mr. Nott). They were not so much objections but perhaps comments on the problems involved. We should examine the objections seriously, and in a nonpartisan fashion. My hon. Friend pointed out that there are certain technical difficulties. That is true to a certain extent. I think the Chief Secretary to the Treasury also said that a base date has to be chosen. That is true, but although to a certain extent the date if arbitrary, it does not in the long run make much difference what base date is chosen. Whatever date so chosen, it would be an infinite improvement upon and provide greater justice than the present system.

The question of what index is used again makes very little difference. The RPI between 1971 and 1974 went up by 35.7 per cent. The GDP deflator over the comparable period shows a rise of 34 per cent. So long as one index is taken for everything it makes very little difference.

My hon. Friend mentioned some other points. He asked whether it is just to index partially and not wholly. On the question of taxation, what is being suggested is that indexation should apply right across the board for all taxpayers in relation to tax allowances, tax bands and tax thresholds, the rate at which investment income surcharge comes in, and everything else. It is true that it will make no difference to the inequalities that occur as a result, in the Chancellor of the Exchequer's own words of some people getting the plums and leaving others with the crumbs. This is not going to be cured by indexation, but indexation will not make anything worse. It will reduce a whole range of inequities which occur as a result of the tax system being unindexed.

Sir John Hall (Wycombe)

Would my hon. Friend not agree that it would help to spread the burden more evenly over those who at the moment cannot protect themselves?

Mr. Lawson

I think my hon. Friend is quite right. It will ensure that, whatever burden there is, it is spread in the way that Parliament intended, and that the spread is not an unintended consequence of inflation. Some part of the capricious redistribution of income which is the result of inflation will have been removed. I do not maintain for an instant that the total capriciousness of inflation will have been eliminated. Clearly, that will not be so.

My hon. Friend raised the question of the indexation being inclined to spread. I think what he and many hon. Members had in mind was that it might spread to the indexation of savings, Government bonds, national savings, and also wages. There is no logical reason why indexation should not be confined, as it is in Canada, to the tax system itself. That would be a great step forward. The indexation of wages only makes sense in terms of a statutory incomes policy, and I am not in favour of a statutory incomes policy, so, as I see it, this problem would not arise. But if one were to have a statutory incomes policy it would seem to me to make slightly less nonsense to have an indexed policy, so that prices were automatically taken care of in the wage rules, than to try to have a prices policy as well as a wages policy, with all the economic distortions and further non-senses that that would introduce. If private employers and unions privately wish to negotiate an indexed agreement, there is nothing to stop them. There is no reason why they should not do so. It is up to them, in a free society and with free collective bargaining.

On savings, my hon. Friend the Member for St. Ives was worried about two matters. It may be that the Government are less worried. In the last Finance Act they introduced two savings bonds, both of which were index-linked, including what the hon. Member for Durham (Mr. Hughes) aptly christened the "geriatric bond." The fear in the mind of my hon. Friend the Member for St. Ives about savings was: … 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.—[Official Report, 8th May 1975; Vol. 891, c. 1738.] If that were to happen, it would be gross mismanagement by those whose responsibility it is to float new bonds.

Mr. John Nott (St. Ives)

Following the passage from my speech which my hon. Friend has just quoted, I said that if it were attractive everyone would want to buy that bond and the result would be a repercussion on the existing fixed-interest bond market. That was my point.

Mr. Lawson

My hon. Friend is quite right. I did not intend to misquote him. But I have in mind the depreciation that occurred in the past. Those who bought War Loan at 100 and now see, as the result of inflation, that it stands at 231, and appreciate that the decline in real terms is infinitely more, have not been helped by the absence of an index-linked bond.

Let us suppose that an indexed bond were introduced to retain its purchasing power whatever the rate of inflation. Let us suppose, further, that it had a nil yield and that existing long-term Government securities, not indexed, have a 15 per cent. yield. The purchaser would have to make up his mind. If he thought that the rate of inflation was likely to be 20 per cent., obviously he would prefer the nil yielding indexed bond to what, in real terms, would be the minus 5 per cent. unindexed bond. If he were of the opinion, like the Chancellor of the Exchequer, that the rate of inflation would be closer to 10 per cent., he would prefer the unindexed bond which was yielding, in real terms, 5 per cent. to the indexed bond yielding zero. Therefore, there is no reason why there should be a rush to one or other type of bond. Some people will make one assumption about the rate of inflation and decide to buy the unindexed bond. Others will take a more pessimistic view of the rate of inflation and buy the indexed bond.

It is the job of those who manage the National Debt to decide when floating an indexed bond where to pitch it so that it will attract custom but not cause a rush to switch out of the old bonds. It may be necessary for the bond to have a small negative yield. But, with the unindexed bonds which we have at present, the Government have every incentive for inflation to romp ahead. The faster inflation goes, the smaller the real burden on the National Debt. It is a way of defrauding the saver, as he has been defrauded hitherto.

If there is an indexed bond with a zero yield, it is a very strong incentive for the Government to prevent any inflation. If there is no inflation, they are borrowing money at nought per cent. That is very cheap and very good for the Government. But if there is rapid inflation, the Government will have to pay the price at the end of the day in redeeming the bond at a value which has increased by the amount of inflation.

This and other arguments were looked at by the Page Committee. The Page Report came down heavily in favour of at least an experiment with an index-linked bond for the reasons that I have suggested. It also suggested that, if there is any connection between inflation and indexation, indexation provides an incentive for Governments not to inflate. This is true of bonds. It is equally true of taxation, because there is no great uncovenanted additional revenue—£1,200 million—to be got from the effect of inflation on an unindexed taxation system.

I echo the remarks of my right hon. and learned Friend the Member for East Surrey, who put forward succinctly all the arguments for indexation of our tax system. This is no panacea. It is no cure for inflation. But we have to remember that, although we have to bend all our efforts to getting the rate of inflation down now that it is running at an annual rate of about 25 per cent., it will not be got down overnight. There will be a considerable period while it is coming down. In that period we must protect the taxpayer and the saver and treat them honestly and equitably.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

But if the Government try to increase inflation, which appears to be their policy at present, does my hon. Friend think that we should seek to bring in indexation against the background of that policy?

4.15 p.m.

Mr. Lawson

I trust that no Government will have a deliberate policy of increasing inflation. Half of this Government have that policy, I agree, but the other half are trying to reduce the level of inflation. This presents certain problems. If the Government are to pursue a policy deliberately to inflate, it is even more necessary to have some protection of this form for the citizen from the capricious and harmful effects of inflation. I do not see why the Government should benefit from it, as they do at present.

Public expenditure will always increase to meet the tax revenues available. If anyone doubts that, he has only to look at what is happening in our town halls. The rates are not a buoyant tax. There is a huge rate protest. There is tremendous resistance to rates increasing. In the future, this will have some moderating effect and give councillors pause about whether to increase expenditure.

Does any hon. Member imagine that, if rates went up faster than the rate of inflation, which is what is happening under our present system of taxation without indexation—roughly speaking, for every 1 per cent. of inflation, tax revenue goes up nearly 2 per cent.—this hugely buoyant source of revenue would act as a greater curb on the spending of local authorities? Of course, it would not. They would spend even more. Public expenditure increases to meet the revenue available and often exceeds that revenue. The difficulty of raising revenue is one of the most important constraints on the level of public expenditure, which is a further reason why we need indexing.

Inflation cannot be cured overnight. We have to live with it for a period. Therefore, the Government should not impose unnecessary hardships on people. The cure for inflation is extremely difficult. There are industrial difficulties, political difficulties and economic difficulties. If something simple and straightforward can be done, like indexation as it was done in Canada, it should be done. It is no good the Government dismissing it by saying that it is not the whole answer. Obviously it is not. But it would be a great amelioration of the present situation. It is something that the Government can do and should do. I hope that it is something which both the great parties in this House will move increasingly towards accepting before it is too late.

The Chairman

At the beginning of his speech the hon. Gentleman used an expression which is outside our parliamentary rules. He knows that I am quite unable to allow the charge of an hon. Gentleman or right hon. Gentleman having told a lie, and I should be very grateful if the hon. Member, before he sits down, would withdraw that expression even if he has to find another within the parliamentary rules.

Mr. Lawson

First of all, I am sorry. I was talking about a statement made by the right hon. Gentleman the Chancellor of the Exchequer outside this House in a television broadcast. I will willingly withdraw that, if that is required of me, and will say it is wholly devoid of correspondence to the facts.

The Chairman

That makes everyone happier.

The Minister of State, Treasury (Mr. Robert Sheldon)

The hon. Member for Blaby (Mr. Lawson) has long had an interest in indexation, but the amendments to which we are directed, of course, are towards revalorisation of these higher rates. He used very extreme language, of which I note your correction, Mr. Thomas, but it is not for me to comment on that, except to say that, for my own part, I feel very saddened when hon. Members outside this House—inside this House is no particular concern of mine; it is your concern—use such words. The word "lie" is becoming a common word in our political life, and that is something about which I feel sad.

I will deal first with the figures quoted by the hon. Gentleman from those given by my right hon. Friend the Chancellor of the Exchequer. I find no fault in what he said. He said that these 9 million people represent the number of people who will pay less tax. That is perfectly true. I know his reservations and I understand them. Indeed, I think most people in the country understand those reservations. He was not making a great claim, just pointing out a simple change which resulted in this situation.

Mr. Lawson

Had the Chancellor of the Exchequer said that 9 million people would be paying less income tax than they would have paid this coming year had he not made these changes, that would have been correct. However, that was not what he said. What he said was: Over 9 million people will be paying less income tax now than they were before —and that is not correct.

Mr. Sheldon

I noted the change in the quotation while the hon. Gentleman was reading it. He was presumably reading from the same document as I, that is the Treasury Press release, which says: Over 9 million people will be paying less income tax now than they were before. That is obviously so. Once he had announced that, that would be so for the whole of the year. He said that this was the position before the announcement, and the other was the position afterwards.

For the hon. Gentleman to use such extreme words on the basis of that was not only unparliamentary, which is no concern of mine, but also rather sad. It is sad to see wider currency given to the use of such extreme language.

To deal with the serious points made by the hon. Gentleman, he pointed out that it was wrong for income tax to be used to recoup large sums surreptitiously without adjustments being made for inflation. That is where I take issue with him. It is undeniably true that keeping the same higher rate threshold and the same higher rate bands will obviously result in an increase in the tax paid, and where the income is not increased there is obviously a net reduction in the income of the individual. That is obviously true. But the hon. Gentleman must not assume that this was an unforeseen consequence. This was understood, known and discussed, as indeed were revalorisation of allowances, rates and bands.

All these matters come up each year for consideration and when changes are not made it is not because they have not been considered or were thought not to be necessary. It was a conscious decision, and the Chancellor made this quite explicit when he said in his Budget statement: I recognise that the result for most people will be, in spite of the increases in allowances I have just proposed, that the burden of income tax in the coming year will be significantly increased, because I am not adjusting the various tax levels in step with money values. That is a clear statement, and he went on: But I am afraid that my need for revenue is paramount, and I cannot offer any general relief beyond the increase in allowances pro-posed."—[Official Report, 15th April 1975; Vol. 890, c. 316.] So there was nothing surreptitious about that. This was a conscious decision, stated precisely.

Sir John Hall

Although I recollect the remark by the Chancellor of the Exchequer to which the Minister has drawn attention, would he not agree that by most taxpayers that statement was either not read or, if read, was forgotten or not fully understood? They do understand, however, an increase in their rate and the effect of leaving the bands unchanged. The effect of inflation is in reality to increase the rate in the pound in real terms. It would be much more understood if inflation were taken into account in moving the tax bands and increasing the rates. People would then know precisely what was being taken from them in tax.

Mr. Sheldon

The argument for indexation is that it will become clear to the individual what is being done, and I accept that that would be an obvious consequence. It has some disadvantages to which I will come later.

There was nothing in the way of a subterfuge here. It was quite clear. This was the principle involved and this was the consequence of the need to obtain revenue. But, of course, in seeking to obtain more revenue income by this means, by the failure to revalorise these bands, the Chancellor had to take into account how he was going to get the taxation he required, how he was going to cope with the borrowing requirement, large as it appeared.

Mr. Lawson

The right hon. Gentleman says it is not indexation to revalorise and refers repeatedly to revalorisation. I am sure he is aware that in this clause we are dealing with income tax for the year 1975–76, and a revalorisation amendment is the only one which would be in order on this clause. I hope he will take it from me that what I and many of my right hon. Friends seek is an automatic indexation formula of the type in use in Canada.

Mr. Sheldon

I understand that and the difficulties of putting amendments, although there is of course an amendment in the name of the right hon. Member for Devon, North (Mr. Thorpe) and his hon. Friends, and we shall be coming to that. I do not think we need to be too precise about this. Many of the arguments for the one will be arguments for the other. The main difference, where a difference exists, is that it should be automatic rather than conscious. I prefer to leave that to be dealt with when the amendment proposed by the hon. Member for Devon, North and his hon. Friends is before us.

I should say that this decision not to revalorise the higher rates of income tax was concious because the burden which needed to be shared had increased very substantially on those with lower incomes over the years.

4.30 p.m.

One thing that is not quite as generally understood as it ought to be is that those with average incomes have been paying a higher proportion of their earnings in income tax over the years. This has gone on steadily. Before the war a person with average earnings paid no tax. For a manual worker in a factory, income tax was something outside his experience. This has changed over the years. As recently as 1950–51 a married man with two children under the age of 11 who was earning the average manual wage paid half of 1 per cent. of his earnings in income tax. That has risen to 18.7 per cent. for the current year. There has been a continuous change irrespective of which party has been in power. The proportion of earnings going to income tax has risen throughout the period.

Mr. John Pardoe (Cornwall, North)

The hon. Gentleman has set the cat among the pigeons. If he looks at the detail of those figures he will see that the largest single increase in any one year is between the figure of 14.9 per cent. for 1974–75 and 18.7 per cent.—the figure he has just quoted for this tax year. That makes a mockery and charade of the Chancellor's implication that he has reduced tax for 9 million people.

Mr. Sheldon

The only point I was trying to make was that income tax on average earnings has increased over the period. If the hon. Gentleman wants a big increase, I can tell him that in 1970–71 it was 14.7 per cent. Whereas in the past sums obtainable from average earnings were small, they are now considerable and form an important part of the revenue. When we call for sacrifices of this kind we need to compare the contribution being made by such people—which the Chancellor quite clearly said had a great deal to do with the large increases in incomes that occurred during that period—with the sacrifices called for from those with the higher rates of incomes.

Mr. Douglas Crawford (Perth and East Perthshire)

Surely the hon. Gentleman is talking about revalorisation and not indexation. There is a need to be precise. I take it that we are talking about revalorisation. The arguments do not necessarily extend to indexation.

Mr. Sheldon

I am talking about re-valorisation and the need for compulsory indexation which, although not part of the amendment is the purpose behind what the hon. Member for Blaby (Mr. Lawson) is saying. We can deal with that now or in a more orderly manner on a later debate. Many of the arguments apply to both cases.

Mr. Crawford

If we are voting on this amendment we are voting on re-valorisation not indexation. That comes in Amendment No. 64.

Mr. Sheldon

In that case I will proceed in the way the Committee obviously wishes to proceed. I am talking about revalorisation and pointing out that when it came to the revalorisation of these higher rate bands this was a conscious decision, as these decisions always are, bearing in mind the burdens being imposed upon average industrial earners.

The hon. Member for Blaby asked me about the cost. He is a fairly expensive hon. Member. The total for the schemes he has put forward would amount to £850 million. The cost for that which we are talking about now is £194 million—that is raising the higher rate threshold and the rate bands in accordance with the amendment. The yields of income tax this year and last year are as follows: in 1974–75 income tax raised £10,237 million. I will give the increase—

Mr. Lawson

It is in the Red Book.

Mr. Sheldon

I will give some information which the hon. Member will not find in the Red Book and which may be of assistance. For 1975–76 the estimated yield is £14,008 million—

Mr. Lawson

It is in the Red Book.

Mr. Sheldon

I acknowledge that that is in the Red Book, but the figures that I am about to give are not and they are related to those I have given. The estimated yield in 1975–76 is £14,008 million which is an addition of £3,771 million. I would like to break the figure down so that the hon. Gentleman may be able to use it. If he uses it against me it is better that he is well informed rather than ill informed. Of this total, 46 per cent. is due to inflation, 19 per cent. is due to the increase of 2 per cent. in basic and higher rates while 35 per cent. is due to fiscal drag, that is to keeping tax allowances, thresholds and so on fixed in money terms or increasing them by less than the going rate of inflation.

Mr. Lawson

Will the hon. Gentleman explain the difference between fiscal drag due to inflation and the increase due to inflation but not fiscal drag?

Mr. Sheldon

One is due to people obtaining higher incomes. As they do so they have more money available upon which they are taxed. Following that, tax rates are raised to obtain greater yields. There are these elements in this breakdown. We need to consider the effects of inflation in raising incomes and the effects of inflation in raising tax rates. The position is basically simple. The greater the problem of inflation the greater the contribution that must be made by those who are better off. More will be required from those with the most means. No one assumes that this will continue indefinitely or that this is a path only half-trodden. There were particular problems this year. The Chancellor has dealt with them. It was not an omission or an oversight. It was a deliberate plan. This is the result.

Mr. J. Enoch Powell (Down, South)

As this is the principal amendment on the subject of income tax, it is, perhaps, the right moment, apart from the Question, "That the clause stand part of the Bill", on which debate may not arise, to enter a protest against something which the Chancellor of the Exchequer said in his speech on Second Reading of the Finance Bill, which ought not to pass without challenge, because it is typical of the whole operation of shifting the blame for inflation from the Government, where it belongs, to the public, where it does not belong—an operation that is profoundly dangerous for the whole politics and system of this country.

In Hansard of 8th May, referring to income tax, the Chancellor of the Exchequer said: So long as the warnings about excessive increases in incomes go unheeded, I shall be obliged to take such measures. In case the avoidance of blame was not clear enough in those words, he went on: 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."—[Official Report, 8th May 1975; Vol. 891, c. 1634.] Perhaps some twenty years ago, when we were on the foothills of inflation and when the nature, causation and consequences of inflation had not been so miserably explored as they have been during the last two decades, there might have been some excuse for ignorant language of that kind being used by a Chancellor of the Exchequer. There is no excuse for it in 1975. There is, particularly, no excuse for it from the lips of a Chancellor of the Exchequer who showed by other parts of his Budget speech, and by other parts of his Budget, that he knew perfectly well where the causation of inflation lay and that a Government which deliberately budgets for a huge uncovered excess of public expenditure over revenue courts inflation from which the British people have no means of defending themselves unless and until they can secure Ministers who will behave differently.

When the Chancellor of the Exchequer said: The choice is not for me, but for the British people as a whole", he was exactly wrong. The choice is for the Chancellor of the Exchequer—at any rate, as a member of the Cabinet—whether or not the Government will balance their budget or budget for huge borrowing requirements which are as pregnant with inflation as a storm cloud is with rain. When successive Governments—not only this one—do that, the consequence is that all prices, wages and incomes cannot help but increase. The increase in incomes is the inevitable symptom of the monetary inflation which the Government have—we must fear nowadays—knowingly and deliberately caused. I repeat, that applies not only to this Government.

It is, therefore, a most blatant inversion of the truth for the Chancellor of the Exchequer to say: The choice is not for me, but for the British people as a whole. 4.45 p.m.

There are many things wrong with our industrial relations today and with our system of collective bargaining, and many of the things which are wrong are themselves the delayed effects of a long regime of inflation. However, what is not wrong with our trade unions and with our system of collective bargaining is that through it the British people choose, as the Chancellor illiterately put it, to demand income we have not earned".

It is not within the power of any trade union system, however powerful, however greedy, however monopolistic, to ensure the continued availability of the supply of money which not merely makes it possible but makes it inevitable that what are mis-called "inflationary increases in wages" should occur.

It is intolerable for the Chancellor of the Exchequer, when he was only partially doing his duty in his Budget—on one side or the other of it—of eliminating the root cause of inflation, to come down to the House and blame the public for the increase in income tax, which was partly a real increase and partly, as appears from the speech of the hon. Member for Blaby (Mr. Lawson), an increase which represents a shift in the burden of income tax mechanically caused by inflation. It is intolerable for the Chancellor to say "It is no fault of mine that income tax is being raised in real terms. It is no fault of mine that increases in incomes, which merely represent a decline in the value of money, are taxed away by an increase in income tax. It is no fault of mine that, because I have budgeted for an exorbitant increase in total public expenditure, therefore I have to go some way towards meeting it by an increase in the income tax."

The Chairman

Order. I would remind the right hon. Gentleman that if the members of the Committee are to make speeches now, of the kind they would make on the Question, "That the clause stand part of the Bill", they must not expect later to have a debate on that Question, because the right hon. Gentleman knows that he is making such a speech now.

Mr. Powell

I am sorry if the effect of my words should be to debar any hon. Member from taking part in a clause stand part debate. I was, however, fortified by the observation, which was not contested, that if the amendment which is before the Committee were carried, it would result in a very large diminution in the return from income tax which the Chancellor of the Exchequer was anticipating. I hope, therefore, that I was directing myself to the effect of the amendment, namely, greatly to reduce the anticipated yield of the proposals of the Chancellor of the Exchequer upon income tax. However, I was in any case drawing to a close and I hope that with a convenient lapse of memory, Mr. Thomas, you will not count any words of mine against any hon. Member who might wish to speak to the Question, "That the clause stand part of the Bill".

Mr. Sheldon

Because the right hon. Gentleman has criticised the Chancellor of the Exchequer, I should like to ask him a question. What would he say to the question put this way: if the British people were to moderate their demands and settle for less than they otherwise would—something which the right hon. Gentleman could well contest—what would happen to the public sector borrowing requirement?

Mr. Powell

I shall tell the Minister exactly what would happen if a particular trade union, all the trade unions together, or all the income earners together were to place that limitation upon themselves, if they possibly could. Of course, it would not be practical or possible, but I accept for the purposes of the argument the hypothesis posed to me. The only consequence would be that all prices other than the price of labour would have to rise in order to take up the consequences of the increased flood of money released by the Government's inflationary financing of its expenditure. It is literally not in the power—and I am obliged to the Minister, for he enables me, finally, to make my point once again and briefly —of the British people either as individuals, or as members of trade unions, or in any other collectivity except that of political parties, to bring about a moderation or cessation of inflation as we now have it. They are only to blame in the sense that the public are always to blame for the kind of Government they get, and that if there is a series of profligate Governments who tax them through inflation instead of taxing them honestly through the Finance Bill, ultimately they are to blame. That, however, was not what the Chancellor of the Exchequer was saying.

Mr. A. P. Costain (Folkestone and Hythe)

I always feel wrong in intervening in such a highfalutin' debate. I have listened to the Minister's reply to the reasonable amendment of my hon. Friend the Member for Blaby (Mr. Lawson), an amendment which he honestly admitted was tabled to allow us to debate the whole question of taxation and its effect on inflation. The Minister was frank when he explained in detail how, in the time when productivity was good in this country and when there were not excessive wage demands, the average pay carried no income tax. That to me is the basis of all the trouble. Basically it is the chicken and the egg in relation to inflation. How often have we found in industry that productivity has ceased to increase when the ordinary working man began to have to pay income tax?

Has it never occurred to the Treasury that the Treasury itself is aiding and abetting the whole matter of inflation by taking a commission on the increase of wages? Is it not helping the Chancellor to balance his Budget when his fellow Ministers do not resist, as they should resist, demands for pay increases? The right hon. Member for Down, South (Mr. Powell) may say that the public are not responsible. The public are not responsible when inflation is aided and abetted like this. It would be a very simple matter if we had remembered what happened on the Continent. Does the Treasury remember that some 10 or 12 years ago the Germans were quickly reminded of what happened immediately after the First World War, and they realised very quickly how inflation could ruin an economy. I hope that the Minister is listening to me, because I am trying to educate him.

The Chairman

Order. I am listening, too, and I must remind the hon. Member for Folkestone and Hythe (Mr. Costain) that there can be little doubt that he is debating the Question, "That the clause stand part of the Bill," rather than the amendment to leave out £4,500 and insert £5,400.

Mr. Costain

Thank you, Mr. Thomas, for drawing that matter to my attention. I was clearly under the impression that the Opposition Front Bench had said that it did not want a debate on the clause as a whole.

The Chairman

That is joyful news, but I am the last person to hear it. However, I accept the offer with gratitude.

Mr. Costain

If you would prefer me, Mr. Thomas, to leave my words of wisdom to a more suitable occasion, I should readily agree. However, perhaps I may relate them more definitely to the amendment.

As I understand it, what we are asking in the amendment is to decrease the amount which is to be paid because of the inflationary factors in the pay packet. That is what the amendment is all about. That is the point to which I was trying to direct my remarks. I may have been persuaded to stray from my theme because the two Treasury Ministers present did not seem the least bit interested in what I was saying. That is basically because they are not interested in getting industry to control wages. That is what the problem is all about. When will they realise that the more they increase taxation, the more we shall get inflation. It is as simple as that. Once we get decreases in taxation we shall begin to reduce inflation.

Mr. Ian Lloyd (Havant and Waterloo)

In making his defence against the case put for the amendment by my hon. Friend the Member for Blaby (Mr. Lawson), the Minister of State made what I thought was a most interesting point and he produced a most fundamental argument. He said that he could not accept the amendment because basically it would involve something contrary to the Government's philosophy, which was that the main burden of the readjustment necessary if we are to beat inflation should be borne—as the Government so often say—by those with the broadest backs. I accept at once that this is a natural and inevitable argument for anyone sitting on the Treasury Bench who professes a Socialist philosophy. However, it is a most dangerous argument. Without straying too far from the rules of order, I hope to demonstrate—because it is central to the amendment—why that is so.

I have produced some figures which are highly relevant to this situation and the proposal that one can correct the situation, to which the amendment refers, by what one might call redistributive economics. I should like to refer particularly to the position of those whom one might describe as the less than £2,000-a-year income group in this situation.

One can ask straight away, what is the percentage of this massive overspend which our society is facing which is directly attributable to the net expenditure within what one might call the PAYE sector—those earning less than £2,000 a year? I will give the most recent comprehensive figures which are available to me. Total final expenditure in the United Kingdom was £89 billion. This is the era of the billion. Total consumers' expenditure was £45 billion. Consumers' expenditure in the less than £2,000-a-year group was, say, about £40 billion per annum. Public authorities' expenditure on current goods and services, plus fixed investment, was £17 billion. On a generous basis, 80 per cent. of that expenditure—this is going well in the direction that Government Members will accept—is attributable to those with incomes of less than £2,000 a year. That means that 95 per cent. of the population is benefiting from only 80 per cent. of public expenditure. One thus adds a figure of £13.6 billion to the total. We must not forget that of private sector investment a considerable proportion is attributable to those with incomes of less than £2,000 a year. To be generous, one takes one-sixth of the figure of £8.3 billion and adds another £1.4 billion to this total.

This makes a total of £55 billion of national resources which are directly in some way or other consumed by the PAYE sector of society. That gives me a figure of 62 per cent. I suspect that the figure is nearer 70 per cent. However, even on this basis, 62 per cent. of the economic deficits, 62 per cent. of the borrowing requirements and 62 per cent. of the balance of payments deficits—62 per cent. of the national economic problem—is directly attributable to, affected by and cannot be influenced without actions which impinge on the mass aggregate of income and wealth in the less than £2,000-per-annum group of society.

I should be glad if the Minister or anyone else would dispute my figures, suggesting that they are wrong, and therefore, suggesting that the whole burden of readjustment and inflation can be borne by those with the broadest backs.

I have argued previously, as I argue now, that this is an obsolete philosophy. It may be Socialism but it has no relevance either to the amendment or to the present economic situation. There is no redistribution of wealth, no alteration of taxation or change in the distribution of incomes between persons which can possibly achieve a national economic adjustment of the magnitude which is now required. That was one of the points my hon. Friend the Member for Blaby was making in moving the amendment.

[Mr. OSCAR MURTON in the Chair]

5.0 p.m.

Mr. Crawford

The right hon. Member for Down, South (Mr. Powell) related the raising or reduction of the tax threshold to the inability of trade unionists to affect the rate of inflation in this country, and other hon. Members have, once again, referred to "this country". I remind the Committee that there is more than one country in this United Kingdom, and more than one economy.

The trouble with the United Kingdom as a whole is that trade unionists are striving for an ever larger share of a decreasing cake. However, when Scotland gets self-government again, trade unionists and others will be seeking a larger share of an increasing cake. Briefly, this will lead to less industrial strife, and arguably--I realise that it is arguable—to less inflation. The Committee should be aware of the differences of the Scottish economic situation.

Mr. Nott

I was conscious at one point that I was required to rise to my feet and suggest that the official Opposition did not want a debate on the Question "That the Clause stand part of the Bill," but I have learned over the years that such an incautious statement would have been rash, to say the least, because my hon. Friends might well wish otherwise.

This has been a very worthwhile debate. The whole Committee owes a debt of gratitude to my hon. Friend the Member for Blaby (Mr. Lawson) for raising the important issue of indexation. The right hon. Member for Down, South (Mr. Powell) took the debate rather wider and so did my hon. Friend the Member for Havant and Waterloo (Mr. Lloyd) but perhaps I can fit in a few comments on what they said within a general answer to my hon. Friend the Member for Blaby.

To the extent that my answer may involve something of a discussion among the Conservative Opposition it certainly would not be anything new to the Chief Secretary and the Minister of State who normally, while they were in Opposition, indulged in almost a perpetual dialogue with their own backbenchers to the total exclusion of the Government.

We do not want a long debate on this issue and I shall, therefore, resist the temptation to go into the wider issues of indexation, except to repeat what I said in Second Reading of the Finance Bill. I believe that to be wholly fair indexation should cover all forms of earned income, investment income, capital taxation, contractual debts and tax scales. In other words, indexation would have to be right across the board.

I certainly accept—as I am sure the Committee does—that although indexation is not at present right across the board it has gone a very long way within our system. It protects public service pensioners, but not generally those in private pension schemes. It protects most social service beneficiaries, but not those who are thrifty and who have saved for their own protection and security. It apparently provides—and I am still referring to indexation generally—a very high degree of security of employment to those within the public sector, where spending is designated in constant prices, while employees in the private sector are subject not to the protection of this so-called funny money, but to the availability of actual cash. In the private sector no cash means no job, even though we have a strange phenomenon in the form of the Secretary of State for Industry. However, not even he, in the medium term, will be able to avoid the very real fact that no cash in the private sector in the end means no job.

The indexation of stocks is a new invention of the Chancellor. In spite of the 10 per cent. element which is related to trading income, in the end it is likely to benefit more the inefficient company, which turns over its stocks rather slowly, than the efficient company which keeps its stocks low and tends not to turn them over so fast, although I appreciate that the Government have tried to avoid this in their measures. I am looking upon the stock value provisions as an alternative to lower corporation tax which would clearly benefit profits generally.

In all those areas we have indexation and it has gone far within our system. However, I believe that these examples merely illustrate the point I made the other day that indexation does not remove the pain of inflation. I am sure my hon. Friend the Member for Blaby would agree with me about that. Indexation redistributes the pain.

Mr. Lawson

It is fairer.

Mr. Nott

It may be fairer, but that is something I shall deal with later.

Sir John Hall

It does something else as well. It takes some of the fear of inflation away and therefore tends to moderate wage demands.

Mr. Nott

As my hon. Friend has raised the question of wages I shall deal with that matter now. I should like to put forward my personal view. I cannot speak for my hon. Friends and I do not want to be charged with making an official statement, because that would be a very boring way of conducting our debate. I must be allowed occasionally to have a view of my own.

I believe that the indexation of wages probably means that all that will happen is that the trade unions will start their bargaining in real terms. We have had that experience with Stage 3. I suppose that I take responsibility for Stage 3 although my influence in those days was not particularly great, to say the least. The effect of indexing wages at that time, with the thresholds within Stage 3, could be said to have been a device which led to trade union bargaining in real terms as opposed to money terms. The trade unions are in existence and they will resent and resist the Government coming along to remove their very purpose. Certainly when considering wages we must be very cautious about the advantages of thresholds related to the cost of living.

Mr. Lawson

Will my hon. Friend not agree that what he is now putting forward is an argument against a statutory incomes policy of any kind—an argument with which I am wholly in agreement—and that the indexation of wages is something that neither he nor I are putting forward?

Mr. Nott

I realise that. My hon. Friend the Member for Wycombe (Sir J. Hall) raised a point about wages and I felt that I should deal with it. I agree with my hon. Friend the Member for Blaby that what I have said is a strong argument against statutory policies. I could not be more aware of that.

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

Which view has the hon. Gentleman just given—was it an Opposition view or his own?

Mr. Nott

Perhaps the Chief Secretary will be patient and wait until the economic debate on Thursday for his answer. I am prepared to admit that such a reply to the Chief Secretary might be defined as a ministerial reply, but if the Chief Secretary will wait he will no doubt hear a great deal more on this subject during Thursday's economic debate.

I turn more specifically to my hon. Friend's amendment and to the indexation of tax revenue. Whether one calls it fiscal drag or tax buoyancy, one is referring to the indexation of tax revenue. What my hon. Friend is saying—and I wholly agree with him—is that what this effectively tends to do is to provide to a largely non-productive public sector, namely to the social services and so on, a supply of additional resources at the expense of individual taxpayers upon whose productive efforts the future of the nation largely depends. I wholly agree with the points that my hon. Friend was making in this respect.

The argument can be narrowed down to one principal proposition. It raises the question of whether all future tax increases should be explicit or whether they should continue to be in part concealed, which is the case at present. All that my hon. Friend the Member for Blaby is saying, and all that advocates of indexation are saying, is that the Chancellor should come clean in his Budget statement. Let him come out straight away and tell the country exactly what he is doing. If he needs more revenue, let him raise the taxation rates rather than reduce by stealth the tax allowances in real terms.

I go a long way with my hon. Friend the Member for Blaby, but in a way—and I am now looking at the other side of the argument, because I hope that my hon. Friend will let me debate this—it presumes a certain naivety on the part of taxpayers which does not wholly exist. These taxpayers may breath an initial sigh of relief when they first hear the Chancellor's Budget statement and are told that tax rates and tax allowances will remain constant, but their behaviour does not support the suggestion that the Chancellor's stealth is normally successful. When they compare their take-home pay with what it purchases, they become well aware of what is happening to their real spending power. They then put in extra wage demands.

The natural buoyancy of the revenue may encourage a degree of pretence—call it deceit if one likes—on the part of Chancellors but the pretence is discovered fairly quickly, and the consumers—I am talking of consumers in the aggregate—do their best to put it right by seeking higher money incomes through wage demands.

Where I agree with my hon. Friend is that I think tax buoyancy deceives Chancellors when they plan their Budgets. The Chancellor frequently believes that he has more money at his disposal, more real revenue than proves to be the case. The planners say to him, "The future year's revenue, Chancellor, will be EX, and the availability of real resources for the public sector is likely to be EY." On that basis, the Chancellor may well plan his public expenditure on wholly false assumptions, because before long additional wage demands are generated in the public sector, leading to higher public spending overall.

The right hon. Member for Down, South pinned the responsibility for inflation on Governments. I think that I am saying something very much along those lines, because Governments have assumed a buoyancy of the tax revenue and therefore indulged in expenditure beyond the resources available. [Interruption.] I shall be happy if the Minister of State intervenes to say that he disagrees.

What has apparently happened since the war is that, in spite of all attempts by Chancellors, the proportion of the gross national product taken by private consumption has remained fairly constant. The proportion taken by public consumption—investment and expenditure on current goods and services--has been on a rising scale. The residual has been private investment. That is what has taken the real beating. Therefore, I think that it is true to say, as my hon. Friend the Member for Blaby did, that the availability of concealed tax increases to the Chancellor has tended to mean that Chancellors have spent more in the public sector than they might otherwise have done.

Mr. Sheldon

I am surprised that the hon. Gentleman is saying this. I assume that things have not changed so much in the past 12 months. When the Chancellor looks at this so-called buoyant revenue he is very much aware—and I should be surprised if he was not always very much aware—how much this means in changing prices, and his estimates of future expenditure take those changes into account.

Mr. Nott

I can only say that the present Chancellor clearly was not aware of it, because at the beginning of 1974 he said that he would have a borrowing requirement of about £3 billion, and the out-turn was £10 billion. What has happened during the past year underlines my point that members of the wage-earning community have been making additional wage demands, and that this has increased the Chancellor's borrowing requirement far beyond the figure he ever expected.

I think that the private consumer has been successful in resisting the Chancellor's intention up to now simply through increased wage demands. But the process has been very inflationary. It has encouraged higher spending in the public sector than the country can afford.

Within the tax system there has been a massive redistribution which has seriously hit the poorer sections of the community and the pacemakers, which I think was the point made by my hon. Friend the Member for Havant and Waterloo. Those are the two parts of the community which have been worst hit. Those around the tax threshold and those on higher marginal rates have suffered most of all while this process of redistribution has been going on.

5.15 p.m.

The Minister of State quoted the amount of income tax paid over the years by persons on average earnings. He rightly said that it had gone up and up in percentage terms. If he had taken those on the higher rates and those who have been around the threshold, he would have found that the percentage of tax they have paid has increased by an even greater amount than the middle band of taxpayers to whom he referred.

The great mistake made in the latest Budget was that the Chancellor used his tax buoyancy to finance more subsidies to paper over the cracks—an additional £1,400 million of subsidies on food and housing—instead of using it to reduce expenditure or, in normal time, use it to raise tax allowances.

The Government often rest their case on the argument that when the Chancellor faces an increasing borrowing requirement it makes no sense to restrict his room for manoeuvre. That traditional argument against indexation has lost much of its force. It is a misconception to believe that the Chancellor gets away with it. I think that over a period of time the consumers put themselves back in the position they were in before. They claw back in money terms the increased revenue which the Chancellor believes he has taken from them. The Government plan more expenditure than they can afford, and the strong maintain their incomes at the expense of the weak and those on the higher taxable incomes. That is a redistribution which can hardly be justified on any grounds.

There are many objections to the indexation of allowances. The arguments go both ways. But if we continue with the present system, whereby we leave it entirely in the present Chancellor's dis- cretion whether he raises the tax allowances, in the end those who are in strong trade unions will continue to benefit at the expense of other equally deserving sections of the community.

As the year goes by, if inflation continues at its present level, there will be an increasing demand for indexation of the tax allowances, simply because it will be claimed that in the end this will be fairer than allowing the kind of redistribution within the tax system which is now going on.

I do not know whether my hon. Friend the Member for Blaby wishes to divide the Committee on these amendments. It has been a useful debate. I invite my hon. Friend to comment on what I have said. As he did not agree with certain comments that I made recently, I shall be interested to hear whether he disagrees with what I have said today.

Mr. Lawson

I indicated when moving the amendment that I did not intend to press it to a Division. I was concerned with having a debate on the matter of indexation, which was involved in this series of amendments. We have had that debate, and in a moment I shall seek leave to withdraw the amendment. But first I should like to say a few words.

I am glad to say that I find myself in far less disagreement with my hon. Friend the Member for St. Ives (Mr. Nott) today than I did in the Second Reading debate. I do not wish to take issue with much of what my hon. Friend said, but briefly I take issue with what was said by the Minister. The Minister, when talking about inflation and fiscal drag, which is largely inflation, said that 81 per cent. of the increase in the yield of income tax of £3,771 million was due to inflation. That is approximately £3 billion. To be fair, I think that that slightly overstates the position. It must be accepted that pro rata the yield will go up with inflation. We must be concerned with the way it goes up more than proportionately—namely, the gearing effect.

It is, of course, a nonsense to say that the broadest backs are bearing the burden when we take into account not only the high marginal rates but those who will be brought into tax this year on incomes which in real terms are no higher than incomes which last year were considered so low that they should not be brought into tax at all. That has happened because the personal allowance is not increasing proportionately with inflation. The people who will be less affected will be those in the middle, the people who the Chancellor was accusing of getting the plums in terms of wage increases.

The question is whether the revenue which has to be raised is to be raised by direct taxation, personal income tax or indirect taxation. I think that there is still a degree of naivety amongst the public. The public see, for example, rates and vehicle excise licence duty increasing explicitly. They see the effect of that more clearly and more vividly than they notice the insidious increase in the burden of income tax through inflation.

Is it conceivable—certainly the Chancellor did not give the impression that this is what he was doing when he made the Budget broadcast to which I referred—that a Chancellor, faced with the need either to cut back public expenditure or to increase taxation by a certain amount, would explicitly say "I shall do nothing about it by cutting public expenditure, I shall do very little about it by increasing indirect taxation."—in real terms that has gone up only very slightly—" I am going to do virtually all of it by increasing personal income tax." I do not think that he would have come to the House to say that. I believe that he would have acted in a more balanced way by making some cuts in public expenditure.

I remain unconvinced by what the Minister has said, but in the interests of progress I beg to ask leave to withdraw the amendment.

A mendinent, by leave, withdrawn.

Sir John Hall

I beg to move Amendment No. 31 in page 17, line 30, leave out '£1,000' and insert '£1,200'.

The First Deputy Chairman

With this it may be convenient to take the following Amendments:

No. 32, in line 31, leave out £1,000' and insert £1,200'.

No. 33, in line 37, leave out £500' and insert £600'.

Sir John Hall

These amendments refer to the surcharge on investment which has been the subject of considerable debate in the past two Finance Bills. Perhaps it is as well to remind ourselves of the background to the surcharge. All too frequently we lose sight of the origin of some of the worst kinds of taxes from which we suffer today.

Hon. Members on both sides of the Committee will know that the surcharge was first introduced by the Conservative Government who introduced the unification of the tax system. That was a change in our tax system which was generally welcomed by both sides of the House. At that time the surcharge started at £2,000 at 15 per cent. Even at that time I seem to remember that there was some debate whether that was the right figure. There was debate whether it was too low and some suggested that the surcharge was too high. Whatever may be the argument, there is no doubt that we would have to increase that figure substantially if we intended to maintain its true value in terms of the falling value of money.

In the first Finance Bill that was introduced after the change of Government it was attempted to reduce the ceiling to £1,000 and £1,500 respectively on the lines which are outlined in this Clause, to which the present amendments are directed. Fortunately, through an amendment moved by the hon. Member for Cornwall, North (Mr. Pardoe), which was strongly supported by the Conservative Opposition, that attempt was defeated. However, we were warned that the Government would attempt to reintroduce that measure on the next suitable occasion. When we came to the now notorious Finance Bill of November 1974, on which so many members of this Committee spent so many weary hours throughout the days and nights, the Government reintroduced their proposal to reduce the figure to £1,000 and £1,500 respectively.

When the Chancellor announced his intention to reintroduce these reduced rates or ceilings, he said: the burden of personal tax should fall that much more heavily on investment income than on income which is earned by current effort. I find that a curious statement and an extraordinary philosophy for a Government who are urging people to defer current spending and to save. When those savings, on which tax has been paid, accumulate to a point when they earn income in excess of £1,000, savers are to be penalised by an additional surcharge over and above the ordinary tax. Apparently the slogan is "Save—but do not save too much." It seems that if people save too much they will, to use the fashionable word which we have heard on several occasions in Finance Bill debates, be clobbered by additional tax penalties.

The Chancellor said at the same time: There must be room for those at the bottom to see their living standards rise. This means sacrifices for those at the upper end of the scale."—[Official Report, 12th November 1974; Vol. 881, c. 274.] That remark must have left a sour taste in the mouths of those living on investment incomes considerably less than the wages of many workers. Hon. Members will remember that several amendments were tabled which were directed towards lifting the burden of the surcharge from those who through disability or through personal circumstances were severely restricted in earning capacity and who found this additional impost a hardship. The amendments—in fact I moved one myself—were treated with considerable sympathy. The Chief Secretary expressed his sympathy as regards our attempts to relieve the burden on those socially disadvantaged. However, the amendments were all resisted. We are now faced with exactly the same situation at a time when severe inflation is creating a growing and dangerous position for the people.

It is true that the changes in allowances introduced by the present Budget have had some effect upon married couples with incomes of up to £2,500 and on single people with incomes up to about £1,200. Those modest concessions to the ravages of inflation apply to everyone equally and not only to those who have to pay a surcharge on investment income. The amendment which I moved during the course of the last Finance Bill was designed to help the disabled. I quoted several cases which I discovered in my constituency. I refer to one such case today. I want to explain to the Committee the effect of the present tax.

5.30 p.m.

Let us take a single woman who at one time was a well-paid, highly skilled professional person until she became crippled and unable to work. Let us say she lives on an investment income of £1,700. In 1974–75 she would have paid £424.75 in tax. In 1975–76 she will pay £428.75—an increase of £4, even taking no account of the effect of the investment surcharge. This is due to the fact that the benefits which follow from the improved allowances tail off for single persons just before they reach £1,200 a year. A single person with an income that is all earned will pay tax of £358.75—£70 less than the single person with no other source of income except her invested income, and a person who is unable to go out to work, however much she may now wish to do so

A figure of £70 does not sound very much, but for a person with a total gross income of £1,700—less than £1,300 after tax—it means the difference in winter between being warm and cold, between having a new coat and having to put up with an old coat year after year. It is a considerable sum of money for somebody on a small income with no chance of earning anything else. Furthermore, at a time of inflation which eats still further into that income, that woman is being penalised by that additional surcharge and is being lumped together with those who are better off and who are being asked to make a sacrifice. She finds that hard to bear.

I am sure that Members on both sides of the Committee could give many examples of persons living on modest investment incomes who are finding themselves unjustly penalised both by the surcharge—and, if they are single, additionally penalised by the increased tax under the Bill.

These amendments are extremely modest. I do not know the cost involved, but it cannot be high. No doubt we shall hear from the Minister. The amendments are designed to offset in some small part the unfair penalty borne by many taxpayers and seeks to draw attention to the impact of inflation, which increases the burden people have to bear. Therefore the surcharge in its present form is unjust, and the destructive effect of inflation makes it doubly unjust. I commend the amendment to the Committee.

Mr. David Mitchell (Basingstoke)

We are debating an additional tax on investment income. I am reminded of the phrase "They also serve who only stand and wait". They certainly also serve the British economy who only supply the money to keep the industry going, to modernise it, and to invest in its plant and machinery—investment which economists and the Treasury Bench so often inform us is the prime need of British industry at present.

Industry is a partnership involving skilled labour, motivated management and capital. One wonders why the Government believe that such a savage investment surcharge is desirable. It is a special tax on investors, on savers, on the thrifty—those who forgo consumption. What have they done to make their case so undesirable? Surely in a country such as ours, which is so desperately short of capital and investment, these are the people whom we should be encouraging rather than discouraging. I wonder why their activities are regarded as so undesirable and why the Government are seeking to dry up this source of funds for British industry? So successful have the present Government been—and indeed this applies to their predecessors—that over a period of time we are increasingly having to look to the oil sheikhs and to others to provide the essential investment so desperately needed by British industry.

Who are these people who are being penalised by this tax? Are they the rich? Are they those in the middle income group? Are they those on the national average wage? Let us look at the figures. The national average wage in March was £60.08p per week. The national average wage for manual workers was £54.65p. Yet here we are seeking to levy an additional tax—a surcharge—on those whose income from investments exceeds £20 a week. Surely that is not the right course to take when we should be seeking to encourage savings, thrift, and the creation of investment capital. I believe that we should now be debating an amendment that is far more radical in its terms than the present proposal which is before us.

Let me tell the Committee who are the people affected. They are widows living on their own, widows with children, the disabled, pensioners living off their life savings. They are the people who face ever-increasing costs, soaring rates, increasing food costs, cost of living rises and who find pressures increasing all the time. I regard the amendments as too modest, and I hope that next year we shall take the matter even further.

A further category in this group who will suffer comprises the retired small business man. I refer to the shopkeeper, the market gardener, the business man with a small engineering works who has no children to whom to hand on the business but who has built up his business during his working life and who has sold it for the purpose of living on the proceeds during retirement. He has that golden nest egg resulting from the sale of his business. But those savings, accrued through a lifetime, become liable to capital gains tax on a sale, and when the money is invested it then becomes liable to an investment income surcharge on any figure above £20 a week.

Let us make a comparison between the position of the people I have mentioned and, say, the well-heeled senior civil servant, the ex-minister, the bank manager—people who throughout their lifetime have relied on their employers to provide the basis of their superannuation and who do not have to pay a surcharge on income. It is the man who has saved his money and invested it who is clobbered by this legislation. It will also hit the selfemployed—those who do not have an employer to pay into a pension fund. Those same people may have built up their savings by investing throughout their lives perhaps in Government stock—poor misled fools though they may be. I repeat that they are the people who are being clobbered today.

Therefore the amendment is an made quate attempt to reduce the attack on the self-reliant, the thrifty saver and the investor. It is wholly in the national interest as well as in the interests of these people that we should not clobber investment savings. Therefore, I hope that the Committee will accept the amendment and next year I hope that we shall propose a more radical amendment to get at the root of the country's problems and to encourage investment, saving and thrift.

Mr. John Ryman (Blyth)

I should like to make one short point, about which I am puzzled. I have never understood why there should be some sort of moral and physical distinction between earned and unearned income as regards taxation. I am no economist. Nor am I an expert on financial affairs—unlike most members of the Committee. Using the criterion of common sense, it seems to me that if a person derives an income from a job on which he is currently engaged, or if he is too old or too sick to work and therefore receives an equivalent income from investments, it is wrong to tax those two sources of income in different ways.

Throughout the years, the Conservative Party have adhered to that distinction in their own fiscal policies. That has been done by many Conservative Chancellors of the Exchequer. It ill becomes the Opposition now to make the pathetic exaggerations such as those made by the hon. Member for Basingstoke (Mr. Mitchell), because Tory Chancellors in the past have paid lip service to this distinction which, I respectfully suggest, cannot be defended on the grounds of common sense.

What is the difference between a man who earns money and the man who works, saves money, retires and who in subsequent years derives the income from the money which he has saved as a result of his hard work in the form of what is euphemistically called unearned income? I do not see the moral distinction.

In the past, all political parties were guilty of believing that there was something inherently more noble in working and collecting money than in working at one time, saving, and collecting the money in a different form. They have therefore given it the somewhat ignoble title of "unearned income". Of course it is earned. But it is earned in a different way. It is earned because of the efforts which took place before the money was invested.

I recognise that there is a distinction to be drawn. If somebody inherits a large sum of money by way of a pecuniary legacy the legatee has done nothing to earn that money. He was lucky in the sense of being a legatee. Therefore, that money, which is invested in stocks and shares, yields an unearned income. A distinction can apply in those circumstances because the money was not earned by the person concerned. The income is therefore truly unearned income, although the capital was earned by the testator who left the money.

Sir John Hall

In the case of inherited wealth the chances are that the legatee will have paid a swingeing rate of capital transfer tax, thus considerably reducing the capital on which he will later enjoy the unearned income. To that extent he will also have suffered a large financial penalty.

Mr. Ryman

The estate of the deceased person will have borne that tax. However, the result is that the legatee will still receive a capital nest egg. This is playing with words. The money is earned in the sense that the legatee will not have made any effort to earn the money. That is another case.

I suggest that there is no merit in distinguishing between a person who works and earns money, and receives it at the end of the week or month, and a person who works, invests his earnings in equities, retires, and seeks to derive the benefit of his previous work in the form of unearned income.

Mr. David Mitchell

The hon. Gentleman said that my comments on the amendment were exaggerated. Will he explain why my tentatively suggested course, which was less strong than his, was exaggerated, yet his more powerful suggestion ceases to be exaggerated?

5.45 p.m.

Mr. Ryman

The hon. Gentleman has totally missed the point I sought to make. I am not suggesting a measure more powerful than that which was suggested by the hon. Gentleman. I expressed surprise, as a layman in these matters, about the fundamental distinction between earned and unearned income. The criticism which I levelled at the speech of the hon. Member for Basingstoke was on that basis. He mentioned deserving members of the community such as widows, the disabled, the sick, the retired, who live on small investment incomes. All hon. Members acknowledge that it is contrary to common sense and fairness that people living on small fixed means should be taxed to such an extent that their inadequate investment income is incapable of surviving the ravages of inflation. I hope that there will be no dispute about that proposition. I thought that the hon. Gentleman exaggerated and sought to make phoney, dramatic forensic points. He asked rhetorically, "Why is there no investment in British industry today? Why have we arrived at the position when we must rely on the sheikhs and the other wealthier sections of the community to provide investment for British industry?".

I shall give one answer from the point of view of the small investor. Despite two booms on the stock exchange in the past 10 years, many small investors have seen astronomical crashes, by comparison with the Financial Times ordinary share index, in the past few years and have seen the advice given to them by reputable stockbrokers go wrong. That has been the experience of many small investors.

One of the reasons why they will never again invest on the stock market is that there are far better propositions in which to invest than the stock market. The property boom of 1972, and the booms in works of art, antiques and other commodities have shown small investors that in future they will be better advised not to put their modest savings into the hands of the avaricious gentlemen who run unit trusts or the glib stockbrokers who make sweeping recommendations about shares in Australia and so on. Those small investors have burnt their fingers badly in the past few years.

The reason for that has nothing to do with the Labour Government or with Socialist policies. It has to do with the unlimited permutations and uncertainties of the stock market, which is subject to international influences and the inherent excesses of capitalism, so forcibly demonstrated during the period of the Conservative Government under the right hon. Member for Sidcup (Mr. Heath) between 1970 and 1974. At that time there were occurrences such as the Lonrho scandal and the hugh tax repayments in the Cayman Islands to gentlemen connected with that company, as well as the beginnings of the Sir Denys Lowson scandal and revenue scandals in the City. Those occurrences greatly alarmed the ordinary people. They will take their savings elsewhere, if they can muster any savings, rather than go through the experience of losing their hard earned savings because of astronomical reductions in the Financial Times ordinary share index, which have repeatedly occurred.

I know of many people in fairly humble circumstances who used to invest in a small way in equities and who have sworn never to do so again.

Mr. Crawford

The hon. Gentleman will be aware that his own party is not without a hint of scandal.

Mr. Ryman

Will the hon. Gentleman be a little more specific about the matter to which he is referring?

Mr. Crawford

The hon. Gentleman will know to what I am referring from his own part of the country.

Mr. Ryman

I do not. If the hon. Gentleman would like to make clear to what he is referring, I shall then know. I was referring to financial scandals in the City of London.

The First Deputy Chairman

Order. I think that we are getting rather wide of the debate. Alleged financial scandals do not enter into it. Perhaps the hon. Gentleman would address his mind to the amendment.

Mr. Ryman

I am sure that the Government will want to be helpful about this matter. Dealing with a surcharge on investment income must involve the proposition that the investment income is susceptible of a surcharge. There must be an inherent reason for introducing a surcharge on investment income rather than a general increase in taxation on all income, earned or unearned. That is the proposition to which I wish to address myself.

I suggest that we should not look at this amendment in the context, is the amount specified adequate or inadequate? If the speeches by hon. Gentlemen opposite are correct, there seems to be no merit in limiting the sum to £1,200 rather than to i1,000 a year. In today's financial terms that is a drop in the ocean. It is a fleabite. It is useless. Why make this footling little amendment if the object, even if it is accepted, is to change the sum by such a small amount? Either there is a question of principle involved or there is not. If the principle is right, the proposers of the amendment should have the moral courage to say so and to stand up for a much larger figure than the example that has been given. They cannot have it both ways. That is the way that I put it.

Mr. Peter Rees (Dover and Deal)

I have been encouraged by what was said by the hon. Member for Blyth (Mr. Ryman) to make a short intervention. I had not proposed to do so, because many of the propositions which should be canvassed on this occasion were canvassed, if my memory serves me right, in December and January. No doubt as long as we enjoy, if that is the correct verb, a Socialist administration, we shall come back to these same points again.

The one valid point in the contribution made by the hon. Member for Blyth—the effect of the ravages of inflation and of stock market fluctuations on those with investment incomes—was unfortunately overlaid by a lot of irrelevant distractions. Indeed, the hon. Gentleman tried to attribute to the last Conservative administration certain incidents not yet fully explored in the City and other places. I am sure that he is aware that not all who do not pay their due measure of tax are necessarily to be found voting the Conservative ticket. They can be found in the hon. Gentleman's part of the country. Indeed, I was surprised that he showed such complete ignorance of the point made by the hon. Member for Perth and East Perthshire (Mr. Crawford). It would be inappropriate—no doubt I should be called to order—to explain in words of one syllable why we on this side of the Committee hear with a certain scepticism and distaste that kind of charge coming from the hon. Gentleman.

The valid point made by the hon. Gentleman, which I warmly commend—I shall wait to see how he votes on the amendment in view of what he said—was that the distinction between earned and unearned investment income is now largely meaningless.

The distinction was introduced some time before the First World War. I entirely agree that it has been perpetuated by Liberal, Conservative and Socialist Chancellors of the Exchequer. But we hope for an entirely fresh approach to the whole problem if, as the Government have promised, they are to introduce a wealth tax.

Some countries have followed our pattern and discriminated in a fiscal sense against investment income by imposing a heavier burden of income tax. Other countries have chosen to introduce a wealth tax. I hope that we shall have opportunities to debate the relative merits of those methods of taxation. It is clear beyond peradventure that there is no case whatever for a wealth tax and a heavier burden of income tax on investment income. Again, when we come to that question, I shall look with interest to see how the hon. Member for Blyth votes.

If Chancellors of all parties have perpetuated this fiction, it is fair for the Opposition to observe that Chancellors of a Conservative complexion have been a little more tender to those who enjoy investment income. Indeed, Lord Barber lifted the starting point for the increased burden in his Budgets of 1972 and 1973. We feel that it is a retrogressive step, against which we must make our protest, that the starting point should be brought down again, particularly in a period of inflation.

It is trite to observe that inflation, in an uncontrolled and entirely haphazard way, redistributes the wealth of the country. It is also fair to observe—I am sure that it will not have escaped the hon. Member for Blyth—that on the whole organised labour, even in a period when inflation has been running at 25 per cent., has not done badly for its members. I am not complaining about that. It is the duty of unions to protect, as best they can, the interests of their members. But I feel that they use illegitimate methods. I think that the hon. Member for Blyth will agree that their tactics have at times gone beyond the permissible. What cannot be denied is that, with inflation at 25 per cent., the only section of the community which has kept its head above water and not lost ground is that which is represented by the powerful trade unions, because it has enjoyed wage increases of 30 per cent. and sometimes more.

The persons in our community who have undoubtedly suffered are those who depend on investment income. I challenge the hon. Member for Blyth or the Minister who is to wind up the debate to tell us of many of those who depend on investment income who can point to increases in income, even before tax, of more than 25 per cent. There are very few. Most, as the hon. Member for Blyth fairly pointed out, have watched their income and capital dwindle. In a period of rapid inflation they have, in a sense, been paying a wealth tax, because the net income that they receive does not to any degree compensate them for the reduction in their real wealth.

I could construct a reasonable case, which I am sure would carry the hon. Member for Blyth with me, for saying that the burden of tax on investment income should be lightened, not increased, in this Budget. Perhaps in these hard times it would be too much to expect the Treasury to do that. But perhaps Treasury Ministers recognise the burdens being carried by those who depend on investment income. They may not be found in great numbers in constituencies represented by Members of the Treasury Bench. But, speaking for myself and others of my right hon. and hon. Friends, all too often we encounter people whose real standards of living have been dramatically eroded over the past 12 months and who can look forward to no alleviation whatsoever over the next 12 months They are the real victims of the total failure of this Government to come to grips with inflation. They are the people who, year by year, watch not only their net income but their capital assets dwindle away.

6 p.m.

I am particularly concerned that people who depend on investment income should be safeguarded. We may be able to do nothing about the value of their capital assets but at least we can make certain that their net income after tax is not savagely eroded as it has been and is likely to continue to be. We can make certain that ill-considered measures of the Government do not harm them further.

I have had certain passages of arms with the Chancellor. I believe that he operates all too often through ignorance and not through malice. I hope that the Minister of State, who has a little more experience as an entrepreneur when he is spared from the Front Bench, and his right hon. Friend the Chief Secretary, who we know has experience as an accountant, no doubt advising those who have to depend on investment income and have to manage businesses and farms, will be able to go away from our debate and convey to the Chancellor, who has not chosen to grace it, that there are some genuinely hard cases of which he must take account.

I encounter all too often in my constituency people who over a lifetime have contributed to the community in business or the public service and who have retired on a modest competence. They have looked forward to a reasonably comfortable old age but they have been hit particularly hard by inflation. Their position has not received the recognition it deserves in this Finance Bill, in the previous Finance Bill or in the one before that.

The hon. Member for Blyth taunted us for putting forward too modest an amendment. That is a charming and amusing taunt from the Government side of the Committee.

Mr. Ryman

Before the hon. and learned Gentleman obscures the one good point he made about 10 minutes ago by a mass of partisan forensic rhetoric, will he deal with this one point? Is he in principle advocating the total exemption of unearned income from an investment tax, or is he saying that the present level of investment surcharge is too high? One has sympathy with people on fixed incomes who suffer in these circumstances. Is the hon. and learned Gentleman saying that their investment income in effect should be tax free or that it should be taxed at a different level from that proposed in the Bill?

Mr. Rees

Sometimes I lapse into obscurity, but I hope I have made clear my argument beyond doubt even to the hon. Member for Blyth (Mr. Ryman). I am saying that when we debate the wealth tax there will be a case for lifting the investment income surcharge. There will even be a case—which I shall be happy to deploy—depending on the form of the wealth tax, for lifting income tax altogether from investment income because there will be another way in which those people can make their due contribution. At this juncture in our affairs I do not believe that the people who depend on investment income would wish entirely to dissociate themselves from our national misfortunes. They recognise that they have a contribution to make.

As the people who depend on investment income of all categories of our community feel the ravages of inflation—to a greater degree even than those who are fortunate enough to be represented by the powerful trade unions—there was no case for the Chancellor to do what he did in his previous Finance Bill, which was to bring down the starting point to £1,000 a year. There is a case for treating these people with a measure of kindness which they have not yet experienced from the present administration. I support warmly and enthusiastically the modest amendment and on that hope that I carry the hon. Member for Blyth with me.

I encounter this kind of case in my constituency, as no doubt does my hon. Friend the Member for Thanet, East (Mr. Aitken), because we represent favoured areas in which people after a lifetime of unremitting toil choose to retire on their modest savings.

Mr. Jonathan Aitken (Thanet, East)

indicated assent.

Mr. Rees

We encounter these cases every day in our constituencies, and we feel that there is no case for the ignorant, destructive approach shown by the Government to those who rely on investment income. Therefore, we support this modest measure of relief and we hope to carry with us the hon. Member for Blyth not only forensically and rhetorically—we have heard his rhetoric—but in the Division Lobby.

Mr. Sheldon

The debate has taken longer than I expected, bearing in mind that we have debated these matters at some length over the past few months. I am surprised that my hon. Friend the Member for Blyth (Mr. Ryman) wishes to clarify the distinction between earned and unearned income or, in modem parlance, between earned and investment income. The hon. and learned Member for Dover and Deal (Mr. Rees) called that distinction a meaningless one.

Unearned or investment income derives from a wide range of capital sources. Savings go towards making that capital, and we regard savings as important. What was said by the hon. Member for Basingstoke (Mr. Mitchell) is important in that regard. There are other sources of capital—for instance, bequests, and the natural increase in capital that comes from good and sensible further investment. I note what my hon. Friend the Member for Blyth said about the rises and falls of the stock market and its resulting unattractiveness for certain forms of investment.

I take issue with the hon. and learned Member for Dover and Deal. The distinction between earned and investment income is still meaningful. It has changed somewhat over the years and people recognise that there is not quite the same distinction in days of inflation as there was before inflation. It is true that investment income is a more certain form of income, but it fluctuates and diminishes as a result of inflation. The essential distinction remains that in considering the means of an individual it is insufficient to consider merely his income. It is an inadequate representation of the amount of wealth owned by a person. The capital standing behind the income represents a much more advantageous form of wealth. That principle has been accepted for decades, irrespective of the Government in power.

Mr. Peter Rees

May we take it from what the Minister says that if the Government, as promised, introduce a wealth tax we can expect a lifting of the investment income surcharge and possibly of all income tax on investment?

Mr. Sheldon

The wealth tax will have a considerable bearing on the investment income surcharge. The two forms of taxation will relate to each other. It is too early to give decisions as the Select Committee is still in the process of receiving evidence and has yet to deliberate on the forms of taxation that might be possible. But clearly the interrelationship is an obvious one which will have to be examined.

The hon. and learned Member for Dover and Deal talked about the burden on those with investment income. Of course, we all have our own examples of those people with whom we would obviously have sympathy. The difficulty is, and it is a straightforward one, that there is a need for revenue. The hon. Member for Wycombe (Sir J. Hall) asked about the cost of the three amendments. It would be about £22 million and it is difficult to agree to concessions, reliefs and beneficial changes at a time when the need for revenue must be paramount, as my right hon. Friend the Chancellor has said more than once. On this basis it is not surprising that the burden will fall more heavily on those with investment income than on those with only earned income.

I would put that further point to my hon. Friend the Member for Blyth. This distinction has always existed. It remains now and it must be considered. The hon. Member for Basingstoke (Mr. Mitchell) talked about the need to encourage people to save, but it cannot be taken for granted that people with an investment income have no other income. The retired, for example, will normally have their State pension and frequently a private pension. When the hon. Member for Basingstoke refers to the problems of those with investment income, he must bear in mind that many of these people will have other forms of income which must also be included. At a time when the economy requires considerable contributions in revenue, this source must also be regarded as important.

Mr. Ryman

My hon. Friend said that those living on unearned income and therefore subject to this investment tax may also in particular cases have other sources of income. Does he not appreciate that for tax purposes those other sources of income are added to the income from the investment? The individual in practice therefore is no better off on the totality of the tax which then has to be paid. What is the point of mentioning other sources of income unless it is to suggest that these people would as a result of that income be better off, when in practice they would not be better off because the total tax paid would be greater?

Mr. Sheldon

The point I was seeking to make was that the investment income in excess of £1,000 attracts the investment income surcharge, but that does not preclude a person from having other sources of income on which such a surcharge will not necessarily be imposed, if it is earned income, for example. There is no obvious need to adjust these levels each year—

Mr. Lawson

Yes there is.

Mr. Sheldon

I know the hon. Member's point and doubtless he will enjoy himself in the debate we are to have on indexation. He can deploy his arguments then.

The fact that the Chancellor did not seek to raise the investment income threshold was not an oversight—

Mr. Peter Rees

It was a mistake.

6.15 p.m.

Mr. Sheldon

The hon. and learned Member can call it a mistake if he likes, but it was not an oversight. Had the threshold been indexed there would have had to be an alteration. In a situation where the requirements of revenue are so great it has had to play its own part and make its own contribution.

Sir John Hall

What is the fundamental difference between income which is enjoyed by someone who is retired on a pension which has been created out of savings from an income, and someone who is retired and then has an investment income on which the surcharge is payable? The two seem to be on all fours, but one person would pay a higher rate of tax than the other.

Mr. Sheldon

Obviously one would naturally hope to give more help to retired people. I thought I had answered this point on three previous occasions when I said that these people paying the investment income surcharge have at any rate the advantage of that capital behind them. Clearly, a person with income derived from capital is in a better position than the person whose income is derived from earnings.

Mr. Lawson

In which of those categories does the Minister place a person with a very valuable pension right?

Mr. Sheldon

The person with a valuable pension right has nothing once that pension has been used. He has nothing to pass on to his family or anyone else. Therefore, the person with income derived from capital is in a better position than the person who has only an income in the form of a pension right. I would have thought that was obvious. The debate seems to me to be reaching a rather elementary level. I hope that the hon. Member for Blaby will consider the other points we have dealt with and which will be discussed further in the forthcoming debate on indexation.

Mr. David Howell (Guildford)

We have been discussing a modest amendment. Some hon. Members might have thought it too modest, and it is certainly extremely modest when set against the astronomical figures which the Minister of State gave us earlier for the extra tax which will be raised this year compared with last. He told us that an extra £3,771 million is being raised in tax this year, of which about 19 per cent. or, roughly speaking, everything over £3,000 million, will arise because the standard rate is increasing from 33 per cent. to 35 per cent. It is worth pondering on the remarkable qualities of this figure. About £3,000 million is being handed over this year from taxpayers to the Revenue silently, without announcement, without parliamentary debate, without public decision, without policy proclamation and without the sanction of Parliament—simply as a result of the combination of inflation and "fiscal drag"—which itself is the outcome of inflation, anyway.

That is a remarkable fact, and if nothing else has emerged from our debates, the fact that that amount of money is being paid without the knowledge, debate and sanction of Parliament is enough to make most people wonder where our finances are getting to with the present rates of inflation.

We are concerned with those who have some investment income and who will be paying more anyway because the tax rate has gone up from 33 per cent. to 35 per cent. People with £1,500 or £2,000 investment will pay more immediately, anyway. After the first £1,000, they will be into the 45 per cent. bracket, and after the first £2,000 they will be into 50 per cent.

It is a sobering thought—although not a new one—that in this nation now anyone with £2,000 investment income and a state pension is into the 50 per cent. tax bracket once one takes into account the £675 single person's allowance. That is an extraordinary fact. With the inflation rate of the past year of 21 per cent., such a person's position is not just a little worse because of the tax rate changes; it is much worse. Those people have moved back a long way, even compared to last year. In relation to the year before, when there was a £2,000 threshold which the Government brought to an end in dubious circumstances in the autumn, they are substantially worse off—far worse off than many other groups, I suspect, and far worse off than those who have obtained pay increases in line with or ahead of the rate of price increases.

I have talked so far about everybody—workers or retired. Admittedly the Minister did not say it, but some will say that Clause 29 provides the wonderful new age allowances which improve the position of those receiving investment income and who are over 65. I am not sure that even their position is much helped. First of all Clause 29 does nothing for those under 65, for women of 60, for the 55-year-old man who is thinking of moving towards retirement and has saved a little to provide for or to supplement his pension, or for the self-employed who have to save for their own pension. The self-employed have no pension scheme. They are not in the happy position of the public servant, who has an unfunded but totally indexed pension to look forward to.

Mr. Ryman

Why does the hon. Gentleman say that the self-employed have no pension scheme? Any prudent self-employed person has abundant facilities under the 1956 Finance Act to provide for a pension scheme.

Mr. Howell

I am not sure that the word "abundant" is the one that I would choose. Pension schemes may exist for some in self-employment but for many they do not. Those are the people who suffer directly as a result of the surcharge.

There is nothing in Clause 29 to help women between 60 and 65 or widows who are younger. Indeed, the bizarre position arises not only that one can pay 50 per cent. marginal tax rate when receiving between £2,000 and £3,000, but also that national insurance pensions plus some graduated pension by themselves take the recipient into tax, because the personal allowances have not been raised for the under-65s. Nor does Clause 29 cover the disabled, the blind, or widows. In short, it does nothing at all to offset the cruel increase in tax which results from the decision to lower the threshhold to £1,000 and the decision this year not to modify it, despite the 21 per cent. decrease in the value of money.

Mr. Nicholas Winterton (Macclesfield)

Does my hon. Friend agree that the Government's attitude to investment income is a direct contribution to inflation, because instead of saving or investing, people will now spend everything they have?

Mr. Howell

That is part of the credo of the present Government, as they have made clear on the investment income surcharge and other tax proposals. Their motto is, "You do the spending, and saving will be enforced through taxation."

Even for those over 65 who can satisfy the criteria of Clause 29 over the two-year period, 1973–75, I doubt whether there will be any real increase in the income of those drawing a modest investment income over and above the State pension, or even without it. At a level of £2,000 investment income I do not think that there will be any real gain for a single person. The gain in real terms for a married person will be very small and in some circumstances nonexistent. So I trust we shall not hear too much of the assertion that Clause 29 invalidates our case.

Finally, there is the argument that I did not think we would entirely avoid from the Minister, about inherited wealth: "We cannot do anything about investment income because, although some of it is the hard won savings of those who have saved in their lifetime, others may be getting it from inherited wealth, and we cannot have that." I do not share the Government's distaste for all forms of inherited wealth, but that is their position, and they have pursued policies in its support.

But one thing has certainly changed since the debates on this subject in January, let alone those on the last Finance Bill, last summer. Now we have the capital transfer tax. We never said that it would not be an effective tax. On the contrary, we said that it would block up the processes of inheritance so effectively that it would destroy small businesses and damage employment prospects in many areas. That is a devastatingly efficient means of attacking the processes of inheritance, which hon. Members opposite find so abhorrent.

And if that does not do the trick, there will soon be the wealth tax to help.

I was interested to note that the Minister of State sat on the fence on the question of the investment income surcharge being an alternative to company taxes. He did not want to use the word "alternative". He used phrases like "in relation to each other" and all the other weasel words which shower out of Treasury briefs. But the case for the surcharge is much weaker than it was, and it is getting weaker still. The argument that this was a means of carrying through social justice and the case for equality has been vastly undermined by the fact that we now have the attack on wealth and capital, and the transfer of capital by other means. So that side of the argument falls away.

On all these grounds, we believe that the case for some modest adjustment for those in this group—the disabled, the blind, those saving up for themselves, the widows and many other disadvantaged groups—who have seen their standard of living slipping away, is strong. We are obviously restrained by the revenue consideration—although, as my hon. Friends have said, the other side of the equation is public expenditure, which so far has been neglected by the Chancellor. Nevertheless, we are restrained to some extent by the revenue consideration.

Even so, in the light of all that has been said, and in the light of the weakness of the argument of the Minister of State, I strongly advise the Committee to press this matter to a vote, and I hope that my hon. Friend the Member for Wycombe (Sir J. Hall) will support me in this matter.

Question put, That the amendment be made:—

The Committee divided: Ayes 151 Noes, 172.

Division No. 211.] AYES [6.30 p.m.
Adley, Robert Butler, Adam (Bosworth) Corrie, John
Arnold, Tom Carlisle, Mark Costain, A. P.
Atkins, Rt Hon H. (Spelthorne) Chalker, Mrs Lynda Crawford, Douglas
Bennett, Sir Frederic (Torbay) Churchill, W. S. Crouch, David
Benyon, W. Clark, Alan (Plymouth, Sutton) Dean, Paul (N Somerset)
Biggs-Davison, John Clark, William (Croydon S) Douglas-Hamilton, Lord James
Boscawen, Hon Robert Clarke, Kenneth (Rushcliffe) Drayson, Burnaby
Bowden, A. (Brighton, Kemptown) Clegg, Walter Durant, Tony
Brittan, Leon Cooke, Robert (Bristol W) Dykes, Hugh
Brotherton, Michael Cope, John Elliott, Sir William
Buchanan-Smith, Alick Cordle, John H. Emery, Peter
Budgen, Nick Cormack, Patrick Evans, Gwynfor (Carmarthen)
Eyre, Reginald King, Tom (Bridgwater) Rifkind, Malcolm
Fairgrieve, Russell Langford-Holt, Sir John Roberts, Wyn (Conway)
Farr, John Lawrence, Ivan Rossi, Hugh (Hornsey)
Finsberg, Geoffrey Lawson, Nigel Sainsbury, Tim
Fisher, Sir Nigel Lester, Jim (Beeston) Scott-Hopkins, James
Fletcher-Cooke, Charles Lewis, Kenneth (Rutland) Shaw, Giles (Pudsey)
Fookes, Miss Janet Luce, Richard Shelton, William (Streatham)
Fowler, Norman (Sutton C'f'd) MacCormick, Iain Shepherd, Colin
Gardner, Edward (S Fylde) McCrindle, Robert Sims, Roger
Gilmour, Sir John (East Fife) Macfarlane, Neil Skeet, T. H. H.
Goodhew, Victor MacGregor, John Smith, Cyril (Rochdale)
Gow, Ian (Eastbourne) McNair-Wilson, M. (Newbury) Speed, Keith
Grant, Anthony (Harrow C) Marshall, Michael (Arundel) Spence, John
Gray, Hamish Marten, Neil Spicer, Michael (S Worcester)
Grimond, Pt Hon J. Mather, Carol Stainton, Keith
Grylls, Michael Maxwell-Hyslop, Robin Stanbrook, Ivor
Hall, Sir John Mayhew, Patrick Stewart, Donald (Western Isles)
Hall-Davis, A. G. F. Miller, Hal (Bromsgrove) Stewart, Ian (Hitchin)
Hamilton, Michael (Salisbury) Miscampbell, Norman Stradling Thomas, J.
Hampson, Dr Keith Mitchell, David (Basingstoke) Taylor, R. (Croydon NW)
Hannam, John Moate, Roger Taylor, Teddy (Cathcart)
Harrison, Col Sir Harwood (Eye) More, Jasper (Ludlow) Tebblt, Norman
Harvie Anderson, Rt Hon Miss Morris, Michael (Northampton S) Thompson, George
Havers, Sir Michael Morrison, Hon Peter (Chester) Thorpe, Rt Hon Jeremy (N Devon)
Hawkins, Paul Nelson, Anthony Townsend, Cyril D.
Hayhoe, Barney Neubert, Michael Tugendhat, Christopher
Henderson, Douglas Newton, Tony Wainwright, Richard (Colne V)
Holland, Philip Nott, John Warren, Kenneth
Hordern, Peter Onslow, Cranley Weatherill, Bernard
Howell, David (Guildford) Osborn, John Welsh, Andrew
Howell, Ralph (North Norfolk) Page, John (Harrow West) Wiggin, Jerry
Hunt, John Page, Rt Hon R. Graham (Crosby) Wigley, Dafydd
Irvine, Bryant Godman (Rye) Pardoe, John Wilson, Gordon (Dundee E)
Irving, Charles (Cheltenham) Parkinson, Cecil Winterton, Nicholas
Jopling, Michael Percival, Ian Younger, Hon George
Kaberry, Sir Donald Prior, Rt Hon James
Kellett-Bowman, Mrs Elaine Raison, Timothy TELLERS FOR THE AYES:
Kershaw, Anthony Rees, Peter (Dover & Deal) Mr. Spencer le Marchant and
Kilfedder, James Renton, Rt Hon Sir D. (Hunts) Mr. Anthony Berry.
King, Evelyn (South Dorset) Ridley, Hon Nicholas
Archer, Peter Doig, Peter Jay, Rt Hon Douglas
Armstrong, Ernest Douglas-Mann, Bruce Johnson, Walter (Derby S)
Ashley, Jack Dunn, James A. Jones, Alec (Rhondda)
Ashton, Joe Dunwoody, Mrs Gwynelh Jones, Barry (East Flint)
Atkinson, Norman Edge, Geoff Jones, Dan (Burnley)
Barnett, Guy (Greenwich) Edwards, Robert (Wolv SE) Kaufman, Gerald
Barnett, Rt Hon Joel (Heywood) Ellis, Tom (Wrexham) Kelley, Richard
Bates, Alf English, Michael Kerr, Russell
Benn, Rt Hon Anthony Wedgwood Ennals, David Kilroy-Silk, Robert
Blenkinsop, Arthur Evans, Fred (Caerphilly) Kinnock, Neil
Boardman, H. Evans, Ioan (Aberdare) Lamborn, Harry
Booth, Albert Evans, John (Newton) Lamond, James
Boothroyd, Miss Betty Ewing, Harry (Stirling) Lee, John
Bradley, Tom Faulds, Andrew Lestor, Miss Joan (Eton & Slough)
Bray, Dr Jeremy Fletcher, Ted (Darlington) Lewis, Ron (Carlisle)
Brown, Hugh D. (Provan) Ford, Ben Lipton, Marcus
Brown, Ronald (Hackney S) George, Bruce Loyden, Eddie
Callaghan, Jim (Middleton & P) Gilbert, Dr. John Lyons, Edward (Bradford W)
Campbell, Ian Ginsburg, David Mackenzie, Gregor
Canavan, Dennis Golding, John Mackintosh, John P.
Carter, Ray Gould, Bryan McMillan, Tom (Glasgow C)
Carter-Jones, Lewis Gourlay, Harry McNamara, Kevin
Cartwright, John Grant, George (Morpeth) Madden, Max
Cocks, Michael (Bristol S) Grocott, Bruce Magee, Bryan
Conlan, Bernard Hamilton, James (Bothwell) Mahon, Simon
Cook, Robin F. (Edin C) Hamilton, W. W. (Central Fife) Marks, Kenneth
Corbett, Robin Hardy, Peter Maynard, Miss Joan
Craigen, J. M. (Maryhill) Harper, Joseph Meacher, Michael
Crawshaw, Richard Harrison, Walter (Wakefield) Mellish, Rt Hon Robert
Cronin, John Hatton, Frank Mendelson, John
Crosland, Rt Hon Anthony Hayman, Mrs Helene Millan, Bruce
Cryer, Bob Heffer, Eric S. Miller, Dr M. S. (E Kilbride)
Cunningham, G. (Islington S) Horam, John Miller, Mrs Millie (Ilford N)
Dalyell, Tam Hoyle, Doug (Nelson) Mitchell, R. C. (Solon, Itchen)
Davidson, Arthur Huckfield, Les Morris, Charles R. (Openshaw)
Davies, Denzil (Llanelli) Hughes, Mark (Durham) Newens, Stanley
Davies, Ifor (Gower) Hughes, Roy (Newport) Noble, Mike
Davis, Clinton (Hackney C) Irving, Rt Hon S. (Dartford) Oakes, Gordon
Dean, Joseph (Leeds West) Jackson, Colin (Brighouse) Ogden, Eric
de Freitas, Rt Hon Sir Geoffrey Jackson, Miss Margaret (Lincoln) O'Halloran, Michael
Dempsey, James Janner, Greville O'Malley, Rt Hon Brian
Orme, Rt Hon Stanley Short, Mrs Renée (Wolv NE) Ward, Michael
Ovenden, John Sillars, James Watkins, David
Park, George Silverman, Julius Weetch, Ken
Peart, Rt Hon Fred Small, William Wellbeloved, James
Prescott, John Spearing, Nigel White, Frank R. (Bury)
Radice, Giles Spriggs, Leslie White, James (Pollok)
Roberts, Albert (Normanton) Stallard, A. W. Whitlock, William
Roberts, Gwilym (Cannock) Stewart, Rt Hon M. (Fulham) Williams, W. T. (Warrington)
Robertson, John (Paisley) Stoddart, David Wilson, William (Coventry SE)
Roderick, Caerwyn Stott, Roger Wise, Mrs Audrey
Rodgers, George (Chorley) Taylor, Mrs Ann (Bolton W) Woodall, Alec
Rooker, J. W. Thomas, Jeffrey (Abertillery) Woof, Robert
Roper, John Thorne, Stan (Preston South) Young, David (Bolton E)
Rose, Paul B. Tinn, James
Rowlands, Ted Urwin, T. W. TELLERS FOR THE NOES
Ryman, John Wainwright, Edwin (Dearne V) Mr. Donald Coleman and
Selby, Harry Walker, Harold (Doncaster) Mr. J. D. Dormand.
Sheldon, Robert (Ashton-u-Lyne) Walker, Terry (Kingswood)

Question accordingly negatived.

[Mrs. LENA JEGER in the Chair.]

Mr. Pardoe

I beg to move Amendment No. 64, in page 17, line 32, after 'remainder', insert:— 'Provided always that if by 5th April 1976 the Official Retail Prices Index shall have risen by more than 5 per cent. since 6th April 1975 then the Treasury shall by order substitute for the said sums of £1,000 such higher sums as shall increase the said sums of £1,000 by a percentage equal to the percentage rise of the Official Retail Prices Index between the last date on which it was announced before 6th April 1975 and the last date it shall be announced before 5th April 1976.'. In previous debates it has been pointed out that we have yet to have a disussion on an amendment proposing indexation of the tax system. However, we have gone over the ground already in previous debates and to a certain extent we went over it on Second Reading. Therefore, I do not wish to cover too much of the same ground, and I shall try not to do so.

We have heard from the Minister of State some of the Government's arguments against indexation. Before the end of this debate, I hope that the hon. Gentleman will get together one figure referring to one of his comments earlier today. He was speaking about the point made by the hon. Member for Blaby (Mr. Lawson) about the 9 million taxpayers whom the Chancellor claimed would be paying less taxes after the Budget than before. I should like to know how many of those 9 million taxpayers are now paying more taxes than before the Budget. Perhaps he will even take the calculation further and say how many of them pay more taxes every hour or every day. With the present rate of inflation—which is what this amendment is about—more and more people are brought into the tax net every day.

I might say in answer to a point made by the hon. Member for St. Ives (Mr. Nott), who said that inflation had managed to fool the Chancellor of the Exchequer, that it fools nearly all Chancellors of the Exchequer. There is no doubt that it fooled his own Chancellor of the Exchequer, now Lord Barber. It enabled him and Conservative Central Office to claim that he had reduced tax rates by £3,000 million, which was technically correct but implied to the unsuspecting public that he had reduced taxes by £3,000 million—and we all know that that had not happened because of the effect of inflation on the buoyancy of the revenue.

Indexation has been variously defined, and I do not propose to go over the technical definitions. It is easier to define the problem that it seeks to solve.

Inflation does not affect everyone equally, and it does not affect every sector of the economy equally. Therefore, if we guarantee wages, salaries and pensions against the rise in prices but do not do the same for savings, it is likely at least that there will be a shift of resources out of savings and investment into income and inevitably, then, into expenditure. That is bound to damage our industrial potential and thereby lessen the growth of real incomes in the future.

Inflation also distorts the balance between lenders and borrowers unless both value their loans and interest in terms of constant purchasing power. So inflation can cause economic distortion and even social disruption by setting one group, which seems to have done well out of it, against another group, which seems to have done badly.

The search for a monetary unit of constant purchasing power to overcome some of these difficulties and others is not new. For many centuries the Tithes were fixed in constant purchasing power terms. Even in the last century the Commissioners of Tithes said how much money was required to purchase so much wheat, barley and oats as would have cost £100 at certain standard prices, and they had their own way of making these calculations.

In his Remedies for Fluctations in General Prices in 1887, Alfred Marshall proposed that this principle of the Commissioners of Tithes should be applied generally. This proposal by Alfred Marshall was a proposal for general indexing right across the board.

I agree with what the hon. Member for St. Ives said today. It was an almost total conversion from his speech on Second Reading, and we welcome that conversion. He seemed to be saying that it would be sensible to have a form of indexation right across the board if we were to have it at all. I think that that is right. Once we start on this process, as we have already on wages and pensions, in my view we have to go on. Therefore, I accept the general principle, as Alfred Marshall did and as Milton Friedman does today, that, in the inflationary situation in which we find ourselves, general indexation is one absolute sine qua non for fighting inflation.

I do not propose that the Government should impose indexation on every financial contract. Where the law does not allow financial contracts to be made in constant purchasing power terms, the Government should intervene to correct the law and make it possible. But in the Government's own financial relations with the citizenry there should be imposed on the Government, by statute, an obligation to index.

Milton Friedman has advocated a very similar course to the one which Arthur Marshall stated. In fact, he set it out in page 32 of his pamphlet for the Institute of Economic Affairs, "Monetary Correction": Perhaps widespread escalator clauses are not the best expedient in this time of trouble. But I know of no other that has been suggested that holds out as much promise of both reducing the harm done by inflation and facilitating the end of inflation. If inflation continues to accelerate, the conventional political wisdom will be reversed. The insistence on ending inflation at whatever cost will lead to a severe depression. Now, before that has occurred, is the time to take measures that will make it politically feasible to end inflation before inflation ends not only the conventional wisdom but perhaps also the free society. That answers a point which the hon. Member for St. Ives made in his speech in our earlier debate, when he said that it did not take the pain out of inflation. It certainly does not take the pain out of inflation. I suggest—and I think Friedman in that passage is also suggesting—that it takes the pain out of fighting inflation. For those of us who recognise the extraordinary weakness of our democratic institutions for dealing with this central problem of our economy today, anything that takes the political pain out of fighting inflation is a useful weapon for us to have on board.

This amendment is not a general indexation amendment; it is specific to taxation. It attempts to meet the problem of the effect of rapid inflation on the tax system. That problem has already been stated in previous debates and I sketched some of its aspects on the second reading of the Finance Bill, when we tabled a reasoned amendment which, among other things, called on the Government to link all tax allowances to the retail price index.

I really do not think we can rub this in too much. Some of the consequences of not indexing the tax system have to be brought to the attention of the Government again and again, because we are constantly told by Government Ministers in these debates on indexation—and we had some on the last Finance Bill and no doubt will have some on the next—that there is no need for it because every time there is a Finance Bill they, in their discretion, naturally change the thing, and it is within the power of Parliament to do that. The fact of the matter is that the Government do not change the thing in line with inflation, and the whole tax system therefore gets out of key.

I quoted some figures in the Second Reading debate, but another way of looking at it is to ask what income a couple earning £30 a week in 1974–75 have to earn in order to maintain their purchasing power in 1975–76, after tax. From the tables in the Red Book one can calculate that a couple with an income of £30 a week in 1974–75 paid tax of £88.11. Their net after-tax income in that year was £1,471, or £28 a week. With inflation at 20 per cent. they will need £1,766 net income, or £34 a week, to maintain their purchasing power in 1975–76. So a married couple with two children will need £1,972, or £37.92 a week, to obtain a net after-tax income of £1,766, or £34 a week, as a result of inflation. And the changes necessary to compensate for this were not made in the Budget.

There are many instances in which this is so. If one looks at slightly higher income groups one can see—I am indebted here to Samuel Brittan for some calculations in the Financial Times—a young couple with two children and a gross income of £1,500 in 1972, whose gross income has kept pace with inflation, which we will assume was 20 per cent. this year and thus will be 50 per cent. over the period, should therefore be earning this year not £1,500 but £2,250. In 1972, a couple with an income of £1,500 would have paid about 71 per cent. of their income in tax—that is, about £115. In 1975–76 they will pay nearly double, in percentage terms, slightly more than 13 per cent. of their income in tax, or about £300.

Of course, the Goverment can do these calculations. They know them only too well. And, as I pointed out—as did the hon. Member for St. Ives and other hon. Members—in the debate on Second Reading, the Child Poverty Action Group submitted a detailed memorandum to the Chancellor indicating the effects of his Budget and his failure to index the allowances and adjust them sufficiently to cope with inflation on low income earners. They are startling in the extreme and are contained in detail in that Child Poverty Action Group memorandum.

I think the time has come for all hon. Members on both sides of the Committee to realise that without indexation of the tax system this sort of effect on poor people particularly is almost inevitable. We must also realise that inflation is no friend of the poor and that those who cause inflation are no friends of the poor either.

The National Institute Review for November 1974 shows what has happened over the longer term.—[Interruption.]

The hon. Member for Blaby is drawing attention to the fact that although there is one hon. Member on the Government Front Bench, of backbenchers there is absolutely none; a sea of emptiness. Nevertheless, we plough on.

The National Institute Review for November 1974 had a whole series of extremely interesting articles covering the whole spectrum. They show what happened for the period 1961–62 to 1972–73. And basically that showed, in relation to personal income tax, that although discretionary budgetary changes compensated for the effect of inflation on the value of allowances over that longer term, they did no such thing for average tax rates, and—I quote from the comments in the review— For the vast majority of taxpayers, discretionary changes only partially offset the price level increases. So what other effects is the failure to index the taxation system likely to have? I suggest that it alters the balance within the tax system between taxes on income and taxes on consumption. I draw the Minister's attention to the fact that if one looks back over the long term, say, to 1956–57—one can do it from the Red Book of that year—one sees that Inland Revenue taxes made up 54.7 per cent. of total tax revenue. In 1975–76, Inland Revenue taxes make up 63.6 per cent. of total tax revenue. Governments of the day have been able to get away with this long-term change from taxes on consumption to taxes on income behind the disguise known as inflation. In the House of Commons they have never seriously debated what proportion of our total tax revenue should come from consumption tax and what from income tax. Certainly in the eight years that I have been in the House we have never had a debate on that fundamental issue. We have not had to, because Governments are able to change the balance through the working of inflation. That would have been obviated had indirect taxes been indexed, and I think that would have been a very helpful thing over the long term.

7.0 p.m.

Mr. Sheldon

Perhaps the hon. Gentleman did not take part in a number of debates that took place in 1966–67–68, when the question of the proportion of revenue raised from direct as opposed to indirect taxes was a matter of great political importance and was pushed hard, particularly by some of my hon. Friends in favour of revenue from indirect taxation. The balance was changed in a marked degree following some of those debates.

Mr. Pardoe

I certainly yield to the hon. Gentleman, but I think I am right in saying that although this subject may have cropped up from time to time in Finance Bill debates it has not been a matter of major political argument, probably because Governments have been able to get away with it by other means.

The second major factor is that inflation has its effects on the allocation of resources between the public and private sector. I was glad to hear the hon. Member for St. Ives coming round to a view which I stated during the Second Reading debate and from which I thought he dissented—although only with a move of his head—that inflation and the failure to index the tax system enables Chancellors to be more profligate than they otherwise would be with public resources and enables spending Ministers to get away with actions which they otherwise would not be allowed. This is the effect of the buoyancy of the revenue. There is nothing wrong with that, provided the buoyancy arises from real growth in incomes. When it is simply a growth in Government revenue coming from "phoney" and totally unreal increases in incomes, we have to take exception.

I come to the slogan which Friedman has coined and which seems an appropriate one for parliamentarians today, namely, "No taxation without indexation". The effect on public expenditure can be seen in this quotation from Friedman in another IEA publication when he says: Experience by this time has demonstrated Parkinson's law beyond a shadow of a doubt: the legislators will spend whatever the tax system will raise plus a good deal more. And therefore the only effective way to impose fiscal discipline is to reduce tax revenues. Therefore I myself have been converted to the policy of being in favour of tax reductions under any circumstances, for any excuse, for any reason, at any time. Perhaps he goes further in that last sentence than some of us might wish to go. Nevertheless, it is true that the ability of the Chancellor to raise revenue irresspective of parliamentary control and independent of that control makes it much easier for Governments to spend public money.

There is no doubt that these increases in income taxation have a profound effect on the long-run rate of inflation. All sorts of studies in Canada, America and elsewhere have shown that raising income tax does have a marked effect on wage-push/cost-push inflation. I know, in the theory of the monetary equation, that if all things were perfect it would not, in the long run, have that effect. But we are dealing with a real world, and with Britain in 1975 it does have that effect.

Indexation of the tax system is important because the ending of inflation is politically difficult. It will help us to make it easier to tackle the problems of inflation and easier to control Government expenditure. There is no doubt that any policy we impose for ending inflation will be inconvenient and painful. We are simply out to lessen the evil and the pain.

I will not go into details of what index might be used, but clearly it might be better to use one that excluded the effect of indirect taxes, at any rate.

It seems that indexation of the tax system is one weapon that any Government faced with the present rates of inflation ought to have in their armoury.

Mr. Lawson

Before the hon. Member concludes his speech may I ask him to say whether he would exclude subsidies from this index?

Mr. Pardoe

Yes, inevitably so. We have seen how Chancellors can fiddle the retail price index. We need an index that cannot be fiddled. We have seen how the Chancellor fiddled the retail price index by a combination of subsidies and reductions in indirect taxation to a rate of 8.4 per cent. for three months just before the last election. We have to isolate an index from that sort of political gerrymandering.

In conclusion, the best I can do is to quote Friedman again. He said: Indexing is not in and of itself a desirable thing. It is … a second-best device for a first-best world; but it is a first-best device for a second-best world. And the world is unfortunately second-best.

Mr. Sheldon

The hon. Member for Cornwall, North (Mr. Pardoe) began by referring to the fact that, perhaps unfortunately, we have debated part of this issue on a previous amendment. He is right to bring to our attention the need to have this subject focused in one amendment. I saw the main debate on indexation arising on this amendment. The hon. Member referred to the evils of inflation. No one will quarrel with himabout that. He seeks to mitigate those evils. His frequent quotations from Milton Friedman emphasise his views.

He points out that it would be necessary to have indexation across the board. I would accept such a thing, reluctantly, if inflation were to be large, continuous and inevitable. In such circumstances the scale of the problem would be such that some form of indexation covering most of the economic variables would be a necessary adjunct to an economy that had got out of hand in that way. The position at present, although serious, is obviously nowhere near that. So long as we still have not succumbed to these problems there are dangers, to which the hon. Member for St. Ives (Mr. Nott) referred, in anticipating such a situation.

Mention has been made of the sophistication on the one hand of some people in this country and on the other—perhaps to be fair I should say by other speakers—of the lack of sophistication by some members of the public. Any Government must take account of the fact that some of those problems are known and understood while some are not. There would be a danger of anticipation among some people if we were to move towards indexation of the kind to which the hon. Member for Cornwall, North refers.

Mr. Lawson

It might help the Committee if the hon. Gentleman could say what he means by the dangers of anticipation.

Mr. Sheldon

There would be a feeling among certain members of the community—the precise proportions neither he nor I would wish to assess—that inflation was to continue at a high level. They would then start making wage demands, or whatever, on the basis of a continuing, large and inevitable inflation. One of the examples given by the hon. Member for St. Ives concerned wage bargaining. There are others.

The hon. Member for St. Ives said that when the Chancellor surveyed his annual revenue he was easily fooled by the belief that this was more buoyant than the situation justified, because in money terms the figures were larger. I was surprised that the hon. Member was so naive as to think that the Chancellor actually believed that money revenue terms produced the money available for a spending bonanza. That is not how these things work. I assumed that the hon. Member for Cornwall, North had dealt with these problems, but he will know—whether in "funny" money or whatever money he cares to consider—that these matters are the subject of close scrutiny, but errors can be made. However, they can be made both ways, up and down.

Admittedly it has not been easy this past year, but we can overestimate the level of inflation as well as underestimate it. Leaving errors of that kind aside, when we look at revenue we seek to relate expenditure in the same kind of money at the relevant times with that revenue which we intend to raise.

This amendment seeks to revalorise the investment income surcharge thresholds by means of a peculiar form of indexation. I am not sure whether the hon. Gentleman is wedded to this form of indexation or whether he devised the amendment just as a peg on which to hang a debate of a general kind on indexation. It places me in some difficulty because I do not know whether to go into this form of indexation or to leave it and deal with the point of substance that underlies it.

Mr. Pardoe

The Minister must understand that it is probably impossible to index completely without a written constitution or a Bill of Rights in which it is enshrined. We have to have entrenched clauses. This seemed to be the only way in which we could get this debated. Presumably the hon. Gentleman will answer this amendment.

Mr. Sheldon

Certainly I should not seek to quarrel with the hon. Gentleman. I have drafted, at considerable labour, amendments of a similar kind. However, I was seeking to ensure that I did not fail to answer a point that the hon. Gentleman might have wished to put, but which I now understand is not particularly important.

As regards the Government's concern about indexation, the Government are always aware of the erosion of allowances. I tried to make this clear in relation to an earlier amendment, but I am prepared to repeat myself. The Government fully understand, when they do not raise allowances, exactly what they are doing. In an earlier quotation I showed that the Chancellor had made available to the House his own view on the matter and his openness on this matter. The Chancellor acted conscientiously when he took this decision. Hon. Members who speak to this amendment and who believe in it see it as a means of forcing the Government to take some sort of action which they would not otherwise wish to take. By trying to impose a statutory obligation on the Government to raise allowances or to produce other forms of indexing, they hope to free the Government from the choice which is at present available. I find this the most surprising aspect. No Government, as anyone who understands these matters knows full well, will ever be placed in a situation like this. If a Government wish to increase, reduce or change allowances, they will do so, irrespective of the political colour of the Government, or what amendment is tabled. During the next Finance Bill, it would be changed in order to produce the flexibility which any Chancellor of the Exchequer, of any party, would demand as essential in conducting his economic policy.

7.15 p.m.

Mr. Tony Newton (Braintree)

I hope that the Minister will allow me to suggest that he is distorting the argument which was put by my hon. Friend the Member for St. Ives (Mr. Nott) and the hon. Member for Cornwall, North (Mr. Pardoe). They are not trying to reduce the Government's flexibility and I certainly would not. We accept the Government's power to make these judgments and to put them to Parliament. We are objecting that these are at present stealthy judgments and not open judgments. The Government are, in effect, never forced to put to the public what they are doing. In the past year we have seen what the Minister is now defending as the alternative to an effective incomes policy. If that alternative were put to the public in that form, the Minister would get a somewhat different answer. We are saying that the Government should be forced to be open and honest with the public and not get their revenue by stealth.

Mr. Sheldon

I find this phrase "by stealth" surprising. The Chancellor spelt it out. Anyone familiar with inflation will be aware that if, unfortunately, this were to continue even at a much lower rate than it is at present, people would become increasingly aware of these problems. When the Chancellor goes so far as to spell out the consequence of what he is doing, it would be astonishing if even more people were to be unaware of precisely what is happening.

There are two aspects. One is the public relations aspect. This is the feeling that we have to make it clear what the Government are doing, and it is clearer if we have an indexing form. Many of my constituents and many people in this country would be more baffled by an indexing system, which they would find difficult to comprehend—at least for some time. This is one of the dangers. On the other hand, there is not only the public relations aspect but the aspect of trying to force the Government into areas into which no Government can be forced, and which I have described.

Mr. Lawson

I am sorry that the hon. Gentleman has such a poor view of his constituents. Is he not aware that precisely what we have been proposing is in operation in Canada and that there it operates entirely satisfactorily? Canada has an indexation tax system, and the Government are free to do as they feel fit. They have a formula, and the Canadians understand it. There are none of the problems that the hon. Gentleman has been suggesting at such great length.

Mr. Sheldon

The hon. Gentleman will be aware that in countries where inflation has not got completely out of hand the use of indexation is a rarity. There are many other countries besides Canada, other than those countries where inflation has got out of hand. This is not a common practice. It is not sufficient for the hon. Gentleman to show that another country is using this system. He needs to prove his case in this country, in relation to our own taxation system. I do not believe he has succeeded in doing this.

I do not want to go into the details of the amendment, for the reasons I gave before. These debates on indexation are obviously valuable. The situation and the argument change all the time. I do not think that the case is anywhere near proved. It would be very dangerous if we were to proceed along this course, apart from those steps which have been mentioned and which have been taken by the Government in certain very limited and very selected areas. Because of this, I would advise my hon. Friends to reject the amendment if the hon. Gentleman were to press it to a Division.

Amendment negatived.

Mr. Newton

I beg to move Amendment No. 60 in, page 17, line 35, after "more", insert: or in the case of a woman that her age was sixty years or more".

The Temporary Chairman

With this we may discuss Amendment No. 61, in page 17, line 35, after "more", insert: or that she is a widow".

Mr. Newton

I shall refer separately to Amendment No. 61, which refers to widows. As a courtesy to the Minister as well as to the rest of the Committee, I should perhaps note that it will be seen from the Order Paper that Amendment No. 60 has some unexpectedly heavyweight support which should have been attached to the immediately preceding Amendment in numerical order, namely Amendment No. 59, which we have not yet reached in our proceedings. I shall hope to persuade my right hon. and hon. Friends that I deserve their support for this amendment, but I should not want to give the Minister the impression that my army is larger and more powerful than it is.

These two amendments are the first two of a series concerned with women which we shall be moving in this Chamber and I hope, in Standing Committee. At this stage, it is fair to say that we are probing the Minister and his colleagues for their approach in these matters. I doubt whether I shall wish to press either of these amendments to a Division this evening. It may be that because these are concerned with the interests of women, and primarily single women, some charge of discrimination or failure to act in terms of the Sex Discrimination Bill could be levelled at me. However, I am entirely in favour of all possible action to eliminate unjustified discrimination against women, but we still have to deal—not least in relation to taxation and national insurance—with the state of our society as it is and the fact that the problems and the situation of many women in our society have special aspects which are not necessarily the same as those of married couples and often those of single men.

As things stand it seems to me that we should look at these special problems and try to ensure that they are taken into account properly in our tax system. We do the cause of anti-discrimination, Women's Lib, or however it may be described, no service by overlooking these problems and pretending them away to the disadvantage of the very women we sometimes pretend to help.

Amendment No. 60 refers to the saving part of the clause which allows additional relief from the investment income surcharge to a taxpayer where his age or that of his wife living with him was sixty-five years or more. Of course, it will be readily appreciated by the Committee, and certainly by the Minister, that what this means, since in this case "his" covers "hers", is that single women who normally retire at the age of 60 and are certainly entitled under the national insurance scheme to retire at 60, do not get the benefit of this additional relief from the investment income surcharge for five years after their retirement. In other words, for these purposes they are treated like a man or like married couples.

I raised this self-same subject in debate on the previous Finance Bill, now the Act, which seems all too recent. It was fairly recent—barely two months ago. At that time I tabled two amendments, to which the same Minister replied. On rereading what was said then, I see that on Report the Minister very carefully confined his rebutting remarks to one of my amendments only, which concerned the situation when a wife became 60. I was suggesting then that married couples ought to have the benefit of the additional help of the relief from the investment income surcharge. The Minister put forward some arguments which at least made me consider that to be possible. That was on an amendment which to all intents and purposes was identical to Amendment No. 60, which we are now discussing.

The Minister carefully and, I assume, with consideration, refrained from referring to that amendment. Therefore, I want to press him today on the specific point of women who are entitled to retire at the age of 60 but who are unable to benefit under the Bill and the present situation relating to investment income surcharge for a further five years by the same relief specifically intended as relief for retired people. That is wholly unjustifiable. The Government should reconsider this matter.

This question has been raised with the Chancellor of the Exchequer, as the Minister will know, in a wider context by Age Concern, in a forceful letter which will have given the Government considerable cause for thought. That showed, probably for the first time in British history, that there are many women between the ages of 60 and 65 who are in practice paying tax on their national insurance pension.

This case has been made very forcefully by Age Concern. It will arise more properly in Standing Committee when we discuss Clause 29. I have no doubt that my hon. Friends will wish to return to it in the wider context at that stage. However, the logic and justification for dealing with the new old-age allowance and extending it to women between the ages of 60 and 65 would apply equally on this narrower point of the extra relief from investment income surcharge.

I have no hesitation in pressing this point on the Minister this evening. It is relatively limited in that it refers only to investment income, but it would at least help. It would help those taxpayers who have investment incomes and who are at present not given this additional relief because they happen to be women who have retired but have not reached the age of 65. In any case, I have moved the amendment to probe the Minister's thinking on this general point, as this may help us to decide how best to press him later in our proceedings in Committee.

I now turn to Amendment No. 61, which is on a related, but broad, point to the extent that it deals with the selfsame extra relief from the investment income surcharge for all widows. That would not, in practice, be as sweeping as it sounds, because clearly widows over the age of 65 already benefit from the proposals in the Bill, and, equally, widows between 60 and 65 would benefit from my earlier amendment. Therefore, we are now talking, for the sake of argument, about younger widows.

We shall be returning to the question of widows on a number of occasions. However, I want to make it generally clear at this stage that my amendment refers only to widows more as a matter of convenience and because it is primarily a probing amendment, and that there are equal problems affecting many divorced women, which I would not want to overlook or have it thought that I was overlooking.

Again, this is a relatively narrow point about widows. We shall be returning to wider matters later, if we get that far in our consideration of amendments relating to Clause 28. Meanwhile, there is no doubt that many widows, as hon. Members must know, are feeling an increasingly acute sense of grievance about the way they are treated by the tax system, which has failed to deal with their problems. We shall return to that matter. However, there is strong justification for extending this concession on investment income to all widows. It cannot conceivably be at all expensive. By definition there must be quite a large number of widows whose income is primarily investment income, because they will be living on the proceeds of the life insurance of their husbands, which they will have invested and which will be producing their income—which was no doubt the intention of their husbands.

Given that this is what it has been provided for and that this is a proper and widely urged way for husbands to proceed in providing for their spouses, it seems very reasonable to suggest that when the widowhood has occurred and the widow is forced to depend on this income from insurance taken out by her husband, the State should extend some kind of special concession to that income.

There is a very strong case—perhaps even stronger than that on some other amendments—for looking at this suggestion for extending the further relief from investment income surcharge to widows. As I have indicated, I hope for a favourable response not only from my right hon. and hon. Friends but from the Minister, because more and more people have become worried about this subject which is causing a greater and greater sense of grievance. For a relatively modest cost, the Minister could spread a great deal of additional happiness at a time when it is much needed.

7.30 p.m.

Mr. Sheldon

The hon. Member for Braintree (Mr. Newton) is moving the amendment drew attention in particular to the situation of elderly people, especially widows.

I deal first with Amendment No. 60. The purpose of this amendment is to reduce the qualifying age for the reduced investment income surcharge of £1,500 to the age of 60 for women instead of the age 65.

I understand that the hon. Gentleman is trying to probe one or two matters with this amendment, but he will know that the objection is that it would discriminate against single men and married couples by introducing different qualifying ages for the reduced surcharge threshold. The effect would be that the woman would be eligible for the reduced investment income surcharge at the age of 60, but a single man or a married couple would not be so eligible until the age of 65. Moreover, I understand that the lower age limit generally does discriminate against men. Previous Governments—and this has been going on for a long time—have retained the same qualifying age for the investment income surcharge as well as for certain other reliefs.

We have had a debate on the investment income surcharge and the need to tax income from investment more heavily than income from the current work, mainly because the savings income has a different character from other incomes. But on retirement savings or investment income has a different aspect and needs to be treated differently.

The proposal to have a lower qualifying age for women, whether for the purposes of giving relief from the investment income surcharge or for other tax relief purposes, is open to the discrimination to which I have referred. One can point to an analogy between the different ages of retirement of men and women and the different ages required to qualify for reductions in the investment income surcharge. It is true that women have the advantage, when it comes to retirement pensions, of being able to qualify at the age of 60 whereas men have to wait until they are 65. However, there is no reason—and succeeding Governments have failed to be convinced—why they should be more favourably treated for the purpose of the investment income surcharge. For men to have to wait five years longer for their pension, plus the investment income surcharge at the reduced rate, would be straining their acceptance too far. A number of men are forced to retire through ill health, through redundancy and for other reasons earlier than the age of 65 and would consequently not be eligible, and are not at present eligible, for the investment income surcharge. If such men were to compare themselves with perfectly fit women in similar situations, who qualify not only for the retirement pension at an earlier age but also for these benefits, it would, at a time of greater sex equality, be extremely difficult for them to accept such a position. Successive Governments have taken that view.

The hon. Member for Braintree asked me a question about Age Concern. I am sorry, but I have been unable to give him a reply at present. I understand that the matter will arise again when we discuss Clause 29 and I shall be happy to give him a full reply then or, if he so requires, I shall be delighted to write to him in the interim period.

Mr. Newton

I was not expecting a reply. The Age Concern paper relates to Clause 29 but it has some relevance to this discussion.

Mr. Sheldon

I am grateful to the hon. Gentleman. I understood that the matter arose under Clause 29. I am glad to note his patience and his willingness to wait until that time.

I turn to Amendment 61 which gives the higher investment income surcharge threshold of £1,500 applicable to elderly people. This is unchanged from 1974–75. This amendment would give the higher investment income surcharge also to all widows. The ground has been fully covered in successive debates in January and March on what is now Section 5 of the Finance Act 1975.

The amendment fixes the threshold. The purpose is to continue the principle that investment income has a taxable capacity greater than that of earned income. The widows' benefits will be taxable as earned income. National insurance widows, as we know, generally receive widows' pensions and allowances unless they happen to be widowed young and have no dependent children. The maintenance payment of the first £1,000 does not rank as investment income. That concerns divorced and separated persons who are living under conditions of great hardship which we all understand.

There will be a number of subsequent debates. We all know that tax relief is not the best way to handle these matters. We deal with them in Finance Bill debates, and those debates take up a great deal of parliamentary time. They arise frequently—nowadays more frequently than they used to—and thus an increasing number of opportunities are provided to raise these matters.

Tax relief helps only those who pay tax. It helps most those who pay the most tax and does not help at all those who pay no tax. The help for investment income is help for those with investment incomes greater than £1,000. The dangers of having a range of preferential starting points for the investment income surcharge is that we complicate income tax. We try to discriminate, we try to create a superstructure of detailed concessions trying to identify individuals in a way in which the income tax system cannot do.

In the age of the Welfare State, where we have one of the largest Departments in the Government concerned with making these identifications possible by trying to find ways of helping those rare specialised individual cases, it would be absurd to duplicate the whole of the work in the area of taxation. I should like to deal with widows. We have the widows' allowance, the widows' supplementary allowance, the widows' pension, the widows' basic pension and the widowed mothers' allowance. Nobody can say that that is the end of the line. Anyone who comes to the House 10 years hence or even longer will find allowances even more discriminating than those we have at present. That surely is the way to proceed. What we can do through taxation about this matter is much coarser and has a much rougher effect. It cannot delineate the millions of problems that arise. The only way in which we can find greater concentration on individual problems so that assistance is given in a much more individual way than is possible through the tax system is through the present social security system. Any moneys that we try to spend in this way—that is, by not raising taxation—would be much better spent in the discriminating manner to which I have referred.

The greatest problem that the House will have to face is that debates of this kind are unlikely to increase in line with demand for expenditure on the social services. If we are not careful we shall end by having virtually two social security systems side by side, one operated by the Department of Health and Social Security and the other a much more feeble and more unwieldy substitute, through the income tax system. Income tax has a rôle to play in some of these broader applications, but it cannot deal with the detail in the way that the social security system can.

I understand that the hon. Gentleman moved the amendment as a probing amendment. I hope that his probe has resulted in his finding at any rate something of interest and possibly of use to him, and that we can move to the further amendments.

Mr. David Howell

I should like to continue the probing of my hon. Friend the Member for Braintree (Mr. Newton) in one or two respects. First, the thesis about the virtues of selective assistance through the social security system, as opposed to the tax system, is in one way a good argument for a tax credit system. It is certainly not an argument for the present mad merry-go-round of arrangements. It might have been valid when tax levels were generally much lower, but when we reach a stage when, as we shall find in later clauses, the national insurance pension drawn by a widowed man or woman is, if there is a graduated element in it, at a level that attracts tax, we are at the beginning of fiscal insanity. We are at a point at which we have turned the merry-go-round into a crazy spiral of administration of a tax imposition.

With inflation, the levels of that imposition are biting harder and harder every moment, and it begins of its own accord to create social problems which must be alleviated with more selective measures through social security, which in turn must be financed by further taxation, which in turn creates further social security problems. This is the road to lunacy. I am sorry to hear that the Minister is tramping so cheerfully, determinedly and confidently along that road—sorry, but not surprised.

On the concessions suggested by my hon. Friend, I add one further question. The Minister made play with the concept of the principle that there must not be too large a deviation from the idea that the surcharge relief should apply only to those over the age of 65. On that basis, he rules out women between 60 and 64 and everyone else. However, the hon. Gentleman reminded us of one area where the principle is already broken—that of divorced or separated people, where the first £1,000 of maintenance income is disregarded and then the first £1,000 of investment income on top of that is allowed as though it were the first £1,000 of unearned income. If that applies to divorced and separated people, who are often in difficult circumstances trying to bring up a family with only one parent, how much more does it apply to widows?

Perhaps I can yet persuade the Minister to tell us what it would have cost to extend the concession, or a similar concession to that applying to divorced people through maintenance income, to widows. What would be the cost, for example, of disregarding the first £2,000 of investment income for widows? That is what it would mean in effect.

I do not press the matter, because we are all the time constrained by the revenue, although the sums we are talking about are spent every morning by the Secretary of State for Industry and again every afternoon by the Chancellor of the Exchequer financing exorbitant wage increases in the public sector. Even though we try to keep that from our minds at present, we should bear in mind that the sums with which we are here concerned are a minute irrelevance compared with the profligacy and extravagance of those Ministers who are supposed to be controlling public finances on the expenditure side and are not doing so. If the Minister does not have figures for that sum in his brief, it would be useful to have them when we discuss similar problems on other clauses, so that we may judge our priorities.

[Mr. ARTHUR JONES in the Chair]

7.45 p.m.

Mr. Newton

I hasten to assure the Minister that I shall seek leave to withdraw the amendment, but I should like to say a few words first.

I accept part of what the Minister said about the difficulty of operating through both the tax system and the social security system, and I fully endorse what my hon. Friend the Member for Guildford (Mr. Howell) said about the desirability of moving to a tax credit system. One of the great missed opportunities of the past two years was that the progress being made towards a system which would produce sensible harmony between our social security system and our tax system was thrown away.

Whilst I accept some of what the Minister says about the difficulties of the situation in which his Government have, alas, left us, I hope that he will also bear in mind that one thing the tax system can do is to help create a greater sense of justice among people who are increasingly feeling a sense of injustice. Widows in general are feeling a sense of injustice about the way in which they are treated by the tax system. More generally, those who have taken the trouble to save in their earning lifetimes, and to build up the capital from which an investment income comes, forgoing things that other people have not forgone, are beginning to feel a burning sense of injustice about the way in which they are treated by the tax system.

I am becoming alarmed by the number of people in my constituency who tell me "I saved, and I can now do certain things for myself, but the State will not give me free teeth or certain other things. It will give them only to those who did not save, who did not bother to look ahead to their own future." More and more people are drawing the conclusion that there is no point in saving. That is not what the Minister desires, and it is certainly not what we on this side of the Committee desire. But it is happening. It is in a way an enlargement of the debate that the Minister and I have been having on this relatively narrow point tonight.

I leave that question to say something about the women aged between 60 and 64. I do not accept what I take to have been a standard Treasury brief, which must have been trotted out year in and year out for almost as long as anyone can remember.

We hear of the need for the system to treat everyone equally at the age of 65, and the idea that single men would see what is proposed as a grotesque discrimination against their interests. If that discrimination exists and men object to it, or have a right to object to it, it must arise in relation to the basic national insurance system, which allows women to retire at 60 with benefits which are clearly not actuarially justified in relation to men. If there is an injustice, it is the differential retiring age. The Minister or his right hon. Friend the Secretary of State for Social Services may want to look at that, but there is no suggestion that they will change it, either by raising the retiring age of women or by reducing men's retiring age.

Once we get away from that we are confronted with the situation that we have in the provision relating to the investment income surcharge a concession which can conceivably be justified not in relation to the age 65, dragged out of thin air, but only in relation to the age at which people retire. Up to that point, the Government do not much care for investment income. They want it to be more highly taxed, but then, because it is the normal male retirement age, the Government are prepared to give a little extra concession. Investment income then becomes rather more acceptable to them. Having urged people to save all their lives, they at least accept that when people retire they can have some use of the money that they have saved.

This is related to the age of retirement. The justification is that people's income has dropped because they have ceased to earn, and that they should now be allowed to enjoy a bit more of the benefit of the money they have saved for their retirement. As I think that that is the justification for the concession, I can see no shred of logic for denying it to women who retire at 60, the age at which they cease to earn and at which they demand our care and attention to help them live on the money they have saved while they were at work.

Let us bear in mind that basically we are talking about single women who have been dependent on their own earnings. They have been responsible for their national insurance contributions and their own savings. At the stage we are discussing they pass out of the system. It seems clear that we should extend to them the benefits of this concession.

I do not follow the Minister's reasoning. As I have said, I shall not press the amendment further at this stage as we shall be returning to this subject later in our debates. I, for one, am profoundly dissatisfied with the Minister's reply, and especially about Amendment No. 60. I shall not let the matter rest later in our proceedings. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Graham Page (Crosby)

I beg to move Amendment No. 34, in page 17, line 37, at end add 'and except that income tax shall not be charged on any sum received by way of pension or allowance payable under any Order in Council, Royal Warrant, order or scheme in respect of death due to service in the armed forces of the Crown or the Merchant Navy or due to war injuries and notwithstanding the provisions of section 528 of the Taxes Act 1970, for the purposes of section 7 of that Act, in calculating total income any sum received by way of such pension or allowance as aforesaid shall be disregarded'. In the previous debate we were discussing widows, and my hon. Friend the Member for Braintree (Mr. Newton) said that his amendment was a probing amendment. My amendment is far from that. I hope that it will be accepted by the Government as a reasonable amendment, its purpose being to exempt war widows' pensions from income tax. They are the only British war pensions which suffer tax. The war widows' pension, other than that of the widows of those killed in Northern Ireland by reason of a recent alteration in the law, is not at reasonable subsistence level. That has been recognised by the exception of the widows of those who have died in the Northern Ireland conflict. They are awarded a reasonable pension of approximately £34 per week, but the war widows of the First and Second World Wars still have a low pension and still suffer tax on it.

The war widows' pension should be free of tax. That is the object of the amendment. We should do away with the ridiculous position that if a person loses a limb as a result of war service his pension is tax-free but if he loses his life the pension to his dependants is taxed.

I always hesitate to quote my own speeches, but to save time I shall refer to an example I gave in the House on 9th May 1974. I said: A British girl who married an American soldier or even a German soldier who dies on active service can live in this country and receive a pension of something over £30 a week from America or Germany, and she is not liable for one penny of tax upon it either there or here. That is because America, like Australia, Canada, New Zealand, South Africa, Rhodesia, France, Belgium and Greece, does not tax war widows' pensions. That is because Germany, like Russia. Japan, Israel, Austria, Hungary, Pakistan, Singapore and Zambia, does not impose tax on war widows' pensions. Nor do Malawi, Malaya or Malta; nor do Bermuda, the Bahamas or even the Isle of Man."—[Official Report, 9th May 1974; Vol. 873, c. 679.] The Isle of Man is within our own area but it recognises that war widows' pensions should be free of tax. But we continue to tax them.

I have a constituent, a Mrs. Gee, who is probably known by name to many right hon. and hon. Members who have received correspondence from her. She is the Chairman of the War Widows' Association of Great Britain. Last summer Mrs. Gee took temporary work in Germany to do some on-the-spot research work into the way that German war widows were faring. She gave me two examples.

The first example is of a German war widow of World War II. She is very proud of the way in which her country has treated her. Her daughter received an excellent State education. This widow is now aged 58. She lost her husband, who was a corporal, at the age of 24, when she had one small daughter. It had never been necessary for her to work, by reason of the pension that she received from her State. It was 10 years ago that she decided to buy her own house, through the special arrangements for war widows, by commuting part of her pension to help with the deposit and the repayments—incidentally, the repayments were made at the rate of 2 per cent. At present her pension is approximately £135 per month free of tax. That is the way in which Germany is treating the widows of those killed in World War II.

Mrs. Gee gave me another example—that of a widow of a man who had been killed in World War I. The widow is now aged 75. She lives in a delightful one-bedroomed centrally-heated apartment for which she pays £15 a month. The State pays the balance of the rent and heating. When Mrs. Gee visited this widow she saw that she was giving her daughter a gift of £120. My constituent asked her whether she had any source of income other than her war pension. She replied that she had never had any other income since her husband was killed in 1916.

When I compare that treatment with that which we hand out to our pensioners I become more than a little ashamed—ashamed when I read those examples of how Germany deals with the widows of those who died in the First and Second World Wars. My amendment, which seeks to exempt war widows' pensions from income tax, would not open any floodgates to others demanding that their payments from the State, whether they be by way of pension or otherwise, should be free of tax. The war widows' pension is the only British war pension to be taxed.

Of course, successive Governments have allowed the taxing of the pension to continue for a considerable time. But it becomes cheaper to the Government each year to remedy this wrong. The Northern Ireland widows have been taken out of this category altogether by the substantial increase in the pension awarded to them. The number of those who are now left as war widows of the First and Second World Wars could be comfortably seated in Wembley Stadium. The amount which the Government would have to allow, if they accepted the amendment, would be a very small sum compared to the prestige that it would give this country, bearing in mind all the other countries which allow their war widows' pensions to be free of tax.

8.0 p.m.

Mr. John Page (Harrow, West)

There was one previous occasion when the right hon. Member for Crosby (Mr. Page) made a speech on a Finance Bill, which I am happy to say formed the basis of a leading article in the Financial Times. Because we share a common name, the right hon. Gentleman's article was attributed to me. On the day following the publication of that article I was invited to lunch by a leading firm of stockbrokers and many of my friends looked upon me with new eyes as somebody possessing a great deal of expertise.

We are dealing in this debate with a more serious matter, and I wish to be associated with my right hon. Friend's remarks. In the last 24 hours a widow of a Royal Artillery gunner in my regiment got in touch with me bceause she had become aware that this debate was to take place and nut before me her own plight. There is little that I need add to what my right hon. Friend has already said, because the case is crystal clear. Labour Governments always like to advertise themselves as being Governments of the compassionate—as people who look after those who are less able to look after themselves. I hone that on this occasion the Government will respond by acceping this amendment—which is not an open-ended commitment but one which the Committee should accept, even at this late stage as a tribute to those who have given their lives for our country and who have left their widows in our care.

Mr. Roger Sims (Chislehurst)

I hope that the Government on this occasion will allow the Committee to implement a recommendation of a Select Committee of this House. In 1919 a Select Committee recommended that widows' pensions should be exempt from tax. Therefore, I warmly support the amendment moved by my right hon. Friend the Member for Crosby (Mr. Page). My right hon. Friend illustrated graphically and movingly our curious treatment of war widows—by what was described in the letter sent out by His Majesty on the occasion of their bereavement as "a grateful country".

My right hon. Friend said that the number of women who would benefit was decreasing, so that this is a limited commitment. This is a special case; we are dealing here with women widowed very young in life, whose husbands had not had the opportunity to build up the amount of life insurance enjoyed by other widows.

There are ample precedents involving principle. My right hon. Friend mentioned the disability pension. Such a pension is not taxed, yet we tax those who suffer the anguish of being bereaved, and who are without a loved companion for life. There are precedents for this practice overseas. We all know of countries in which war widows' pensions are not taxed. This is the case not only in western countries but in countries such as Malawi or Pakistan, whose economic circumstances are very different from ours.

A further practical problem suffered by widows is that they find that invariably when their pension is increased the increase is promptly taxed. An increase in income often means that they lose rent and rate rebates, and consequently they are worse off because of that increase.

This is not a new issue, and these are not new arguments, but the arguments are no less valid because of that factor. Therefore, I urge the Government, on behalf of a grateful country, to do belated justice to this limited group.

Sir John Hall

I support the amend-men so eloquently moved by my right hon. Friend the Member for Crosby (Mr. Page). He said that he happened to have in his constituency the chairman of a war widows' association. I have in my constituency the secretary of such an organisation, and she is untiring in her efforts to bring before me examples of hardship which face war widows. She has also given me examples of the treatment of these widows by other nations which allow their incomes to be free of tax.

I was particularly struck by the fact that the United Kingdom, alone among the great Powers which took part in the last war, does not allow war widows' pensions to go tax free. Many other countries have seen fit to recognise the sacrifices made by men in the last war and the effect which this has had on widows and families. Therefore, I believe that even at this late stage we should be prepared to recognise that fact and to grant exemption from tax to those pensioners. It is by its very nature a diminishing financial liability. It cannot be very expensive, and the amount involved must decrease year by year. Therefore, at this late stage I beg the Minister to treat this matter with much more sympathy than he has treated similar proposals made from the Opposition benches. I hope that he will do all he can to help this less fortunate section of society. I hope that he will find it possible to ignore his brief, which no doubt says "Resist", and accept by right hon. Friend's amendment.

Mr. Sheldon

As for any "brief", I would inform the hon. Member for Wycombe (Sir J. Hall) that I have only some handwritten notes to help me to reply to this debate. I find this a most difficult problem—one of the most difficult of all the matters which come before Parliament on these occasions. I begin by referring to the remarks made by the right hon. Member for Crosby (Mr. Page). He spoke about the treatment of war widows in Germany and said that he felt ashamed of the way in which we have treated these women. Obviously, he struck a chord of response in the Comittee, and no doubt there are many areas in which assistance needs to be given. This is what the present Government felt last year, and it is why we have brought about a large increase of a kind I shall describe later in my remarks.

The right hon. Gentleman gave a list of countries which exempt war widows' pensions from tax. On all these matters it is difficult to make comparisons because the system of taxation in so many of these countries differs so widely. We have only to think of Russia and Japan to know what a problem it is to relate what one country gives in the way of remission of taxation to what another country gives in the way of benefit. It is a fact that of the nine Community countries, four countries tax war widows' pensions. I am not saying that that is something in its favour, but I put that argument forward as a means of expressing the problem which exists in relating tax systems one to another, even in countries which have a good deal in common with each other—namely, the Community countries.

The hon. Member for Chislehurst (Mr. Sims) was right to point out the long-term nature of the pressure to exempt war widows from income tax—a process started after the First World War. The interesting thing is not how long these pensions have been liable to tax but how long the pressure to exempt them from tax has continued.

At present war widows' pensions are treated as earned income, but previous Ministers on all sides of the political spectrum have never felt justified in freeing them from tax. The case for income tax exemptions has often been raised in long debates on Finance Bills. One of the more recent occasions was the 1973 Finance Bill when the then Financial Secretary, the hon. Member for Worthing (Mr. Higgins), replied to the debate. The main burden of his argument on that occasion related to the anomalies and repercussions that would arise if the provision were accepted. Those anomalies and repercussions have not diminished with time. I suppose, if anything, that they tend to increase as the social security system becomes more complex.

The right hon. Member for Crosby sought to move a new clause in the 1974 Finance Bill dealing with this subject. That new clause was not called. We must examine the Government record and seek the best way in which to deal with the problem of war widows. This is one of the most emotive cases with which we have to deal.

Until July 1974 the widows' pension stood at £10.10p per week or £525.20p per annum, which was raised to £630 and subsequently to £780 from April 1975. Therefore the pension was increased by about 50 per cent. within one year, which was a considerable increase. That shows the great strength of feeling aroused about these matters. The direct result of the substantial increase in these pensions must be compared with the problems which are involved in freeing from tax the benefits paid by the social security system. That method would produce great problems.

Mr. Ivan Lawrence (Burton)

Will the Minister say what would be the cost to the Exchequer if my right hon. Friend's amendment were adopted?

Mr. Sheldon

It is not easy to estimate those costs. It is difficult to identify people with other sources of income. I accept that the number of such people would not be large. I am sorry that I am unable to give the figure.

We must look at the general principle concerning all allowances by comparing what help can be given. What are we trying to do? We are trying to help, not through the method but through the giving of assistance. To the widow what is important is how much cash she receives as a measure of the community's concern rather than the manner in which help is given. If the administration finds that the disadvantages of one method are exceptional, the Committee must accept the available evidence as to the ways more readily open to the administration to offset those disadvantages by providing some additonal advantage through the social security system.

If we freed the benefits from tax, that would become a form of allowance. We would end up by giving most to those who have most. Once an income tax allowance is given, those paying substantial amounts of income tax benefit the most. Those paying small amounts of income tax benefit less, while those paying no income tax benefit the least. That is not a good system of directing resources and assistance to the people most in need.

8.15 p.m.

Mr. John Page

The estates of soldiers who are killed in action are free of death duties. This means that the widows of those who had large estates are left with those estates. There is no reason to change that. Cannot the same principle apply to these pensions?

Mr. Sheldon

There is a difference. We are talking about the Government paying out benefits to war widows. The Government make payments to them. I do not think that we can compare these two different matters as the hon. Gentleman sought to do.

We are trying to give aid to all widows. As regards the tax system and the social security system, we are trying to give aid to those who require it most. We seek to do that by the way in which we operate the social security system. The increases are an all-time record, even in real terms. That is what we intend to do and have intended to do. I hope therefore that the Committee will acquit us of not wishing to give the maximum assistance to these people.

Mr. David Howell

The handwritten notes of the Minister of State did not serve him well. Perhaps he would have done better to use a Treasury brief.

Having listened to my right hon. and hon. Friends, and especially the right hon. Member for Crosby (Mr. Page), who moved the amendment, I feel that we should be humbled by the relative position of the United Kingdom vis-à-vis the treatment of war widows by the rest of the world. The catalogue was familiar. It gave a sour twist to the statement made so often in the United Kingdom that we won the war and lost the peace.

I am sorry that the Minister of State could not give us even a vague idea of how much a change in the system would cost. It is about time that calculations were made to establish a rough estimate of the cost. I see the difficulties involved in collecting the precise details. The calculation depends upon the income levels of those affected. However, it would be of value if an approximate figure could be obtained. I am sorry that the Minister could not provide one.

My hon. Friend the Member for Harrow, West (Mr. Page) said with confidence that death duties were not applied to the estates of soldiers killed in action. I warn him to be cautious. When the Government brought in the new capital transfer tax proposals to replace the former estate duty system they had every intention of ending that provision in 1984. It was only because of an Opposition amendment in Committee, which was successfully pressed, that the Government backed down. We can have no confidence that even those concessions are safe from the claw of the Socialist tax gatherers. They have their beady eyes even on those concessions.

It will not surprise the Committee that we have received from the handwritten notes of the Minister of State a thoroughly negative answer. It lacked the appropriate realisation that, in the world context, we were in a very bad position vis-à-vis the treatment of war widows. My right hon. Friend produced a catalogue of nearly all the countries in the world.

These are times of stringency. This is not the time when we on this side of the Committee can press the kind of amendments that we believe to be of the highest priority. However, when things get better—perhaps the very condition of their getting better will be when we are on different sides of the Committee—the case made out by my right hon. Friend the Member for Crosby will have a very high priority. We can do better than shuffle out handwritten notes and say that we will help through social security or in some other way at some other time.

Mr. Graham Page

In moving the amendment I should perhaps have delared a past interest. My father was killed at Saint Julien in 1917. My mother was left a widow with three small children to bring up. My recollection is that the pension of the widow of a colonel in those days was £300 a year. That was all that my mother had, together with a very small investment income, with tax on the whole, to bring up three young children.

Therefore, I am apt to feel a little bitter about the way the country has treated war widows over the years from the First World War. I have no doubt that the Minister feels very much the same as I do by the way he answered the debate and said that it was indeed a very difficult problem.

The Minister of State disappointed the Committee when he trotted out old arguments. They do not hold water. It is true that some of the States that I mentioned have different systems of taxation, but the system of taxation is not so different in Germany and America. If a British girl is the widow of an American or German soldier, she will receive tax-free in this country about the figure which the Government have recognised that the widow of a soldier who has died in the Northern Ireland conflict should receive. Yet, although war widows from the two main wars receive, I admit, an increased pension, they still suffer tax on it.

The Minister of State said that there would be many repercussions and anomalies and that problems exist. What problems? What problems have been raised by the tax-free disability pension? No problems at all. One might have thought that there could have been greater problems when giving freedom from tax for the man who has lost a limb. There will be no problems when allowing a tax-free war widow's pension.

It was significant that the Minister said that the cost would not be large. To that extent I think that my hon. Friend the Member for Guildford (Mr. Howell) was kind in saying that we ought to see this proposal accepted when things get better. The small amount involved in this amendment should be allowed at the earliest moment.

The Minister treated this proposal as a matter of social security. It is not just a question of giving a subsistence benefit to a war widow. It is a matter of treating the war widow fairly, with justice, and with gratitude for the way in which her husband served. It is not a question whether the war widow is destitute. The country is providing her with a subsistence allowance. Many war widows supplement their pensions by working. As a result, they have to pay tax on the basis of the pension plus what they earn from their work. Many have a small investment income which, even at a young age, their husbands had been able to save. Thus they pay tax based on their total income.

I think that in justice the time has come to show compassion towards war widows. Having regard to what my hon. Friend the Member for Guildford said, I do not intend to press the amendment to a Division. The points have been made more forcefully by my hon. Friends than could ever be shown by pressing the amendment to a Division. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Newton

I beg to move Amendment No. 58, in page 17, line 37, at end insert: 'and except that in the case of an individual who shows that in the year of assessment his total income does not exceed £1,200 and in the case of a married couple that, in the year of assessment their income does not exceed £1,500 there shall be an entitlement to a deduction of one-half of the amount of income tax otherwise chargeable,'. The purpose of the amendment is to reintroduce the system of reduced rates—that is, rates below the standard rate— of income tax for those with relatively small incomes.

I am sure that the Minister of State will readily appreciate the basic reasoning behind the proposal. It is the concern of hon. Members on this side of the Committee, and no doubt on the Government side were they more in evidence, about the so-called poverty surtax or wages trap—it has been described by a variety of names—which has grown up over the past few years essentially because of the overlap between the social security and tax systems with the result that people earning very little are paying what amount to tax rates at the highest surtax levels and in certain extraordinary cases effective tax rates of over 100 per cent.

Therefore, at certain levels of income, people pay not only the normal standard rate of income tax—now 35 per cent.—plus national insurance contributions, but lose perhaps rent rebates, school milk and meals subsidies and a whole variety of social security benefits which are income-related and which, from their point of view at any one point in time, have the same effect as an increased payment of income tax. The net result is that the deduction from their pay may be such that it is not worth their earning an extra pound.

This is a subject on which many hon. Members have spent a great deal of time and I will not attempt to elaborate the problem further. Clearly the reintroduction of a reduced rate of income tax below the standard rate would not eliminate the problem. Equally, it would help the problem. Given that we seem to be as far as ever away from tackling the problem on a larger scale, namely, by the introduction of a tax credit system, and given that we are geting further away from a system which can tackle the problem in a more organised way, the reintroduction of a reduced rate is one method which might help.

The reduced rate disappeared almost by accident in the Budget introduced by the right hon. Member for Birmingham, Stechford (Mr. Jenkins) during the period of the previous Labour Government, when the reduced rates of income tax were withdrawn as part of a device for juggling the income tax system to give additional relief at the bottom end of the scale while clawing it back from the so-called middle classes. The device used for doing that was to increase personal allowances and to remove the reduced tax rates. It was not suggested that reduced rates were a bad idea, but in the political, economic and financial circumstances of the time that seemed to be a convenient way for the right hon. Gentleman to operate. Since that time the British tax system has been without the reduced rate band.

The amendment would reintroduce a reduced tax rate for a single person earning between £700 and £1,200 a year and for a married couple without children earning between £1,000 and £1,500 a year. Those are relatively small sums at current inflated income rates. Between those levels, instead of jumping straight into the standard rate of income tax of 35 per cent. a person would pay only half that rate.

That provision would reduce the tax burden significantly. It would relieve the problem of the so-called poverty trap that is acknowledged by both sides of the Committee to be among the more serious difficulties of British social and fiscal policy and, in simpler terms, it would help to remove the serious disincentive effect which applies to a large number of less-well-off people. For people in the band of earnings around this level, there is little point in bothering to earn more because the chances are that they will lose most of it to the State.

8.30 p.m.

It is common ground between both sides of the Committee that that cannot in the long run be a satisfactory state of affairs. It is probably also common ground that a starting point for tax of 35 per cent. is too high and that suddenly to jump from paying no tax at all on a marginal pound to losing over one-third of a marginal pound of earnings is not an ideal fiscal arrangement.

The amendment is a probing amendment, but I hope that the Minister will look reasonably sympathetically at least in the time ahead at the possibility of reintroducing a form of reduced rate of income tax if not exactly along the lines of the amendment, then on similar lines that would help to ease a problem that is recognised by both sides of the Committee.

Mr. Nott

My hon. Friend the Member for Braintree (Mr. Newton) moved the amendment clearly and concisely. I rise to emphasise that we are conscious of some of the defects in the drafting of the amendment. I am grateful to the Minister of State for telling me how much it was likely to cost. I understand that because of certain defects in the drafting the cost could go into astronomical figures.

The intention of the amendment, which my hon. Friend and I drafted between us, is to restore the reduced rate band which the right hon. Member for Birmingham, Stechford (Mr. Jenkins) removed in his 1969 Budget. We are seeking a way to case the lower income groups into the tax net so that the benefit does not necessarily go right the way up to the highest tax levels. I do not know how that can be done, but there may be means of doing it which are known to the Government and unknown to me. The Chief Secretary and I discussed the matter a short time ago. The answer may lie in the method adopted for applying the age exemption allowance, which runs out above a certain income level.

We are seeking to ensure that when a person comes out of the non-tax-paying bracket into tax for the first time he should move by stages rather than by jumping immediately into a 35 per cent. rate of tax. In the Second Reading debate I pointed out that if a typical wage earner who is just below the tax threshold comes into tax as the result of a wage increase he will pay at the rate of 35 per cent. on every pound of additional income he earns. Of course, this means that, taking what I admit is an extreme example, a person needs to receive an increase of one and a half times the current rate of inflation in order to retain his current standard of living where the increased charge takes him just over the tax threshold.

This extreme example arises only where someone is paying an extra 35 per cent. on every pound of additional income, and as the income levels increase the position becomes less extreme. It is only at the higher income levels that this huge jump in marginal rate arises, and it is where the marginal rate differs at its greatest from the average rate that the problem arises in its starkest form.

The Child Poverty Action Group is a worthy body. All Ministers receive its circulars, and it is correct when, in its recent statement headed "More Poor Families Paying Tax", it says: Although the Chancellor made much ado about taking 400,000 workers out of tax, the blunt fact is that there are over one million more low paid workers paying tax as a result of this Budget than there were before Mr. Healey introduced his first Budget in April 1974". In other words, as a result of inflation about 1½ million low-paid workers have been drawn into the income tax net since last year. That situation will be corrected only by raising the threshold even higher than at present.

The amendment seeks to help people who are just above the threshold or who are just coming over it, rather than those who are below it. I am sure that the Minister is aware of its basic intentions. As my hon. Friend the Member for Braintree said, it is fundamentally a probing amendment. I do not think that my hon. Friend wishes to press it to a Division. Certainly we shall not do that if, as I suspect, it would, through faulty drafting, cost the Government £1,000 million. That is not our intention.

The extent of the increase of direct taxation is shown by two of the recent Red Books. In the last Red Book published by the outgoing Conservative Government the estimate of the income tax yield for 1973–74 was given as £7,233 million. As far as I recall, the out-turn was not greatly different from the estimate. This year, after the Budget changes, only two years later, the Government's estimate of the yield of income tax is £14,008 million. So in two years, in money terms, the yield of income tax has risen from £7,000 million to £14,000 million. That is a most staggering figure. Not only has the yield doubled in money terms but it has risen by £7,000 million in two years. I am not suggesting that the major proportion of this increase has been borne by those who are around the tax threshold—who are below the figure of £1,500 for a married couple—but there can be no doubt that the tax band between, say, £1,000 and £1,500 for a married couple provides considerable revenue.

We are conscious of the defects of the amendment. I know that the Minister of State, who was kind enough to help me when I inquired of his office about the revenue implications, will not make a point of that. Nevertheless, we are on an important point. Have the Government given any thought to the way in which they can help to overcome this problem? I have heard the Minister make four speeches in the last week in which he has repeatedly said that it is is the Government's policy to ensure that those with the broadest backs should pay the major part of the additional revenue that the Chancellor requires. But the increase in the taxation of this low-paid section has been far greater, in terms of disposable incomes than the increase for those further up the scale.

Mr. Sheldon

The hon. Member for St. Ives (Mr. Nott) dealt with certain broad tax matters with which perhaps I might deal first. I have previously shown how the income tax paid by those on average earnings has changed from before the war, when no contribution was expected or obtained from manual workers, to today, when over 18 per cent. of their income goes in tax. I outlined one of the problems that our present income tax structure has created.

The problem of the reduced rate band was the strongest reason for the Chief Secretary and I producing a minority report to the Select Committee Report on tax credits. There are a number of advantages in a tax credits system which would have separated out the benefits from taxation, but had we gone ahead with the system which had been proposed to us, not only would the benefits not have been good enough, but it would have set the system into a rigid framework which would have debarred us from ever introducing in practice a reduced rate band.

The hon. Member talks of finding a way of easing the tax burden of the lower paid without going all the way up and in doing so he poses the problem which beset that Select Committee and has beset anyone who has considered these problems. This is the philosopher's stone. How can we help those at the lower end without helping also those who earn incomes in excess of that?

8.45 p.m.

Mr. Nott

I understand what the Minister is saying, and he will probably go on to say a lot more, but the principal advantage of the tax credit scheme did not lie in this area. It lay primarily in the fact that with such benefits as FIS, where there is a 50 per cent. marginal rate—and I have read every word that was said in the Committee on tax credits—

Mr. Sheldon

Surely not.

Mr. Nott

I certainly did. I was an equally conscientious Minister of State as is the hon. Gentleman. We do not want a debate about the tax credit scheme now—although I would welcome one soon, because the Government were very foolish to throw it overboard—but its principal advantage was that it would have reduced the marginal rate from 50 per cent. on many social benefits down to the basic rate of tax, and if the hon. Gentleman is saying that he opposed some of the votes on the tax credit scheme for the reason that it prohibited a reduced rate band, and now he cannot find one, this is a very regrettable argument. I hope to hear more from him on this aspect.

Mr. Sheldon

If I may be allowed to intervene, perhaps I shall be able to get my ideas across. FIS involved only a relatively small number of people producing problems of their particular kind, but this was not the main task. We did not examine the tax credit system because of the problems of FIS. This was one element alone, and the hon. Gentleman will appreciaae that. But this big problem of how to help those at the lower end, without giving that same assistance to those at the higher, arose whenever this question was examined.

This happens in a number of cases, and one can try to arrange some sort of claw-back, either by trying to accelerate the tax proportion payable by those people at a certain level, or by trying to get it back in this other way. What one cannot do is just give the benefit to all those below some arbitrary figure and say that that benefit will not be available to anybody else, because clearly there one faces marginal relief problems of an insuperable kind—that it will pay people not to work, and pay people to do all sorts of foolish things.

Under the old age exemption relief there was a marginal tax rate of 55 per cent. in an attempt to get from this lower rate to the standard rate. This was fiercely resented, and the hon. Gentleman will know that this was why the age allowance was introduced.

This problem arises all the time. I do not want to quote figures at the hon. Member—because I understand that this is just a probing amendment, designed to air this particularly important matter, in which I have very great personal interest—but whenever I look at the problems of a reduced rate band, the difficulty is one of cost because of the way in which these things operate. If one were to have a reduced rate band in order to bring people into tax at an initial rate lower than 30 per cent. or 35 per cent., or whatever it may be at a particular time, it would have to be at a more modest level than this. At a rate of 17½ per cent. the cost would be about £2,000 million, because of the marginal relief problems and the way in which these would have to be carried all the way through. There is always the problem of cost. The reason is that over the years the threshold has been going down in a way which I described in an earlier debate when I showed the contribution made by people on average earnings.

Sooner or later we shall have to deal with this problem either through the reduced rate band or in some other way. It remains a problem, and this debate has helped the Committee focus its attention on the problem and on possible solutions to it.

Mr. Newton

Having unexpectedly moved the amendment, I find myself almost equally unexpectedly about to ask leave to withdraw it. Having been slightly rude to the Minister of State in one debate, I have to thank him on behalf of the Committee for the thoughtful way in which he replied to the discussion on this amendment.

I know from my past work that it is very difficult to see how to deal with this problem. The hon. Gentleman has made a helpful contribution, and in that sense it will be almost a pleasure to ask leave to withdraw the amendment—certainly more so than it might have been in other circumstances.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 23 ordered to stand part of the Bill.

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