§ I now turn to my proposals for carrying forward our attack on inflation and for encouraging the greatest possible reduction in the growth of wage costs. I hope to achieve this through relating tax concessions to a lower limit on earnings during the next pay round.
§ The experience of the past 12 months has brought it home to all sections of the community that inflation is the great enemy of full employment. For a country in Britain's present economic situation, 271 the number of people who have a job will depend directly on the level of pay received by those in work.
§ I think we have all seen reports of people who have actually accepted lower wages so as to save jobs. The relationship between jobs and wages is seen at its starkest in some of the nationalised industries, such as the Post Office and the railways, where the price increases generated by higher wage costs are already risking the driving away of custom and putting jobs at risk.
§ The nation as a whole has to draw a similar lesson from the experience of the past few years. As I have already argued, unless we can improve our ability to compete on price, the balance of payments will set a limit on the speed at which we can return to full employment. Moreover, we shall be unable to finance our external deficit in the period before we achieve a surplus on our current account unless we succeed in getting our rate of inflation down. If wages had continued to rise at the rate they were rising last summer, the collapse of foreign confidence in Britain would have brought the collapse of our economy.
§ The agreement with the unions saved the situation. The £6 pay limit which emerged from the crisis in July last year has not cured unemployment in Britain. But it has ensured that hundreds of thousands of men and women are now in work who would otherwise have lost their jobs in the inevitable collapse of confidence at home and abroad and the deflationary measures which would have had to follow it.
§ Excessive pay increases are not only bound to increase unemployment. They are self-defeating even for those who manage to keep their jobs, since they cause rising prices which swallow up most of their value within six to 12 months and nearly all of it in one or two years. Yesterday's figures show with startling clarity that over last year as a whole although pay rose by a record 29 per cent., living standards did not rise at all. In addition, the inflation such pay increases generate reduces the international value of our currency, thus adding further fuel to inflation.272
§ There is no end to this vicious circle except to get inflation down at least to the level of our international competitors. That is why the fight against inflation must remain our first priority. Winning the battle against rising prices is the first condition for our return to full employment. If our industries cannot finance their operations, cannot invest, cannot compete at home or abroad, if we cannot finance our overseas deficit, jobs are at risk on a massive scale.
§ The progress we can expect to make this year in the fight against inflation depends above all on the pay limit devised last summer by the trade union movement itself in full knowledge and acceptance of the nation's economic needs. We need a similar voluntary policy for incomes when the £6 limit expires at the end of July. Let me stress at the outset that what I am seeking is a voluntary policy—that is, a policy which the General Council of the TUC and the Congress agree willingly to recommend to their members as something good for themselves and good for the country.
§ The Government's overriding purpose is to reach a fresh agreement with the trade unions on a voluntary policy for the next pay round—an agreement which will help to bring the rate of inflation down still further in the coming year. In its Economic Review for 1976, the TUC has suggested a target which the Government fully endorse. It is to reduce the rate of inflation next year to a figure well below 10 per cent. The TUC stresses that this target cannot be achieved by a policy for incomes alone. The Government agree. A major contribution must also be made through policies for prices, taxation and public finance. But, in my view, the key to achieving a rate of inflation which is well below 10 per cent. by the end of 1977 is to relate our tax policy in the coming year to the next policy for incomes.
§ I am prepared to use my powers as Chancellor of the Exchequer to help the TUC to get the next pay limit as low as possible by reducing the amount of income tax which is taken from the pay packet. I intend to guarantee that the working population as a whole does not suffer by accepting a lower pay limit rather than a higher one; indeed, I would ensure that a lower pay limit leaves those 273 who need help—families with children—a good deal better off than a higher pay limit. I shall explain how this will be achieved.
§ It is clear that the next pay limit will need to be well below this year's limit of £6 a week. If the limit were only a little less than the present £6—say £5—it would produce little, if any, further reduction in the rate of inflation by the end of 1977. Our objective must be more ambitious. The £6 limit should have helped to cut our inflation rate by well over half by the end of this year compared with December 1975. If we want to end next year with an inflation rate at least in line with our foreign competitors we must aim at a further halving of our inflation rate by December 1977. Since we are likely to face higher import prices, partly because our earlier inflation has caused our exchange rates to depreciate, this would require that in the next pay round the nation's money wage bill should rise by under half as much as it is likely to rise in this pay round.
§ It will, of course, be for the TUC to judge the size of the pay increases to which it can secure the agreement of its members. I emphasise again that I am not seeking to dictate or impose a particular figure. But I do want to prove that the majority of working families would gain by agreeing to a lower limit rather than a higher one.
§ The proposals for income tax reliefs which I shall now set out show how this result could be achieved. Part of the reliefs would have to be conditional on a low pay limit, and I must state clearly the level on which these particular reliefs would depend, because the House will want to know on what assumption it would be asked to approve them and the trade unions will want to know what tax benefits would flow from a particular limit.
§ But, as I said before, my overriding purpose is to get a fresh agreement with the TUC on pay which will at least guarantee further progress in the fight against inflation. If in the end the TUC found that it was unable to agree to a figure as low as that on which these tax reliefs are based, I would, of course, have to reduce the amount of the reliefs accordingly. If, on the other hand, it could go lower still, I would more than compensate with still 274 greater tax reliefs and the nation as a whole would benefit still more.
§ I have based the tax reliefs which I shall now describe on the assumption that the pay limit in the next wage round will be in the area of 3 per cent. I cannot be absolutely precise because much will depend on the way in which the new policy is structured—for example, whether it is a flat sum or a percentage, or a mixture of the two. A limit of 3 per cent. is the basis of my proposals because I do not believe that in the circumstances of the coming year a higher limit could be relied on to bring down our rate of inflation to that of our principal competitors.
§ My proposals are in two parts. The first part will take effect at once, and I commend it to the House unconditionally. It is intended primarily to help sections of the population, like the old and children, who will not be involved in the coming negotiations on incomes policy. The second part, as I have just explained, must be conditional upon agreeing—I hope at the latest by early June—a pay limit which is consistent with a further halving of our inflation rate in the coming year.
§ First, I wish to deal with the unconditional set of income tax reliefs. Besides the increase in pensions I have announced, I propose to increase the age allowance for single people by £60 to £1,010 and for married people by £130 to £1,555 and also to raise the ceiling for the allowance by £250 to £3,250. These increased allowances will be substantially above the rates of retirement pension which will be payable after the uprating in November and this will enable old people to continue to supplement their pension without paying tax.
§ Next, I turn to the situation as it will affect children. For a number of reasons, the real incomes of families with dependent children have fallen behind in the last few years, relative to those of the majority of single people. Since 1972 policy on low pay and equal pay has tended to help single people more than married people and married people with children least of all.
§ Although last year I made the first increase in family allowances since 1968, the child tax allowances have not been 275 increased since 1974. As a result families with children have been bearing a disproportionately high part of the total tax burden.
§ I propose, therefore, to increase child tax allowances by £60 so that they will become £300 for children under 11, £335 for children between 11 and 16 and £365 for children over 16. This improvement will cost £300 million in a full year. I must regard it as part of the compensation for accepting a low pay limit which I am offering to the TUC. Nevertheless, in the confidence that we shall in fact achieve a low limit, I propose to include it in the first part of the package and to give effect to it immediately. Like the increase in the allowances for the elderly, it will be implemented through PAYE as soon as the Inland Revenue can make the necessary changes.
§ I now turn to the second part of the income tax package which must be conditional on our achieving the low pay limit. I propose to improve the personal allowances for single and married people and, as part of my policy to give as much relief as possible to families, I propose to give a greater increase this year to the married than to single persons. Among the married for this purpose I include single parents because, as I made plain last year, I intend to raise the additional personal allowance so that the allowance for one-parent families is kept in line with that for two-parent families.
§ I propose, therefore, once the low pay limit is agreed, to increase the single person's allowance and the allowance for wives' earnings by £60 to £735, the married persons' allowance by £130 to £1,085 and the additional personal allowance by £70 to £350. These increases in allowances, if the pay limit enabled me to implement them, would keep 670,000 out of tax altogether and would help to reduce the administrative cost of collecting taxes.
§ The single allowance is given to widows as well as to single women pensioners under the age of 65 and, if I am able to increase it as I hope, it will be sufficient to cover the standard rate of national insurance pension payable in 1976–77. If not, when these women have only the standard pension and no other income, they will still be kept out of tax 276 liability. This is because the Inland Revenue does not in these cases assess small amounts of tax, and to save administrative costs it is now proposing to increase the limit of this assessing tolerance from £10 to £30. The new limit will be sufficient to cover the difference between the standard pension and the single allowance.
§ This will mean in practice that, even if I am unable to make the proposed increase in the single allowance, assessments will not be made on this class of pensioners if they have no other income. So these widows and single women pensioners under the age of 65 with no other income will have their tax anxieties relieved. I believe that the whole House will welcome this decision.
§ I come finally to the higher rate tax structure. The threshold for higher rate tax has been eroded by inflation so that it now lies between one-and-a-half times and twice average earnings. Unless I adjust it this year, the numbers subject to higher rate tax will rise from 1.3 million in 1975–76 to 1.9 million in 1976–77, including very large numbers of skilled workers. This would impose a very heavy new administrative burden on the Inland Revenue.
§ As I made clear earlier in my speech, I believe that it is desirable in any case to reduce the extent to which fringe benefits are used as a substitute for pay increases at the higher levels. We have far more of these fringe benefits in Britain that other comparable countries. I have already described how I propose to limit the value of fringe benefits through action on business cars, cheap loans and so on. Nevertheless, the counterpart of action on fringe benefits must be some reduction in the income tax burden, particularly on middle managers in industry who have seen their net pay severely reduced in real terms over recent years by inflation and the incomes policy of successive Governments. The Diamond Report on higher incomes gives compelling evidence of this. I believe that middle management must play a key rôle in our industrial and economic recovery.
§ Taking all this into account, I have decided that the second, conditional, stage of the income tax package should also include an increase of £500 in the higher rate threshold and a similar increase of 277 £500 in the next four thresholds up to a taxable income of £8,500 a year. The starting point for the higher rate at 40 per cent. would therefore be £5,000 instead of £4,500 and so on; but the 65 per cent. rate would continue to start, as now, at £10,000. This would wall a long way short of restoring the real value of these five higher rate thresholds to what it was two years ago, but it is the most I now feel able to propose.
§ The total cost of these income tax reliefs, if both stages are fully implemented, would be about £1,300 million in a full year. Of this, £370 million is included unconditionally in the first part and the balance will be held over to the second part, since it is conditional on the low pay limit. The revenue from the increased duties on alcoholic drink, tobacco and petrol will broadly cover the cost of the unconditional £370 million which is concentrated on the old and children. I believe that the House will feel that this reflects the right social priorities.
§ These tax reliefs are designed to ensure that if we add together families with and without children and single people, the majority would actually be better off with the low pay limit than with a higher limit but with none of the tax reliefs. At average earnings families with children will be substantially better off though the single man or woman will be a little worse off, since the use of the tax system enables us to pay regard to social need.
§ Moreover, poor wage earners who pay tax will benefit proportionately more because they get the same cash increase in their net incomes as other taxpayers on the basic rate. The low paid with means-tested benefits will do particularly well from the low pay limit with tax relief, since tax relief, unlike increases in gross pay, does not affect their entitlement to most of the means-tested benefits.
§ The reason why most people would be better off with the lower pay limit is that the real value of their pay would be increased not only by the tax reliefs but also by the fact that prices would be lower as a result of the lower pay limit. The contrast is seen most clearly if we compare the low pay limit with one which was, say, £3 higher or about 7½ per cent. instead of 3 per cent. By comparison with the inflation generated by the higher limit, the low pay limit would make infla- 278 tion 2 per cent. lower at the end of 1977. This 2 per cent. cut in the level of prices will be worth as much to the man on average pay as a pay rise of about £2 a week—a bit less for the single man, a bit more for the married man with children.
§ The income tax reliefs I have described would add substantially to that advantage, particularly since there is, of course, no tax to pay on them, whereas the extra £3 of earnings would be taxable. So on top of the £2 gain through lower prices, the tax reliefs would be worth as much to the man on average pay as a pay rise of 68p a week to the single man, £1.48 a week if he were married and £2.84 a week to a couple or a single parent with two children—and even more to bigger families. The married taxpayers would thus be getting advantages worth well over the £3 difference in the pay limit.
§ Let me put it another way. If one takes into account both the tax reliefs and the lower price increases which would follow, the 3 per cent. pay limit for the person on average earnings would be equivalent to 6½ per cent. or about £4.50 a week for a single person, 8½ per cent. or about £5.40 a week if he were married, and 10½ per cent. or about £7 a week for a couple or a single parent with two children. These figures would compare with 7½ per cent. or £5 for all average wage earners, whatever their family circumstances, under the higher limit which I have taken for purposes of comparison. For larger families the proportionate advantage of the low pay limit would be even greater.
§ In case, as I suspect, the House may find it somewhat difficult to follow these calculations when they are heard for the first time, some tables to illustrate the points which I have made are available in the Vote Office.
§ The advantage of the low pay limit with tax relief does not stop here, because the tax relief would be backdated to today, whereas the great majority of workers would not get their normal pay increase in the next pay round until next year at least nine months later—in other words, the benefit in income tax would come long before the low pay limit affected them.
§ I recognise that the demand effect of the low pay limit with tax relief would 279 for this reason be somewhat greater than the demand effect of the higher pay limit without tax relief. But the difference between the two should not be sufficient to change more than marginally the pattern of demand and the growth rate over the next 12 months, which I outlined earlier as likely to emerge on the basis of what might be called a "no change" Budget. The small increase in aggregate demand and in particular the small stimulus to consumption, would in my view be entirely justified by the better performance which our industry would be able to look forward to both at home and abroad if we could get the lower inflation rates which the low pay limit would lead to.
§ As I have already described, in addition to the direct advantage in real take-home pay produced by the lower pay limit, it would also generate more jobs by improving the ability of our industry to compete by stimulating investment and by improving confidence in Britain both at home and abroad. The advantage would be particularly great for those firms and industries which I have already mentioned, where further increases in wage costs risk pricing their products out of the market and their work people out of their jobs.
§ I hope that the advantages of this approach will commend it to trade unionists. I am asking the TUC to reach a conclusion in the General Council on the level of the pay limit for the next round by early June at the latest. On that basis, the House will have a further opportunity to debate the second group of income tax reliefs in conjunction with a White Paper about the pay agreement in the later days of June or the early days of July. I would then move amendments to the Finance Bill at the appropriates stage so as to seek Parliament's authority for the second group of reliefs, either in whole or in part depending on the pay limit which is agreed.
§ I know that this procedure is unusual. Indeed I believe it has no precedent. But the situation in which we find ourselves has no precedent, either. And I think that the House will agree that the assumption which I must make about the rate of inflation in this coming year is of critical importance to my Budget judgment. It is of even greater importance to the prospect for improving the 280 nation's economic performance as a whole. I therefore make no apology for presenting the nation with the facts of the situation as I see it and enabling trade unionists who must reach a decision on the new pay limit to do so in full knowledge of all the advantages of making it as low as possible.